How a Hike in Hong Kong Revolutionized Crypto Trading Forever

In 2015, during a hike in Hong Kong, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived. Ben Delo, BitMEX co-founder and mathematician, was discussing a persistent problem with a friend, Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, but customers complained about positions closing unexpectedly. They sought a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo asked, 'What if a future never expired?' Bavik replied, 'Mathematically, it would be worth infinity.' Although technically correct, Bavik suggested charging traders the bitcoin overnight rate. However, Delo was unsure what that rate was, so he created it. This innovation led to one of the most significant financial products of the 21st century. To understand the perpetual swap's impact, it's essential to consider BitMEX's origins. Founded in 2014 by Delo and Arthur Hayes, the exchange aimed to provide institutional hedgers with a platform to manage their bitcoin exposure. However, instead of institutions, the exchange attracted sophisticated retail traders seeking high-leverage speculation. By Halloween 2015, BitMEX offered 100x leverage, thanks to Delo's real-time margining system. The issue with futures contracts was the basis premium, which confused many in the crypto space. Customers would ask why bitcoin prices were higher on BitMEX, and the exchange would explain that it was due to the implied interest rate. The solution to this problem was the perpetual swap, which launched in May 2016. The core mechanic was straightforward: a futures contract with no expiry date, anchored to the spot price through a daily funding rate. Initially, the funding rate was derived from third-party lending markets, but it eventually became dynamic, looking inward at how the swap was trading. This approach allowed market makers to anchor the swap price back to the spot price, creating a dynamic equilibrium. The perpetual swap's success was unprecedented, with BitMEX becoming the most liquid bitcoin market by 2017. The exchange processed $3-4 billion daily, and the perpetual swap was at the center of it all. Competitors noticed, and soon every major exchange in crypto offered its own perpetual swap. Delo believes that the fact that every other exchange has copied the swap is a testament to its financial innovation. With traditional finance regulators now taking notice, the perpetual swap may soon attract even more attention. Delo is confident that once traditional finance sees the benefits of this financial product, it will be impressed.