The Hike That Gave Crypto Its Most Popular Derivative

It was sometime in 2015, on a hiking trail in Hong Kong, that the perpetual swap was born. Ben Delo, the mathematician and co-founder of BitMEX, was walking with a friend called Bavik, a derivatives trader. Delo had been wrestling with a problem for months.

BitMEX had tried everything. Quarterly futures. Monthly futures. Weekly futures. 48-hour futures. Even a contract that lasted just 24 hours. Customers kept complaining that their positions closed without warning. They wanted something that looked like spot, traded like spot, and gave them leverage.

"What if a future never expired?" Delo asked.

Bavik's answer was immediate. "Mathematically, it would be worth infinity," Delo recalls him saying.

Technically, he was right. A futures contract's value is partly derived from the time until expiry. Remove the expiry date and the carrying cost compounds indefinitely. Then Bavik offered a solution: charge traders the bitcoin overnight rate, like LIBOR in traditional finance.

There was one problem. "I said, what's that?" Delo recalls. "He said, 'Hm, just charge them the overnight bitcoin interest rate.' I said, 'I don't think that exists.'"

So Delo built it.

To understand why the perpetual swap mattered, you have to understand what BitMEX was trying to be. Delo and Arthur Hayes founded the exchange in 2014. They were not thinking about retail traders with 100x leverage. Their thesis was that bitcoin miners and payment companies needed to hedge, and BitMEX would provide professional infrastructure.

"We built it basically to look like a Bloomberg terminal," Delo said. "We used Reuters instruction codes. Z14 meant expiring December 2014."

The institutions never came. What came were traders, sophisticated retail players using their own money. They did not want guaranteed settlement or low leverage. They wanted to speculate with as much size as possible.

BitMEX listened. By Halloween 2015, the exchange offered 100x leverage, made possible by a real-time margining system Delo built from scratch. "I built the order matching engine, the position keeping system, the margining system, the PnL system, the settlement system," he says. "Everything on that was me."

The issue with futures, even short-dated ones, is basis – the premium at which a futures contract trades above spot. In traditional finance, this is well understood. In crypto in 2015, it confused almost everyone.

"Our customers would be like, why is bitcoin so expensive on your exchange?" Delo recalled. "And we would say, 'Well, if it is expensive, why don't you short it?' And that would blow some of their minds."

BitMEX kept shortening the expiry. Weekly futures. Then 48-hour. Then a contract that relisted every single day.

"Every 24 hours, it would expire or settle. And people would say, 'Why did you liquidate me?' And we'd say, 'We didn't liquidate you. Your position closed at the index price. You got exactly the spot price,'" Delo said. "They're like, 'We don't understand.'"

The customers wanted a leveraged product that never went away. Delo's hiking trail conversation gave him the framework.

The perpetual swap launched in May 2016 with little ceremony. The core mechanic: a futures contract with no expiry, anchored to spot through a daily funding rate. Longs paid shorts, or vice versa, depending on whether the swap traded above or below spot. BitMEX took no cut.

The early funding rate came from third-party lending markets, primarily Bitfinex. Take the dollar borrow rate, subtract the Bitcoin borrow rate, and you had something approximating the cost of holding a long position.

It worked until it did not. As Bitcoin rose through 2016 and into 2017, demand for long exposure overwhelmed the funding mechanism. The swap started trading at a persistent premium to spot. The interest rate imported from Bitfinex was not high enough.

"We had to dynamically adjust how we calculated that funding rate," Delo said.

The new approach looked inward. BitMEX began measuring how far the swap traded above or below spot over an eight-hour window, treating that gap as an implied basis, and back-calculating an annualized rate. That rate would then be charged at the end of the next eight-hour window.

"This was very important because you gave market makers notice of how you were calculating it, what it would be, and then when you would charge it," Delo said. "Because it was paid from longs to shorts, if the swap was trading at a 1% premium, you would charge longs 1% and give 1% to shorts. And then immediately the market makers, knowing that, would come in, short the swap, and anchor it back down to the spot price. It was a dynamic equilibrium."

This is the funding rate mechanism that every major derivatives exchange now uses.

By 2017, BitMEX was the most liquid bitcoin market on the planet, processing $3-4 billion a day. Price discovery happened on its order book, not on Coinbase or Bitstamp.

Before the swap, BitMEX ran quarterly, monthly, weekly, 48-hour, and 24-hour contracts simultaneously, spreading market maker capital thin across six tenors. The swap collapsed all of that into one instrument.

"By offering one product, they were able to consolidate their liquidity, which meant a more liquid market, tighter spreads," Delo said.

Competitors noticed. One copied the BitMEX FAQ verbatim without understanding how the product worked, Delo told CoinDesk. Others took it seriously. Every major exchange now offers its own perpetual swap.

"The fact that every other exchange has copied the swap just proves what a financial innovation it is," Delo said. "I think it now does $40, 50 trillion dollars a year of turnover. It's one of the most successful products in the history of capitalism."

BitMEX chose not to patent the perpetual swap. Delo says they considered it. They decided the startup's time was better spent building.

"We were a scrappy startup," he says. "We thought, just get it out there. If it was any good, the market would show us."

Now, a decade on, traditional finance regulators are taking notice. The CFTC is reportedly making room for perpetual swaps under its framework. There is speculation that the CME could eventually list them on equities. CME Group (Alpha Score 59, per AlphaScala's metric) would be a natural home.

For Delo, that prospect is the final validation of something that started as a question on a hillside above Hong Kong, asked by someone tired of watching his customers complain about positions that kept disappearing.

"I think once traditional finance sees the benefits of this financial product," he said, "it'll be impressive."