The inside story of how a hike in Hong Kong changed crypto trading forever

§ 01 Executive Snapshot

• What: The invention of the perpetual swap, a pivotal financial product in crypto trading, originated during a hike in Hong Kong in 2015.
• Who: Ben Delo, co-founder of BitMEX, and Bavik, a derivatives trader.
• Why it matters: The perpetual swap transformed crypto trading by providing a derivative that does not expire, allowing for continuous trading and improved liquidity.

§ 02 Key Developments

• The perpetual swap was launched in May 2016, offering a futures contract with no expiry and anchored to the spot price through a daily funding rate.
• By 2017, BitMEX became the most liquid bitcoin market globally, processing $3-4 billion a day, with the perpetual swap at its center.
• The funding rate mechanism developed by BitMEX is now utilized by every major derivatives exchange in the world.

§ 03 Strategic Context

• Initially, BitMEX aimed to cater to institutional hedgers but pivoted to retail traders who sought high leverage and speculative opportunities.
• The perpetual swap's design consolidated liquidity, allowing traders to focus on a single product rather than multiple contract types, enhancing market efficiency.

§ 04 Strategic Implications

• The immediate consequence is the establishment of a new trading paradigm in crypto, leading to tighter spreads and greater market depth.
• Long-term implications include potential regulatory recognition and integration of perpetual swaps into traditional finance, validating its significance.

§ 05 Risks & Constraints

• Potential regulatory hurdles as traditional finance regulators, like the CFTC, begin to scrutinize perpetual swaps.
• Competition from other exchanges that may innovate or offer alternative products, impacting BitMEX's market share.

§ 06 Watchlist / Forward Signals

• The CFTC's ongoing discussions regarding the classification of perpetual swaps and possible listings by traditional exchanges like the CME.
• Observing how traditional finance adopts the perpetual swap model and the response from legacy financial institutions will indicate its future success.