The Transformative Power of a Hong Kong Hike: How a Crypto Trading Revolution Began

In 2015, on a Hong Kong hiking trail, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived. Ben Delo, BitMEX co-founder and mathematician, was hiking with Bavik, a derivatives trader, grappling with a problem that had plagued him for months. BitMEX had experimented with various futures contracts - quarterly, monthly, weekly, 48-hour, and even 24-hour contracts. However, customers consistently complained about positions closing without warning, seeking a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo posed a question: 'What if a future never expired?' Bavik's immediate response was that it would be mathematically worth infinity. Technically, he was correct, as a futures contract's value is partly derived from its time to expiry and carrying costs. Removing the expiry date would make the theoretical value infinite. Bavik suggested charging traders the bitcoin overnight rate, similar to LIBOR in traditional finance. However, Delo was unsure what that rate was, prompting him to create it. This invention would become one of the most significant financial products of the 21st century. To understand the perpetual swap's impact, it's essential to grasp what BitMEX aimed to be before becoming the world's most liquid bitcoin market. Founded in 2014 by Delo and Arthur Hayes, the exchange initially targeted institutional hedgers, not retail traders chasing 100x leverage. Hayes had worked at Deutsche Bank, while Delo built high-frequency trading systems at JP Morgan. Their thesis was that bitcoin miners and payment companies needed a hedging mechanism, which BitMEX would provide. The institutions never arrived, but sophisticated retail traders did, seeking speculation with high leverage. BitMEX adapted, offering 100x leverage by Halloween 2015, thanks to Delo's real-time margining system. The issue with futures contracts, even short-dated ones, was basis - the premium at which a futures contract trades above the underlying asset's spot price. This concept confused many in crypto in 2015. Customers would ask why bitcoin was expensive on the exchange, and BitMEX would explain that they could short it. The exchange shortened the expiry of its listed futures contracts, but customers still struggled to understand. The customers knew what they wanted - a leveraged product that never expired. Delo's conversation on the hiking trail provided the framework to build one. The perpetual swap launched in May 2016 with a straightforward mechanic: a futures contract with no expiry date, anchored to the spot price through a daily funding rate. Longs paid shorts, or vice versa, depending on whether the swap was trading above or below spot. The early funding rate was derived from third-party lending markets, primarily Bitfinex. However, as Bitcoin rose in 2016 and 2017, demand for long exposure overwhelmed the funding mechanism. The swap traded at a persistent premium to spot, causing the contract price to drift away from the actual bitcoin price. Delo had to dynamically adjust the funding rate calculation. The original funding rate was replaced with a dynamic one, looking inward at how the swap was trading rather than outward at external lending markets. The solution was elegant: BitMEX measured the gap between the swap and spot over an eight-hour window, treating it as an implied basis, and back-calculated the annualized rate. This rate would be charged at the end of the next eight-hour window, giving market makers notice and allowing them to anchor the swap back to the spot price. This funding rate mechanism is now used by every major derivatives exchange. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its center. Price discovery for bitcoin happened on the BitMEX order book, not on Coinbase or Bitstamp. The concentration of liquidity was a product of the swap's design, consolidating market maker capital into one instrument. Competitors noticed, and some copied the concept. Every major exchange in crypto now offers its own perpetual swap, built on the funding rate architecture Delo created. The fact that every other exchange has copied the swap proves its financial innovation, with turnover reaching $40-50 trillion annually. BitMEX chose not to patent the perpetual swap, focusing on building instead. The market has shown its value, and now, a decade later, traditional finance regulators are taking notice. The CFTC is reportedly making room for perpetual swaps, and there is speculation that the CME could list them on equities. For Delo, this prospect is the final validation of something that started as a question on a hillside above Hong Kong.