Perpetual swaps, also called perpetual futures or “delinquents” for short, are the dominant trading instrument in the cryptocurrency market, processing an estimated volume of between $40 and $50 trillion annually. They eclipse spot trading, and are the product that professional traders, hedge funds, and retail speculators look for when they want leveraged exposure to the price of bitcoin or others without owning the underlying asset. Despite their ubiquity, the mechanisms that make them work are not widely understood.
To understand criminals, it is helpful to understand what came before them. In traditional finance, leveraged exposure to an asset typically occurs through a futures contract, an agreement to buy or sell something at a fixed price on a specific date. When that date arrives, the contract expires and is settled. Traders who want to maintain their position must include it in the next contract.
In the early days of cryptocurrencies, this practice created persistent problems. Futures trade at a premium to bitcoin’s spot price, a concept known as basis, which confused retail traders who wanted direct directional exposure. And every time a contract expired, positions were closed regardless of whether traders wanted it. BitMEX, the derivatives exchange founded by Arthur Hayes and Ben Delo in 2014, spent the better part of a year shortening contract durations trying to solve this, going from quarterly expirations to monthly, weekly, 48 to 24 hours, but none of that was enough.
A contract that never expires
The perpetual swap, which Delo developed and BitMEX launched in May 2015, solved the problem by eliminating the expiration date entirely, creating a derivatives contract that tracks the price of an asset indefinitely. There is no settlement date, no renewal or expiration. Traders can hold a position for hours or years. This created an immediate structural challenge: without an expiration date to act as an anchor, nothing would naturally force the contract price to approach the spot price of the underlying asset. BitMEX resolved this through a mechanism that has since become the industry standard.
Every eight hours, a payment is exchanged between traders on opposite sides of the market. If the perpetual swap is trading above the spot price, indicating excess demand for long positions, long traders pay short traders. If the perpetual swap is trading below the spot price, payment is made in the opposite direction. The exchange takes no part. The rate of this payment, known as the funding rate, is calculated based on how much the perpetual swap price has deviated from spot over the previous eight-hour period. The larger the deviation, the higher the rate. This creates a self-correcting balance. When longs are charged a substantial funding fee, it becomes expensive to hold the position, reducing demand and driving the price back to spot. Market makers accelerate this process by shorting the perpetual swap and buying spot whenever a significant premium opens, capturing the difference as profit. The funding rate mechanism is now used, in essentially the same way, on all major derivatives exchanges in the world.
The role of leverage
The other defining characteristic of perpetual swaps is leverage. Most exchanges allow traders to control positions significantly larger than their deposited capital, with limits varying by platform and jurisdiction. On BitMEX at its peak, up to 100x leverage was available, meaning that a 1% move in the price of Bitcoin would produce a 100% profit or loss on a fully leveraged position. To manage the risk this creates for the exchange, perpetual swap platforms use automated settlement systems. If a trader’s losses approach the value of their deposited margin, the system closes the position before it can turn negative, protecting the exchange from absorbing the shortfall. The speed and reliability of that settlement engine became a key competitive differentiator in the market’s early years and remains critical to how exchanges compete today.
Perpetual swaps are now the primary venue for price discovery in cryptocurrencies. When Bitcoin moves sharply, the movement typically originates in rogue markets before spreading to spot. The structure Delo built in 2015 has proven durable enough that U.S. regulators are now exploring its application to traditional assets, and the CME potentially includes perpetual swaps on equities. What started as a solution to the limitations of crypto futures has become one of the most traded financial products in the world.
