Perpetual contracts are the future, and TradFi must accept high leverage and socialized losses.
Author: Arthur Hayes
Translated by: Baihua Blockchain
Less than a decade ago, the esteemed veterans of TradFi (traditional finance) scoffed and derided the 100x leveraged crypto derivatives market created by BitMEX using a new type of derivative contract called perpetual swaps. When I read articles by Jim Grant of Grant’s Interest Rate Observer and Dan Oliver of Myrmikan Capital emphasizing how crazy it was for BitMEX to offer this cryptocurrency "weapon of mass destruction" (WMD), I laughed. But times have changed, and now TradExchanges (traditional trading platforms) like SGX (Singapore) and CBOE (USA) are set to launch perpetual swaps or similar products by the end of 2025. In the realm of retail under "Pax Americana," the call for granting the commoners and aristocrats the privilege to trade perpetual swaps (without the need for a VPN) led Coinbase to list a "bastard" version of perpetual swaps earlier this year, similar to the CBOE version. In this increasingly declining empire, other fearless entrepreneurs eager to challenge CME's dominance will have the opportunity to test their mettle in the proposed regulatory sandbox managed by the CFTC (Commodity Futures Trading Commission). It is said that after pursuing me and others in the crypto derivatives space, the CFTC seems to have turned over a new leaf and is once again a friend of financial innovation.
What has brought perpetual swaps to a "adapt or die" moment for TradFi? Why has the trading volume of derivatives for global and all financial assets shifted from outdated futures and options contracts to perpetual swaps that never expire? To answer these questions, I will first provide a historical lesson on perpetual swaps, explaining how I and BitMEX invented this new financial vernacular. Then, I will dissect the fundamental principles of perpetual swaps and why they are a better derivative in a 24/7, 365 interconnected internet world. Finally, I will share my views on the adoption trajectory of perpetual swaps beyond the crypto space and why TradExchanges will have to adjust their products to include perpetual swaps and a socialized loss margin system, or they will quickly be outpaced by centralized (CEX) and decentralized (DEX) crypto trading platforms.
Hyperliquid is the hottest new DEX on the market, launching a permissionless protocol, HIP-3, allowing a company called XYZ to create Nasdaq100 stock perpetual swaps. It is said that this contract now trades over $100 million daily, making it one of the largest contracts listed on Hyperliquid. Stock perpetual swaps will become the hottest product in 2026, and all DEX and CEX platforms, including my beloved BitMEX, will offer them by the end of next year. This product will completely disrupt the stock derivatives trading market, which has so far resisted the waves of progress from market entry and competition from various venues. If you invest in the tokens or stocks of trading platforms, you better understand everything about perpetual swaps.
Understanding History
If you want to conquer a foreign group, strip them of their history. When I was young, my parents always supplemented the official narrative taught in school with other readings. This is not to say they had an alternative version of a set of known facts; rather, they encouraged me to question the official narrative and provided me with books that offered different perspectives. Clearly, much of this academic inquiry stemmed from the lack of positive and truthful narratives about "Black identity" in the American experience. My parents did not allow me to become ignorant as intended by the public and private school systems.
In light of this, I will provide a first-hand account of the history of perpetual swaps.
Recently, many have jumped in to express opinions on the significance and origins of crypto perpetual swaps (often referred to as "Perps"). Given that they are telling the story of me and BitMEX, often in a incorrect version, let’s set the record straight. Like everything in life, the BitMEX team relied on others' prior technologies to create perpetual swaps and their supporting margin system. I resent anyone who belittles my team's achievements by saying it was merely Robert Shiller's design from the 1990s, popularized by BitMEX and the crypto industry. To hell with that! That's nonsense! Read on to understand why.
Let’s go back to May 2016, when BitMEX was a company of just five people. Ben Delo and Sam Reed were my other two co-founders, and our first two employees were Greg Dwyer (business development) and Jinming Shao (trading engine engineer). The landscape of crypto derivatives at that time was similar to today in some ways but different in others.
OKCoin (now OK) and Huobi (now HTX) dominated the crypto derivatives market, collectively controlling about 95% of the average daily volume (ADV). BitMEX was a distant third and frankly insignificant. While we had the highest leverage of all trading platforms (100x), our futures contract liquidity paled in comparison to OKCoin and Huobi. The most liquid contracts at that time were quarterly futures contracts priced in Bitcoin. At BitMEX, we tried many ways to improve contract liquidity. We had calendar spreads, daily, weekly, monthly, and quarterly futures contracts. In short, we had spread liquidity too thin across various XBT/USD futures contracts. We often asked ourselves, was there a way to create a product without an expiration date so we could concentrate liquidity on one contract?
We also asked ourselves how to simplify derivatives trading to better attract traders who had graduated from leveraged trading. Leveraged trading is easy to understand because traders simply borrow money and trade on the spot order book. For traders, there is no need to understand expiration dates and the price difference or basis between futures and spot. But when these traders upgraded to trading futures, they felt confused. Because Ben, Sam, and I personally answered every customer support question, we always tried to lighten the daily workload so we could focus on other tasks. A product that looked and felt like leveraged trading would eliminate the need to answer many confused customer questions.
The initial version of perpetual swaps was created to address these two issues. Ben and I reached out to several excellent financial engineers in Hong Kong who supported BitMEX (Joseph Wang and Bhavik Patel). We sought their ideas on how to create such a product. The feedback we received looked very much like the perpetual futures contract described in a paper published by Robert Shiller in 1993.
The first perpetual swap product we launched had long and short positions exchanging future cash flows based on a daily updated dollar and XBT funding rate. At that time, the main crypto spot and leveraged trading platform was Bitfinex, which offered a liquid peer-to-peer borrowing market. Users could borrow and lend funds through these markets, directly affecting the interest rates paid by leveraged traders. This was the design of the first perpetual swap we launched in May 2016. The margin system used an insurance fund combined with a socialized loss mechanism called Dynamic Profit Equalization; we internally referred to it as the "Double Penetration Experience." We launched the XBTUSD perpetual swap, delisted the daily and monthly futures for Bitcoin/USD, but retained the quarterly futures. Most customers were confused, and our support ticket volume skyrocketed. One of the biggest confusions traders faced was the funding rate. They did not understand how it was calculated. Customers criticized us in forums, our TrollBox, and through support tickets. They demanded we remove the perpetual swap and provide it like the most liquid quarterly futures contract offered by OKCoin. Internally, there was a divide between those who supported keeping the product and those who advocated for reverting to only offering futures contracts.
The confusion was bad enough, but the rapid rise in Bitcoin prices brought another problem. The success of Shiller's design required domestic and foreign interest rates to be dynamic enough to influence behavior. If these rates were not sensitive enough to the market, perpetual swaps would trade at a much larger discount or premium compared to the spot price, known as the basis. Take Bitcoin in 2016 as an example; the price was rising rapidly, making it hard to find traders willing to short the market. In other words, the synthetic dollars used to buy spot and leveraged Bitcoin were in short supply on trading platforms. In any case, we needed to increase the supply of synthetic dollars on BitMEX. In Shiller's design, the observed market dollar-to-XBT interest rate differential could achieve this. If Bitcoin was rapidly rising in dollar terms, the dollar interest rate should be higher than the XBT rate. On Bitfinex, dollars earned 1% daily, while Bitcoin was far below this. This was a significant difference, but when Bitcoin was surging 10-25% daily, it was still not enough to entice arbitrageurs to sell perpetual swaps and buy Bitcoin for a market-neutral synthetic dollar lending. Given that external platforms provided the dollar and XBT rates, we had no control over them on BitMEX. The result was that our swap contracts traded at a high and continually rising premium relative to the spot.
The issue of the huge basis between perpetual swaps and spot created trouble for the margin system. To illustrate this, I will provide a programmatic and extreme example.
XBTUSD (perpetual swap) = $1,000
XBT (spot) = $500
Basis = $500
For traders, you can mark their positions based on the current perpetual swap price or the spot price. If we mark based on the spot price, the longs have an unrealized loss of $500, while the shorts have an unrealized gain of $500. To ensure that the longs can meet their margin requirements, we must add an additional $500 margin fee. If we mark based on the perpetual swap price, the longs incur no extra margin fees, but if the perpetual swap quickly falls back to the spot price, the longs will lose $500, while the shorts will not profit. To prevent socialized losses, we mark traders based on the spot price. This results in higher margin requirements for longs. This is not ideal, as it makes trading too expensive compared to our competitors (who do not require longs to pay this extra margin). I recognized the problem we faced and began to work on a solution, but it took time until market conditions prompted its implementation.
For those internally skeptical about whether we should continue offering perpetual swaps, this market dysfunction validated their viewpoint. I believed this product was our future and the salvation of our trading platform, but I needed to come up with a solution to this problem; otherwise, negative feedback would force us back to futures. My solution was to create a retrospective index that recorded the basis between swaps and spot. This basis, under certain constraints, would become the funding rate for the next period. For example, if the perpetual swap traded at an average 1% premium relative to spot over the past eight hours, if you held a position at the funding payment timestamp, the longs would pay 1% to the shorts.
To prevent instant liquidation at the funding payment timestamps (UTC 12:00, 20:00, 04:00), we automatically rebalance unrealized and realized profits and losses and use this feature to limit the funding rate:
min(funding rate, 75% * maintenance margin or 0.5%)
To adjust the sensitivity of the funding rate to the premium index, simply shorten or extend the funding payment interval, and vice versa. For example, if you charge funding fees every hour, the maximum cumulative funding fee paid daily would be 0.35% * 12 = 4.20% per day.
Ben, Jinming, and I spent a week studying how to implement this new funding calculation from the perspective of the trading engine and market structure. Ben and Jinming quickly added this feature to our trading engine. The feature was ready; it just needed extreme market dysfunction to force us to launch it.
Our chaotic market angered customers. Sam wanted to cancel the swaps, but I convinced him that if we launched the premium index, the market would self-correct within days. Whether good or bad, BitMEX was not a dictatorship of Arthur Hayes, but a triumvirate composed of Arthur, Ben, and Sam, ruling through consensus. I secured a stay of execution for the perpetual swaps and set about fixing the market in true Arthur Hayes fashion. Subtlety is not one of my strengths, so I decided that a sudden change over a weekend in mid-June 2016 would be the most effective course of action.
I announced that 24 hours later, the funding mechanism would change to a retrospective premium index. At that time, perpetual swaps were trading at a high premium, and after the announcement of the change, they immediately contracted as longs anticipated paying large funding fees. The funding fees would increase significantly due to the enormous premium of the perpetual swap price relative to spot. By Monday morning, the perpetual swaps were trading closer to spot, alleviating the market dysfunction. I told Sam to give it one more day, as the power of high interest rates would render the basis negligible. When Ben, Jinming, and I arrived at our Lai Chi Kok office for dim sum on Monday, the perpetual swaps began to perform well. Fortunately, my intuition about creating a self-correcting mechanism based on prior basis changes in funding amounts paid off, and the internal calls to remove perpetual swaps dissipated.
The only significant change to the product design that followed was the introduction of Automatic Deleveraging (ADL). We copied Huobi's ADL mechanism but made some adjustments. The main problem with Huobi's ADL implementation was that traders could not estimate the probability of their positions being prematurely liquidated for profit, and ADL traders would lose their entire position. Therefore, our innovation was to create a ranking system based on several factors and allow for partial ADL. The front end displayed a heat bar to traders, showing the probability of their positions being subject to ADL. The partial ADL feature allowed the trading platform to liquidate less than the entire position to balance the profits and losses of longs and shorts.
In the following months, we gradually phased out all Bitcoin futures contracts with expiration dates, followed by altcoin contracts. Traders became familiar with the trading of perpetual swaps day after day and gradually grew to like the product. One day at the end of 2017, BitMEX surpassed OKCoin to become the most liquid derivatives trading platform, and by the end of 2018, BitMEX became the largest crypto trading platform in the world (by spot and derivatives trading volume).
The Legacy of Predecessors
Everyone stands on the shoulders of giants. I want to list the previous technologies that contributed to the birth of perpetual swaps as a tribute.
ICBIT:
This was the first crypto derivatives trading platform. They invented inverse futures contracts. This means that the margin and profit/loss currency (Bitcoin) are the same as the local currency. For example, each contract is worth $100 worth of Bitcoin at any price. Regardless of the Bitcoin price, the dollar exposure of the contract is $100. In Bitcoin terms, the exposure is $1/x$. This is a peculiar derivative, but it works because the trading platform only accepts Bitcoin deposits. This is where I first traded Bitcoin futures, and I modeled the inverse contracts on BitMEX based on their design.
Robert Shiller:
As I explained earlier, he wrote a paper on perpetual futures contracts in 1993. The interest payments exchanged between longs and shorts are determined by an exogenous pricing source. I have never read his paper, but I guess his ideas influenced the suggestions we received from Joseph Wang and Bhavik Patel.
Chinese Commodity Trading Platforms:
The concepts of socialized losses, ADL, and insurance funds originated here. 796 was the first Chinese native crypto derivatives trading platform to use a socialized loss system. The technology stack and understanding of peculiar derivatives at 796 could not cope with providing 50x leverage to "degens." Ultimately, due to its poor implementation, the high weekly socialized loss tax rate gave OKCoin and Huobi an opportunity to steal all their Chinese customers.
To be fair, most crypto traders at that time could not correctly price quantos and inverse Bitcoin futures contracts. When BitMEX first started, we offered two types of futures. Our main market maker, still one of the largest crypto proprietary trading firms today, was severely impacted by incorrectly pricing these contracts, even after I told them their math was wrong. Their revenge was to angrily exit the trading platform for three years after their fundamental liquidation.
OKCoin:
The first iteration of the BitMEX margin system mimicked OKCoin's socialized loss system.
Huobi:
Many features of Huobi inspired BitMEX's ADL margin system.
Thank you for reading this lesson on the history of perpetual swaps. But who would care? Why would this invention from an obscure trading platform in Hong Kong spark a movement that would change the trading patterns of most financial asset derivatives? To understand this, I will gradually explain why perpetual swaps attract retail traders.
The Perfect Retail Trading Product
Perpetual swaps combined with a socialized loss margin system solve two "L's": Leverage and Liquidity. Therefore, retail traders love perpetual swaps. It is precisely because retail traders love perpetual swaps that they threaten the rent-seeking behavior of TradExchanges.
Retail traders find it difficult to obtain high leverage because, in most jurisdictions, retail traders cannot access the derivatives markets offered by TradExchanges. Therefore, they tend to gravitate towards shady "bucket shops" that offer high-leverage Contracts for Difference (CFDs). When trading CFDs, speculators face the bucket shop directly, while when trading perpetual swaps and futures, customers trade on a transparent order book. If the bucket shop has issues, it will not allow customers to enter and exit positions at reasonable prices. If traders want to avoid the non-consensual "ass-fucking" of CFD bucket shops, the only way they can satisfy their leverage needs is to use options. This is why products like 0DTE options are so popular in many markets. These products have crazy implied leverage. The problem with options is that the returns of the contracts do not correspond one-to-one with the underlying asset like futures contracts do. In industry terms, futures are "Delta One" products. In my brief TradFi career, I was a Delta One trader. In the early days of perpetual swaps, some of BitMEX's best traders, due to their understanding of Delta One derivatives, were my former colleagues at a Delta One trading desk in Hong Kong. Some of them used to dedicate one of their multiple screens in the trading hall exclusively to trading BitMEX perpetual swaps.
To truly understand why perpetual swaps are so transformative, I need to delve deeper into how margin systems operate in TradFi and cryptocurrency.
One reason TradFi trading platforms cannot offer high leverage to retail investors is that their clearinghouses guarantee settlement. If the losing party goes bankrupt, the clearinghouse must have enough paid-in capital to pay the winners. Therefore, trading platforms utilize the courts to recover any bankrupt trader's assets. But in cryptocurrency, the situation is completely different. Cryptocurrency is highly volatile. This volatility, combined with high leverage, creates a breeding ground for mass liquidations. For us owners of crypto trading platforms, recovering cryptocurrency through the courts is not feasible because the cryptocurrency we need to recover is anonymized assets. In TradFi, you do not own your financial assets; the intermediaries own them. Therefore, the courts can easily instruct a bank (as a government department, it will always follow court decisions) to send your assets to TradExchange to settle your debts. The court cannot tell the Bitcoin blockchain to send Bitcoin from one address to another. Therefore, the margin system of crypto trading platforms can only rely on the initially deposited margin to meet settlements. Thus, a socialized loss system combined with an insurance fund is absolutely necessary for operating a crypto derivatives trading platform.
Another reason TradExchanges cannot offer 100x leverage is that their clearinghouses are severely under-collateralized. A few years ago, I conducted some research on the capitalization levels of the world's largest clearinghouses. I learned some frightening things. Given that cryptocurrency is a 24/7 market, governments and central banks cannot manipulate it like stocks, bonds, and forex, for example, the sharp rise or fall in Bitcoin prices, combined with the large number of open contracts in the derivatives market, could destroy the largest trading platforms in the world. Therefore, the margin levels for cryptocurrencies and other derivatives offered by TradExchanges are far lower than those of their local crypto competitors. This is an important point of understanding when comparing the new stock perpetual swap products with high leverage (20x) launched by Hyperliquid and BitMEX (upcoming) to the low leverage levels offered by stock futures contracts listed on TradExchanges. Retail traders will avoid the stock derivatives products of TradExchange and turn to the high-leverage stock perpetual swap products of crypto trading platforms. The only way TradExchanges can compete is by changing the entire global derivatives market's clearing model, which I believe will not happen in the short term. The historical leverage of BitMEX provides an enlightening case study.
BitMEX initially adopted a guaranteed settlement margin system. Therefore, we could only offer 3x leverage. Our under-leverage compared to our Chinese competitors was the main reason our trading volume was nearly 0 in the first nine months of operation. To compete, I switched our system to a socialized loss system, which, combined with our superior trading engine technology, allowed us to increase leverage to 100x in October 2015. Shortly thereafter, our trading volume soared, making the trading platform profitable.
Crypto derivatives trading platforms provide customers with high leverage that they cannot obtain in TradFi, but the cost is that if prices move too quickly, traders sometimes cannot realize their full profits. This is perfect for cryptocurrency because if we did not have perpetual swaps, using options to gain leverage would be too expensive. Nick Andrianov, the chief trader at Maelstrom, who was the head of exotic derivatives at Deutsche Bank in Hong Kong, always pointed out the inefficiency of crypto options compared to perpetual swaps in leveraged trading. He told me that a call option on Bitcoin/USD with an implied volatility of 30, one month to expiration, would have a return on equity of only 3.1 times if the Bitcoin price rose by 10% in one day. Let's compare this to trading perpetual swaps with 100x leverage. The initial margin is 1%; for example, if you deposit 1 BTC as margin, the position size is 100 BTC. If BTC rises by 10% in one day, this means your unrealized profit is 10 BTC, or a return on equity of 10 times.
Trading options on high volatility assets and achieving profitability from correct judgments is not as effective as achieving profitability from correct judgments on high-leverage perpetual swaps. Therefore, traders use perpetual swaps instead of options to gain leveraged exposure.
Let's continue discussing the next "L"—Liquidity.
Because perpetual swaps never expire, they eliminate the need to spread liquidity across a range of futures contracts. The invention of perpetual swaps allows us at BitMEX to consolidate liquidity into a single contract. This gives us critical liquidity volume, challenging the dominance of OKCoin and Huobi, which spread liquidity across multiple quarterly futures contracts. Another benefit of offering only one contract for each cryptocurrency is that, from a user interface/user experience (UI/UX) perspective, it is easier for retail traders to understand. Users do not have to figure out which contract is the best trading contract based on their goals. There is only one option, and the liquidity is very good.
The Empire Strikes Back
I said that perpetual swaps and TradFi are not a match made in heaven; this is the most understated statement of my life.
I genuinely believe that perpetual swaps are a better product than futures and options contracts, and more importantly, they are better for the trading platforms themselves. This belief that I am selling a superior and safer product naively gave me the confidence to persuade regulators of its merits. At that time, I wanted BitMEX to have a crypto-enabled trading market for any asset class. This is how I thought we could destroy CME. I reached this conclusion by evaluating the performance of perpetual swaps against TradFi futures and options on the following variables:
Collateral usage and safety:
Because perpetual swaps allow for high leverage, customers do not have to keep excessive collateral on the trading platform. This is not an issue for TradFi trading platforms that hold fiat margin in banks. But for crypto trading platforms, which are frequently targeted by hackers, customers must be highly vigilant about the location and amount of collateral they keep on the trading platform.
If fiat stablecoins become the way customers fund their TradExchanges accounts in the future, the security of anonymized blockchain assets will become a real issue even for TradFi, as they will understand why crypto trading platforms prefer customers to minimize the amount of capital left on the trading platform.
Financial safety:
With a socialized loss margin system, crypto traders will only lose their initial margin at most. No matter how bad a trader they are (cough, cough, James Wynn), the losses on the crypto trading platform will not affect their off-platform financial situation. In stark contrast, in TradFi, a "degen" like James Wynn could wipe out his entire net worth because the trading platform would pursue all his financial assets to settle debts.
Trading platform security and competition:
Trading platforms can offer high-leverage trading on high-volatility assets because settlement is not guaranteed. Users accept that sometimes profitable traders will not receive all their profits in exchange for the ability to trade with 100x leverage. Because there is no need to hold a large amount of paid-in capital to support the guaranteed settlement of traditional clearinghouses, the number of products on trading platforms will increase. Trading platforms compete by offering differentiated products. In TradFi, most jurisdictions have only one national derivatives trading platform, which, combined with government support and a large capital base to support guaranteed settlement clearinghouses, prohibits any competition.
By mid-2018, because I believed that perpetual swaps and the socialized loss margin system were the safest way to provide high-leverage derivatives to a broad base of retail traders, I thought it was time to meet with the CFTC in the United States to obtain our license. My goal at that time was to make BitMEX larger than CME, which was then and now the largest derivatives trading platform in the world. This required entering and dominating the U.S. derivatives market. With the assistance of our lawyers at Sullivan & Cromwell, we arranged a meeting with the CFTC Lab and CFTC Market Division in Washington, D.C. The goal of these two meetings was to determine whether the CFTC was interested in accepting our applications for DCM (Designated Contract Market) and DCO (Derivatives Clearing Organization) licenses to introduce BitMEX's perpetual swaps and our socialized loss margin system to the U.S. market.
We spent a morning meeting with both teams. They asked very smart questions… I explained in detail how BitMEX operates, including the perpetual swap products and the socialized loss margin system. A few weeks later, I learned that the CFTC was not interested in accepting our license application. That was the end of it until more than two years later when the U.S. Department of Justice and the CFTC charged us with criminal and civil violations of the Bank Secrecy Act and the Commodity Exchange Act.
I was very naive at the time, thinking that the CFTC would appreciate my theoretical arguments. The CFTC, like all regulatory bodies, is protecting the status quo. No amount of logic can persuade them to allow competition if they believe the current market structure is sufficient. Allowing true innovation into the financial sector is something global regulators are reluctant to do because it could lead to the collapse of their national financial champions. It is commendable (though he does not deserve too much praise) that Sam Bankman-Fried (SBF) exploited the mistakes we made at BitMEX. He and his politically connected parents attempted to do the same thing in the American way, which is to introduce perpetual swaps to the U.S. and compete directly with CME… by donating large sums of money to politicians (mainly Democrats).
When you ask people why they invested in FTX or why they believed SBF would succeed, they mention that SBF's parents are professors at Stanford University and have close ties to the Democratic Party. I do not know now, but they were once one of the party's largest campaign fundraisers. When we talk about campaign finance in the U.S., the terms used carry a certain legitimacy. We talk about "donations" and "fundraising"; but when the West talks about other countries and their campaign finance systems, it is all about "bribery" and "corruption." Western investors deceived by SBF politely say that SBF is legally bribing the right people.
Some of my critics may counter that I am just a failed sour grape, throwing dirt at someone who is currently imprisoned and unable to respond quickly. But people remember that by mid-2022, FTX was on the verge of obtaining a banking license to offer its own stablecoin, as well as getting CFTC's DCM and DCO licenses. Look at the image gallery below, and you will get the impression that SBF is a trusted friend of the establishment, even as his business was trying to destroy one of their biggest corporate donors—the banking system. The right kind of white boy walks into the lion's den and gets a hug; this black guy walks in and gets convicted. That's how it is; read my article "White Boy" to delve deeper into how SBF exploited stereotypes for his own gain, harming his customers, investors, and global regulators. SBF and FTX.us disbursed nearly $100 million in campaign donations, and if he weren't a "clown" with no talent in risk management and trading, FTX would be larger than Binance at this moment.
Look how cute. To SBF's right is U.S. Congresswoman Maxine Waters, the powerful chair of the House Financial Services Committee from 2020 to 2022 (the peak of FTX). See, this is not a racial issue. This is the post-racial American future that Dr. Martin Luther King Jr. envisioned in his "I Have a Dream" speech in 1963.
Former U.S. President Biden appointed Caroline Pham as a CFTC commissioner in early 2022. SBF certainly knew how to deal with the right people. My closest encounter with a CFTC commissioner was at a CME-sponsored party in Boca Raton, Florida, in 2018.
Money talks…
After the collapse of SBF's FTX/Alameda, the acceptance of perpetual swaps by regulators and TradFi suffered a severe blow. This is because Team Blue Democrats in the U.S. shifted their attitude towards cryptocurrency from ambivalence to outright hostility. Leading politicians trusted SBF because he was the right kind of white boy, attended prestigious universities, and his parents were political heavyweights. To clear themselves of any complicity in the SBF scam, they set out to prove they had always opposed fraudulent cryptocurrencies. Thus, from late 2022 to early 2025, various U.S. regulatory agencies took a hard line against individuals in the U.S. cryptocurrency space until former President Trump regained power. The shift of Trump and his family from cryptocurrency critics to cheerleaders is worth examining.
Trump's pro-cryptocurrency stance is both smart politics and a form of revenge. It is smart politics because Democrats alienated a wealthy, vocal, and rapidly growing voter base. The transformative nature of cryptocurrency allowed SBF and others to accumulate billions in wealth in just a few years. The new crypto elites in the U.S. are eager to support any politician they believe is worth supporting. Trump and his Team Red Republicans raised hundreds of millions from wealthy cryptocurrency individual donors, companies, and PACs. In 2024, this money helped Trump overwhelmingly defeat Democratic presidential candidate Kamala Harris and helped the Republicans regain the House and Senate. This was one of the loudest victories in modern American political history.
This is revenge because Trump's opponents debanked his family after he left office in 2020, violating the rules of the game. Trump is part of the establishment. Just look at the photos of him with the elites of New York City (the imperial capital) over the past 40 years. Trump's opponents crossed a line by targeting him through criminal and financial means. Typically, when elites disagree in the context of the "kabuki theatre" of a four-year presidential election cycle, it is merely for public consumption, to show the plebeians that Team Blue Democrats and Team Red Republicans have different political agendas, while in reality, they are both promoting the long-term rule of the elite. No matter what mistakes they made, past presidents always received pardons from the next administration. Even Richard Nixon was pardoned. But it was not the same for Trump. After losing the 2020 election, he faced a barrage of civil and criminal convictions. To exacerbate his defeat, Team Blue Democrats debanked the Trump family from 2021 to 2025. From someone who was at best dismissive of cryptocurrency, he and his family now understand the evil power of banks. They also recognize the necessity of non-political hard currency like Bitcoin. Trump embraced Bitcoin and cryptocurrency out of necessity. If you listen to his son's remarks, they clearly state that one of the main reasons their family is fully invested in cryptocurrency is their experiences with the banking system during the Biden administration. Now that Trump is back, it is time to dismantle the financial system that nearly destroyed his family and his business empire by allowing cryptocurrency to compete with TradFi. Therefore, by 2025, TradFi must adapt or die to perpetual swaps and other crypto innovations.
I revisit this regulatory history of perpetual swaps in the U.S. for two reasons. First, most global TradFi regulators follow the U.S. like lemmings. This is a "cover your ass" situation. No regulator will lose their job for following the financial regulations of the empire. But if a regulator acts differently and suffers adverse consequences, they will certainly be swept out. Therefore, if the U.S. is embracing perpetual swaps for any reason, it gives regulators permission to embrace them. For example, SGX immediately launched perpetual swaps after Trump made cryptocurrency acceptable to TradFi regulators again. Second, I want to provide this history as evidence that the status quo will not change until at least 2029, when Trump's term ends. By then, the largest S&P 500 and/or Nasdaq 100 derivatives will be stock perpetual swaps traded on crypto trading platforms, not contracts traded on CME. By that time, the influence of perpetual swaps will be too great to be destroyed, even if the next "emperor of America" is anti-crypto.
Before I turn to how perpetual swaps will completely disrupt stock trading, I want to provide the following perspective based on the wealth created by some key figures in perpetual swaps. Changpeng Zhao (CZ), co-founder of Binance, is, I believe, one of the top ten richest people in the world, and he is not a political leader. He achieved this in less than a decade. I trace the rise of his wealth directly to the moment Binance took over from BitMEX as the largest trading platform in the world after the March 2020 Bitcoin pandemic price crash. Binance elevated the adoption of perpetual swaps to another level, combined with their dominance in the altcoin trading space, creating a crypto trading platform giant. SBF created FTX after trading perpetual swaps for his hedge fund Alameda on BitMEX. SBF achieved billionaire status faster than anyone in human history (at least on paper) through the growth of FTX, which essentially only offered perpetual swaps. Jeff Yan of Hyperliquid has likely become a dollar billionaire, if not very close, after creating the fastest-growing perpetual swap DEX, and if my stablecoin theory comes to fruition, he may ultimately become the largest trading platform in human history. The next batch of crypto billionaires in the trading platform space will come from the intersection of perpetual swaps and stocks.
Stock Perpetual Swaps
TradFi is desperately clinging to its dominance in stock trading. The public stock market is politically and financially very important to the establishment. It will be interesting to observe how they respond to the rapid rise of stock perpetual swaps. The first market that perpetual swaps will dominate is the offshore trading of U.S. stock price risk.
U.S. stocks, along with all stocks, will ultimately be tokenized. But stock perpetual swaps can succeed without the tokenization of stocks. The foundation for perpetual swaps on stocks has already proliferated. The U.S. stock market is the largest in the world. The market capitalization of the largest U.S. tech companies, like Nvidia, is larger than the annual GDP of most countries. People around the world are using their products. But most retail traders cannot trade these stocks. These retail traders are accustomed to trading cryptocurrencies with high leverage 24/7 from anywhere in the world. If you give Jaewon in Seoul the opportunity to bet on NVDA perpetual swaps in the same way he trades Bitcoin, on the subway ride home from work, he would be all in. That is the promise of stock perpetual swaps.
Stock perpetual swaps are already trading over $100 million daily. As traders and market makers become familiar with the contract specifications, this number will soon reach billions. With the increasing frequency of sudden political, military, and economic announcements after the Friday night close of TradFi markets, stock perpetual swaps will become the way for institutions and retail traders to hedge risks over the weekend. This will force large U.S. stock trading platforms to transition to 24/7 trading faster than they originally planned. Will the "muppets" of cryptocurrency or the suited bankers win the stock perpetual swap market? It will depend on whether TradFi regulators allow clearinghouses to offer a socialized loss system.
I predict that by the end of 2026, the price discovery of the largest U.S. tech stocks and key U.S. indices (i.e., S&P 500, Nasdaq 100) will occur in the perpetual swap market serving retail investors. I will smile when financial media showcase the codes for S&P 500 stock perpetual swaps as the best pricing source, rather than the CME's Globex version. It’s not too late yet; CME and other trading platforms have all the advantages in the world, along with a large number of smart, proactive employees. Perhaps they will read this article and get motivated. There is no reason to let a group of crypto degenerates displace their intermediary status, especially in a context where regulators are competing to cater to trading platforms.
The Final Frontier
The largest traded derivative contract globally is the CME SOFR futures contract. Fixed income trading volume dwarfs that of the stock, forex, and cryptocurrency markets. The challenge I pose to our crypto community is to create a derivative that allows retail investors to speculate on interest rates in new ways. The Pendle team is working hard to do this. Their Boros protocol is rapidly gaining attention. But this vertical space is open for many innovators to bring their ideas to the market.
Article link: https://www.hellobtc.com/kp/du/11/6141.html
Source: https://cryptohayes.medium.com/adapt-or-die-6d14649bdd90
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