Adaptation or Death
Less than a decade ago, those high-and-mighty, respected veterans of traditional finance (TradFi) were filled with disdain and contempt for the 100x leveraged crypto derivatives market created by BitMEX using a new derivatives contract called "perpetual swap." I laughed when I read the letter from Jim Grant of Grant's Interest Rate Observer and Dan Oliver of Myrmikan Capital, emphasizing how insane BitMEX was providing this "weapon of mass destruction" (WMD) for cryptocurrencies.
But things change so quickly. Suddenly, traditional exchanges like the Singapore Exchange (SGX) and the Chicago Board Options Exchange (CBOE) are set to launch perpetual contracts or similar products by the end of 2025. [1] In the retail sector of Pax Americana, calls for granting commoners and nobles the same privileges, allowing them to trade perpetual contracts without VPNs, prompted Coinbase to launch a CBOE-like, stripped-down version of perpetual contracts earlier this year. In this declining empire, other fearless entrepreneurs eager to break the Chicago Mercantile Exchange's (CME) monopoly will have an opportunity in the proposed regulatory sandbox managed by the CFTC. [2] The CFTC is said to have reformed itself and become a friend of financial innovation again after hunting me down and others in the crypto derivatives space.
What is the magic of perpetual contracts that has created a " fight to the death " moment for traditional finance? Why is the trading volume of all financial asset derivatives globally shifting from futures and options contracts with expiration dates to perpetual contracts that never expire?
To answer these questions, I will first give a history lesson on perpetual contracts , explaining how and why BitMEX and I invented this new financial primitive. Then, I will break down the fundamental principles of perpetual contracts and why they are a better fit for derivatives in our 24/7, 365-year interconnected world. Finally, I will share my thoughts on the adoption trajectory of perpetual contracts beyond cryptocurrencies and explain why traditional exchanges will either adapt their products by incorporating perpetual contracts and “socialized loss margin systems” or face rapid demise under the pressure of centralized (CEX) and decentralized (DEX) crypto exchage.
The hottest new DEX, Hyperliquid, has launched a permissionless protocol, HIP-3, allowing a company called XYZ to create perpetual contracts for Nasdaq 100 stocks. The contract now has a daily trading volume of over $100 million, making it one of the largest contracts on Hyperliquid by average daily trading volume (ADV). [3] Stock perpetual contracts (Equity perps) will be the hottest product in 2026 , and all DEXs and CEXs, such as my beloved BitMEX, will offer them by the end of next year. The product will completely disrupt the stock derivatives trading market, which has so far resisted the wave of progress regarding market access and competition from diversified venues. If you invest in exchange tokens or stocks, you need to know everything about perpetual contracts.
Learn your history
If you want to conquer a foreign race, strip them of their history. When I was young, my parents always supplemented the official narrative taught in school with other readings on specific topics. It wasn't that they had a prescribed alternative version of known facts; rather, they encouraged me to question the official narrative and instilled in me books with different perspectives. Clearly, much of this academic pursuit stemmed from the lack of positive and authentic narratives about “blackness” in the American experience. My parents wouldn't allow me to become ignorant as the public and private school systems expected.
In light of this, I have provided this firsthand account of the history of perpetual swaps.
Recently, a lot of people have appeared out of nowhere, offering their opinions on the importance and origins of cryptocurrency perpetual swaps (often simply called "perps"). Given that they're telling my (and BitMEX's) story (which is often incorrect), let's set the record straight. Like everything in life, the BitMEX team created perpetual contracts and their accompanying margin system using prior art from others. I'm offended by anyone claiming this was just a design by Robert Shiller in the 1990s, popularized by BitMEX and the crypto industry. Fuck you! That's nonsense. Read on to find out why.
Let's go back to May 2016, when BitMEX was a company with only five people. Ben Delo and Sam Reed were the other two co-founders, and our first two employees were Greg Dwyer (business development) and Jinming Shao (trading engine engineer). The crypto derivatives landscape then was similar to today in some ways, but also quite different in others.
OKCoin (now OKX) and Huobi (now HTX) dominated the crypto derivatives market. Together they controlled about 95% of the daily trading volume. BitMEX was far behind in third place, which, frankly, was insignificant. While we had the highest leverage of any exchange (100x), the liquidity of our futures contracts paled in comparison to OKCoin and Huobi. The most liquid contract at the time was a quarterly delivery futures contract with Bitcoin margin. [4] At BitMEX, we tried many ways to improve the liquidity of our contracts. At that time we had calendar spreads, daily, weekly, monthly and quarterly futures contracts. In short, we spread our liquidity across a variety of XBT/USD futures contracts, which was too thin. [5] We often asked ourselves if there was a way to create a product with no expiry date so that we could concentrate our liquidity on a single contract?
We also asked ourselves how to simplify derivatives trading to better appeal to users graduating from margin trading. Margin trading is intuitive because traders simply borrow money and trade on a spot order book. When trading on margin, traders don't need to understand expiration dates or the price difference (basis) between futures and spot. But when these traders upgrade to trading futures, they get confused. Because Ben, Sam, and I personally answer every customer support question, we always strive to lighten our daytime workload so we can do other things. A product that looks and feels like margin trading would eliminate the need to answer many of the questions that confuse our clients.
The first iteration of perpetual contracts stemmed from an attempt to solve these two problems. Ben and I contacted several BitMEX enthusiasts and excellent financial engineers in Hong Kong. We asked them (Joseph Wang & Bhavik Patel) for ideas on how to create such a product. The feedback resembled the perpetual futures contracts described in a paper published by Robert Shiller in 1993.
Our first perpetual swap was a product where long and short positions exchanged future cash flows based on daily updated USD and XBT funding rates . At the time, the dominant spot and margin trading exchange was Bitfinex, which offered a highly liquid peer-to-peer lending market. Users could borrow and lend through these markets, directly impacting the interest rates paid by margin traders. This was the design of our first perpetual contract, launched in May 2016. The margin system used an insurance fund combined with a socialized loss mechanism called “Dynamic Profit Equalization”; internally, we jokingly referred to it as the “Double Penetration Experience.” We launched the XBTUSD perpetual swap, delisted the daily and monthly Bitcoin/USD futures, but retained the quarterly futures contracts. Most customers were confused, and our customer support tickets surged. The biggest “brainstorming” for traders was the funding rate. They didn’t understand the calculation method. Customers were furious with us on forums, our TrollBox, and customer support tickets. They demanded we remove the perpetual contracts and offer the most liquid quarterly futures contracts, like OKCoin. Internally, a division arose between those who supported retaining the product and those who supported offering only futures contracts.
The confusion was bad enough, but the rapid rise in Bitcoin prices brought another problem. The success of Schiller’s design required that local and foreign interest rates be dynamic enough to influence behavior. If these rates were not sensitive enough to the market’s reaction, perpetual contracts would trade at a huge discount or premium relative to the spot price (called the basis). In the Bitcoin market in 2016, prices rose rapidly, making it difficult to find traders to short the market. In other words, there was a shortage of synthetic dollars for buying spot and leveraged Bitcoin on exchanges. [6] We needed to increase the supply of synthetic dollars on BitMEX in some way. In Schiller’s design, the observed market USD to XBT interest rate differential should have done this. If Bitcoin rose rapidly in USD terms, the USD interest rate should be higher than the XBT interest rate. On Bitfinex, the USD yielded 1% per day, while Bitcoin yielded much less. This was a fairly large difference, but when Bitcoin was surging 10-25% per day, it was not enough to attract arbitrageurs to synthetically lend dollars by selling perpetual contracts and buying Bitcoin in a market-neutral manner. Given that external platforms offer USD and XBT interest rates, which we cannot control on BitMEX, the result is a high and rising premium for our swap prices relative to the spot market.
The problem with an excessively large basis between perpetual contracts and the spot market is that it creates problems for the margin system. To illustrate this, I will provide a stylized, extreme example.
- XBTUSD (Perpetual Swap) = $1,000
- XBT (in stock) = $500
- Basis = $500
For traders, you can tag their positions at the current perpetual contract price or the spot price. If we tag at the spot price, the long position has $500 in unrealized loss and the short position has $500 in unrealized gain. To ensure that the long position can meet the margin requirement, we must add an extra $500 in margin. If we tag at the perpetual contract price, the long position has no extra margin fee, but if the perpetual contract quickly falls back to the spot price, the long position will lose $500 and the short position will not profit. To prevent the socialized loss situation, we tag traders at the spot price. [7] This results in a higher margin requirement for the long position. This is not ideal because it makes trading too expensive relative to competitors who do not require the long position to pay this extra margin. I recognized the problem we faced and started working on a solution, but market conditions took some time to allow it to be implemented.
This market dysfunction validated the views of those within the company who questioned whether we should continue offering perpetual contracts. I believe this product is our future and salvation as an exchange, but I need to devise a solution to this problem, otherwise negative feedback will force us to revert to futures. My solution is to create a look-back index that records the basis between the swap and spot prices. This basis, subject to certain restrictions, will become the funding rate for the next cycle. For example, if the average trading price of the perpetual contract over the past eight hours is 1% higher than the spot price, if you hold a position at the funding rate timestamp, the long position will pay the short position 1%.
To prevent instantaneous liquidation at funding rate timestamps (12:00 UTC, 20:00 UTC, 04:00 UTC), we automatically rebalance unrealized and realized profits and losses, and use this function to limit funding rates:
Min (Funding Rate, 75% * Maintenance Margin or 0.5%)
To adjust the sensitivity of funding rates to the premium index, simply shorten or lengthen the time interval between funding rate cycles. For example, if you charge funding fees hourly, the maximum cumulative funding fee payable per day is 0.35% * 12 = 4.20% .
Ben, Jinming, and I spent a week studying how to implement this new funding rate calculation from the perspectives of trading engines and market structure. Ben and Jinming quickly added the functionality to our trading engine. The functionality was ready; it just needed an extreme market dysfunction to force us to roll it out.
Our messed-up market angered our clients. Sam wanted to kill the swaps, and I convinced him that if we launched a premium index, the market would self-correct within days. For better or worse, BitMEX wasn't a dictatorship of Arthur Hayes, but rather a triumvirate of Arthur, Ben, and Sam, ruling through consensus. I secured a moratorium on perpetual contracts and set out to fix the market in a truly Arthur Hayes-esque manner. Subtlety isn't one of my virtues, and I decided that a sudden change over a weekend in mid-June 2016 was the most effective course of action. [8]
I announced that the funding rate mechanism would be changed to a backtested premium index 24 hours later. The perpetual contract's premium was very high at the time, and it immediately contracted after the announcement as long positions were liquidated in anticipation of large funding payments. Given the high premium of the perpetual contract relative to the spot price, funding payments would increase significantly. By Monday morning, the perpetual contract was trading closer to the spot price, mitigating market dysfunction. I told Sam to give it another day; the basis would be negligible due to the power of high interest rates. When Ben, Jinming, and I arrived at our office in Lai Chi Kok for snacks on Monday, the perpetual contract started performing very well. Thankfully, my intuition about creating a self-correcting mechanism that changed funding amounts based on previous basis worked, and internal calls to remove the perpetual contract disappeared.
The only major change to the product design after that was the introduction of Automatic Limit Up (ADL) . We copied Huobi's ADL mechanism but made some adjustments. The biggest problem with Huobi's implementation of ADL was that traders couldn't estimate the probability of their profitable positions being prematurely closed, and when ADL was applied, traders would lose the entire position. Therefore, our innovation was to create a ranking system based on several factors and allow partial ADL. The front end displays a heat bar to traders, showing the probability of their positions being ADLed. The partial ADL feature allows the exchange to close less than the entire position to balance the profits and losses of long and short positions.
Over the next few months, we gradually phased out all futures contracts with expiration dates for Bitcoin and Altcoin. Day by day, traders adapted to the perpetual contract trading experience and gradually grew to like the product. One day in late 2017, BitMEX overtook OKCoin to become the most liquid derivatives exchange, and by the end of 2018, BitMEX had become the world's largest cryptocurrency exchange by spot and derivatives trading volume.
Everyone stands on the shoulders of giants. I want to list the existing technologies that led to the creation of perpetual contracts so that credit can be given to those who deserve it.
- ICBIT: This was the first crypto derivatives exchange. They invented the inverse futures contract. This means that the margin and profit/loss currency (Bitcoin) are the same as the original currency. For example, each contract is worth $100 of Bitcoin at any price. Regardless of the Bitcoin price, the contract's USD exposure is $100. In Bitcoin terms, the exposure is 1/x. This is an exotic derivative, but it works because the exchange only accepts Bitcoin deposits. This was the first place I traded Bitcoin futures; I simulated the inverse contract based on their design on BitMEX.
- Robert Schiller: As I explained earlier, he wrote a paper on perpetual futures contracts in 1993. The interest payments exchanged between long and short positions are determined by an exogenous pricing source. I have never read his paper, but I can imagine that his ideas influenced the advice we receive from Joseph Wang and Bhavik Patel.
- The concepts of socialized loss, ADL, and insurance funds originated from Chinese commodity exchanges . 796 was the first Chinese-registered crypto derivatives exchange to use a socialized loss system. 796's technology stack and understanding of exotic derivatives were ill-suited to offering gamblers 50x leverage. Ultimately, due to poor implementation, the high weekly socialized loss tax rate gave OKCoin and Huobi the opportunity to steal all their Chinese customers. To be fair, most crypto traders at the time couldn't properly price dual-currency (quanto) and inverse Bitcoin futures contracts. When BitMEX was founded, we offered both types of futures. Our anchor market makers (who are still among the largest crypto proprietary traders today) were liquidated even after I told them they had miscalculated the math. Their revenge was to angrily withdraw from the exchange for three years after essentially being liquidated.
- OKCoin: The first iteration of BitMEX's margin system imitated OKCoin's social loss system.
- Huobi: Many of Huobi's features inspired BitMEX's ADL margin system.
Thank you for reading this history lesson on perpetual contracts. But who cares? Why did this invention from an obscure Hong Kong exchange spark a movement that changed the way most financial asset derivatives are traded? To understand this, I will explain step by step why perpetual contracts are attractive to retail traders.
The perfect retail trading product
Perpetual contracts, coupled with a socialized loss margin system, address two key "L"s: leverage and liquidity . This is why retail traders favor perpetual contracts. And it is precisely this preference for perpetual contracts that threatens rent-seeking behavior on traditional exchanges.
Retail traders struggle to access high leverage because, in most jurisdictions, they lack access to the derivatives markets offered by traditional exchanges. They are thus drawn to shady "bucket shops" that offer highly leveraged Contracts for Difference (CFDs). In CFD trading, the gambler faces the bucket shop directly, whereas in perpetual contracts and futures, clients trade on a transparent order book. If the bucket shop is corrupt, it won't allow clients to enter or exit positions at reasonable prices. If traders wish to avoid being involuntarily "backstabbed" by CFD bucket shops, their only way to gain leverage is through options. This is why 0DTE (zero-day expiration) options are so popular in many markets. The implicit leverage of these products is insane. The problem with options is that the contract's payout isn't directly tied to the underlying asset like a futures contract. In industry terms, futures are "Delta One" products. I was a Delta One trader during my brief career in traditional finance. In the early days of perpetual contracts, some of BitMEX's best traders were former colleagues at Delta One trading desks across Hong Kong, thanks to their understanding of Delta One derivatives. Some even used to dedicate one of the many screens in the trading hall to trading BitMEX perpetual contracts.
To truly understand why perpetual contracts are so transformative, I need to delve deeper into how margin systems work in traditional finance and cryptocurrencies.
One reason traditional exchanges can't offer high leverage to retail investors is that their clearinghouses guarantee settlement. If a losing party goes bankrupt, the clearinghouse must have sufficient paid-up capital to pay the winner. As a result, exchanges rely on the courts to recover all assets of any bankrupt trader. But in cryptocurrencies, the situation is entirely different. Cryptocurrencies are extremely volatile. Combining this volatility with high leverage creates the recipe for massive liquidations. For us crypto exchage owners, recovering cryptocurrencies through the courts is not feasible because the cryptocurrencies we must recover are bearer assets. In traditional finance, you don't own your financial assets; the intermediaries do. Therefore, a court can easily instruct a bank (which, as an extension of the government, always follows court judgments) to send your assets to a traditional exchange to repay debts. A court cannot tell the Bitcoin blockchain to send Bitcoin from one address to another. As a result, crypto exchage margin systems can only rely on the initial margin issued to meet liquidation needs. Therefore, a socialized loss system combined with an insurance fund is absolutely necessary for operating a crypto derivatives exchange.
Another reason traditional exchanges can't offer 100x leverage is their extremely under-collateralized clearinghouses. A few years ago, I did some research on the capitalization levels of the world's largest clearinghouses. I learned something terrifying. Given that cryptocurrencies are a 24/7 market, governments and central banks can't manipulate them like they do stocks, bonds, and foreign exchange. A dramatic rise or fall in Bitcoin's price, coupled with the massive open interest in the derivatives market, could potentially destroy the world's largest exchanges. Therefore, traditional exchanges offer far lower margin levels for cryptocurrencies and other derivatives than their native crypto competitors. This is a crucial point to understand when comparing the new high-leverage (20x) stock perpetual contracts offered by Hyperliquid and BitMEX (coming soon) with the low leverage offered by stock futures contracts listed on traditional exchanges. Retail investors will ditch traditional exchange stock derivatives and opt for the high-leverage stock perpetual contracts on crypto exchage. The only way for traditional exchanges to compete is to change the clearing model of the entire global derivatives market, which I don't think will happen anytime soon. BitMEX's leverage history provides an illuminating case study.
BitMEX initially used a guaranteed settlement margin system. Therefore, we could only offer 3x leverage. This insufficient leverage was the main reason our trading volume was practically zero for the first nine months of operation, compared to our Chinese competitors. To compete, I switched our system to a socialized loss system, combined with our superior trading engine technology, enabling us to increase leverage to 100x in October 2015. Shortly thereafter, our trading volume surged, and the exchange became profitable.
Crypto derivatives exchanges offer clients high leverage they can't get in traditional finance, but at the cost of sometimes missing out on full profits if prices rise or fall too quickly. This is perfect for cryptocurrencies because using leverage with options would be too expensive without perpetual contracts. Nick Andrianov, chief trader at Maelstrom, who previously headed exotic derivatives at Deutsche Bank's Hong Kong branch, always points out how inefficient crypto options are compared to perpetual contracts in leveraged trading. He told me that if Bitcoin's price rises 10% in a day, a Bitcoin/USD call option with an implied volatility of 30 and one month to expiry would only have a return on equity of 3.1x. Let's compare that to trading a perpetual contract with 100x leverage. The initial margin is 1%; for example, you put in 1 BTC as margin for a 100 BTC position. If BTC rises 10% in a day, that means your unrealized profit is 10 BTC, or 10x return on equity .
The profit from correctly trading options on highly volatile assets is less than that from correctly trading highly leveraged perpetual contracts. Therefore, traders use perpetual contracts instead of options to gain leveraged exposure.
Let's move on to the next L – Liquidity .
Because perpetual contracts never expire, there's no need to spread liquidity across a series of futures contracts. The invention of perpetual contracts allowed us at BitMEX to consolidate liquidity onto a single contract. This gave us crucial liquidity quality, enabling us to challenge the dominance of OKCoin and Huobi, which spread liquidity across several quarterly futures contracts. Another advantage of having only one contract per cryptocurrency is that it's easier to understand from a UI/UX perspective for retail traders. Users don't have to figure out which contract is best suited for their trading goals. There's only one option, and the liquidity is excellent.
When you find the Lord, you must spread the gospel. After perpetual contracts made BitMEX the world's largest exchange, it's time to attack other markets.
Imperial Counterattack
The most conservative thing I've ever said in my life is: perpetual contracts and traditional finance are not a perfect match.
I wholeheartedly believe that for the vast majority of traders, and most importantly for the exchange itself, perpetual contracts are a superior product compared to futures and options contracts. This belief that I am selling a superior, safer product naively gives me the confidence to convince regulators of its merits. I want BitMEX to dominate the crypto-enabled trading market for any asset class. This is how I believe we can destroy CME. I reached this conclusion by evaluating the performance of perpetual contracts versus traditional financial futures and options on the following variables:
- Collateral Usage and Security: Because perpetual contracts allow for high leverage, clients don't need to hold as much collateral on the exchange. This isn't a problem for traditional exchanges where fiat currency margins are held in escrow by banks. However, for crypto exchage, which are frequently hacked, clients must be highly vigilant about how much collateral they leave on the exchange. If fiat stablecoins become the means by which clients fund their traditional exchange accounts in the future, the security of bearer blockchain assets becomes a real issue, even for traditional finance, and they will understand why crypto exchage prefer clients to minimize the capital they keep on the exchange.
- Financial security: With the socialized loss margin system, crypto traders can only lose their initial margin at most. No matter how bad a trader they are, cough cough James Wynn, losses on a crypto exchage will not affect their off-platform financial situation. This contrasts sharply with traditional finance, where a gambler like James Wynn could potentially destroy his entire net worth as the exchange would pursue all his financial assets to pay off debts.
- Exchange Security and Competition: Exchanges can offer high leverage trading on highly volatile assets because settlement is not guaranteed. Users accept that traders who sometimes profit may not receive their full winnings in exchange for the ability to trade with 100x leverage. Because the huge paid-up capital required to support the guaranteed settlement of traditional clearinghouses is not needed, the number of exchange products increases. Exchange competition provides differentiated products. In traditional finance, most jurisdictions have a national derivatives exchange, where government support combined with a huge capital base to support guaranteed clearinghouses prohibits any competition.
By mid-2018, because I believed that perpetual contracts backed by the social loss margin system were a safe way to provide highly leveraged derivatives to a broad retail trading population, I thought it was time to go to the United States to meet with the CFTC to issue us a license. My goal at the time was to make BitMEX bigger than CME, which was, and still is, the world’s largest derivatives exchange. This required entering and dominating the U.S. derivatives market. With the assistance of our lawyers, Sullivan & Cromwell, we arranged meetings in Washington, D.C., with the CFTC Labs and the CFTC Markets Division. The goal of these two meetings was to determine whether the CFTC was interested in accepting the DCM and DCO license applications and introducing BitMEX’s perpetual contracts and our social loss margin system to the U.S. market. [9]
We spent a morning meeting with two teams. They asked very insightful questions… I explained in detail how BitMEX operated, including its perpetual contract products and socialized loss margin system. A few weeks later, I learned that the CFTC was not interested in receiving our license application. That's how it went, until more than two years later, when the U.S. Department of Justice and the CFTC indicted us for criminal and civil offenses related to violations of the Bank Secrecy Act and the Commodity Exchange Act.
I naively believed the CFTC would appreciate my reasonable arguments. Like all regulators, the CFTC's role is to protect the status quo. No amount of logic can convince them to allow competition if they believe the current market structure is good enough. Global regulators are reluctant to allow genuine innovation into the financial sector because it could lead to the collapse of their national financial champions. Commendably (though he doesn't deserve it), SBF (Sam Bankman-Fried) capitalized on the mistakes we made with BitMEX. He and his politically connected parents attempted to do the same thing, bringing perpetual contracts to the US and going head-to-head with CME, by doing it the American way… donating huge sums of money to politicians (primarily Democrats).
When you ask people why they invested in FTX, or believed SBF would succeed, they mention that SBF's parents were Stanford professors with close ties to the Democratic Party. I don't know about now, but they were once one of the party's biggest campaign finance bundlers. When we talk about campaign finance in the US, the terminology we use implies a certain degree of legitimacy. We talk about "donations" and "bundling"; but when the West talks about other countries and their campaign finance systems, it's all about "bribery" and "corruption." Western investors deceived by SBF politely stated that SBF was legally bribing the right people.
Some of my critics might argue that I'm just a sore loser throwing mud at someone who can't recover quickly because he's currently imprisoned. But people remember that by mid-2022, FTX is poised to receive a banking license to offer its own stablecoin, as well as DCM and DCO licenses from the CFTC. Looking at the gallery below, you get the impression that SBF is a trusted friend of the establishment, even as his business attempts to destroy one of their largest corporate donors—the banking system. The kind of "right" white boy who walks into a lion's den gets a hug; this black guy walks in and gets sued. That's it; read my article "White Boy" for a deep dive into how SBF exploits stereotypes for his own benefit and harms his clients, investors, and global regulators. SBF and FTX.us have distributed nearly $100 million in campaign contributions, and if he weren't a complete idiot when it comes to risk management and trading, FTX would be bigger than Binance right now.
(Image: SBF with Maxine Waters) Ah, how lovely. To SBF's right is U.S. Representative Maxine Waters, who chaired the House Financial Services Committee from 2020 to 2022 (FTX's heyday). See, this has nothing to do with race. This is the post-racial American future envisioned by Dr. Martin Luther King Jr. in his 1963 "I Have a Dream" speech.
(Photo: SBF with Caroline Pham) Former US President Biden appointed Caroline Pham as a CFTC commissioner in early 2022. SBF certainly knows how to network with the right people. My closest brush with a CFTC commissioner was at a CME-sponsored cocktail party in Boca Raton, Florida in 2018.
(Image: SBF donation news) Money speaks volumes...
Following the FTX/Alameda collapse, the acceptance of perpetual contracts by US and overseas regulators and traditional finance suffered a severe blow. This was because the US Democratic Party's attitude towards cryptocurrencies shifted from ambivalence to outright hostility. Major politicians trusted SBF because he was the kind of "good white boy" who attended a prestigious university and whose parents were political heavyweights. To dispel the stench of their involvement in the SBF conspiracy, they set out to prove they had always opposed fraudulent cryptocurrencies. Therefore, from late 2022 to early 2025, when President Trump returned to the throne, various US regulators cracked down on cryptocurrency advocates in the US. The shift in attitude of Trump and his family from cryptocurrency critics to cheerleaders warrants close examination.
Trump’s support for cryptocurrencies was both shrewd politics and revenge. It was shrewd politics because the Democratic Party alienated a wealthy, outspoken and growing electorate. The transformative nature of cryptocurrencies allowed SBF and others to amass billions of dollars in just a few years. America’s crypto upstarts were eager to support any politician they deemed worthy. Trump and his Republican Party raised hundreds of millions of dollars from wealthy crypto individual donors, corporations and political action committees (PACs). [10] In 2024, this money helped Trump defeat Democratic presidential nominee Kamala Harris by a landslide and helped the Republicans win the House and Senate. It was one of the loudest victories in modern American political history.
This is revenge because Trump's opponents broke the rules of the game by debanking his family after he left office in 2020. Trump is part of the establishment. Just look through his photos with the elite of New York City, the imperial capital, over the past 40 years. Trump's opponents crossed a red line by pursuing him criminally and financially. Usually, when elites disagree against the backdrop of the kabuki theater of the quadrennial presidential election cycle, it's for the public, to show the common people that Democrats and Republicans have different political platforms, and that they are actually both working to prolong the lives of the elite. Whatever they did, past presidents always got a pass from the next administration. Even Richard Nixon was pardoned. But not Trump. He was convicted civilly and criminally for various offenses after his defeat in the 2020 election. To rub salt into his wounds, the 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 harmful power of banking. They also understood the necessity of non-political hard currencies like Bitcoin. Trump embraced Bitcoin and cryptocurrencies out of necessity. If you listen to his sons, they've made it clear that one of the main reasons their family was fully committed to cryptocurrencies was their experience with the banking system during the Biden administration. Now that Trump is back, it's time to dismantle the financial system that nearly destroyed his family and business empire by allowing cryptocurrencies to compete with traditional finance. Therefore, by 2025, it's time for traditional finance to adapt to perpetual contracts and other crypto innovations, or die.
I review the history of perpetual contract regulation in the US for two reasons. First, most traditional global financial regulators follow the US like lemmings. This is a self-protective situation. No regulator loses their job for following the empire's financial regulations. But if regulators act differently and suffer adverse consequences, they are certainly ousted. Therefore, if the US embraces perpetual contracts for some reason, it gives regulators permission to embrace them as well. For example, once Trump allowed cryptocurrencies to be accepted by traditional financial regulators again, the Singapore Exchange launched perpetual contracts. Second, I want to provide this history as evidence that the state of the game will not change until at least 2029, when Trump's rule ends. By then, the largest S&P 500 and/or Nasdaq 100 derivatives will be equity perpetual contracts traded on crypto exchage, not contracts traded on the CME. By then, if the next "American Restoration" emperor opposes cryptocurrencies, the influence of perpetual contracts will be too great to destroy.
Before I go on to discuss how perpetual contracts will completely revolutionize stock trading, I want to offer insights into their power by looking at the wealth creation of several key figures in the perpetual contract arena. Binance co-founder Changpeng Zhao (CZ) is, I believe, one of the ten richest non-political leaders in the world. He achieved this in less than a decade. I trace his rise to wealth directly back to March 2020, when Binance took over the title of the world's largest exchange from BitMEX amidst the Bitcoin COVID price crash. Binance took perpetual contracts to another level in terms of adoption, and coupled with their dominance in Altcoin trading, created a crypto exchage behemoth. SBF founded FTX after trading perpetual contracts for his hedge fund Alameda on BitMEX. Through FTX's growth, SBF achieved dollar billionaire status at least on paper, the fastest pace in human history, and FTX essentially only offers perpetual contracts. After creating the fastest-growing perpetual contract DEX, Hyperliquid's Jeff Yan is likely already a dollar billionaire, if not very close, and could eventually become the largest exchange in human history if my stablecoin theory comes true. The next wave of crypto billionaires in the exchange space will come from the intersection of perpetual contracts and stocks .
Equity Perps
Traditional finance is desperately clinging to its dominance in stock trading. The public stock market is politically and fiscally vital to the establishment. It will be very interesting to observe how they respond to the rapidly gaining traction of perpetual stock contracts. The first market to be dominated by perpetual contracts is offshore trading of US stock price risk .
U.S. stocks, and indeed all stocks, will eventually be tokenized. But stock perpetual contracts don't need stock tokenization to succeed. Stock perpetual contracts already have the substrate for proliferation. The U.S. stock market is the largest in the world. The largest U.S. tech stocks, like Nvidia, have a market capitalization exceeding the annual GDP of most countries. Globally, everyone uses their products. But most retail traders can't trade these stocks. These retail traders are used to trading cryptocurrencies 24/7 with high leverage, anywhere in the world. If you gave Jaewon in Seoul the ability to trade NVDA perpetual contracts like Bitcoin on the subway home from his dead-end job at a chaebol's, he'd go all in. That's the promise of stock perpetual contracts.
Daily trading volume for stock perpetual contracts has already surpassed $100 million. This will soon reach billions of dollars daily as traders and market makers adapt to the contract specifications. With a surge of political, military, and economic announcements following the closure of traditional financial markets on Friday nights, stock perpetual contracts will become a way for institutional and retail traders to hedge risk over the weekend. This will force major U.S. stock exchanges to shift to 24/7 trading sooner than originally planned. Will cryptocurrency muppets or suited bankers win the stock perpetual contract market? That will depend on whether traditional financial regulators allow clearinghouses to offer socialized loss systems.
I predict that by the end of 2026 , price discovery for the largest U.S. tech stocks and key U.S. indices (i.e., the S&P 500 and Nasdaq 100) will occur in the perpetual contract market serving retail investors. I'll smile when financial media shows the S&P 500 stock perpetual contract code as the best pricing source, rather than CME's Globex version. It's not too late; CME and other exchanges have all the advantages in the world and a huge pool of smart, proactive employees. Maybe they'll read this and cheer up. There's no excuse to allow a bunch of crypto gamblers to disintermediate them, especially when regulators are competing to see who can appease the exchanges best.
The Last Frontier
The most traded derivatives contract globally is the CME SOFR futures contract. Fixed-income trading volume dwarfs that of the stock, forex, and cryptocurrency markets. My challenge to our crypto community is to create a derivative that allows retail investors to speculate on interest rates in a new way. The Pendle team is working on doing just that. Their Boros protocol is rapidly gaining traction. But this vertical is open to many innovators bringing their ideas to market.
[1] SGX stands for Singapore Stock Exchange; CBOE stands for Chicago Board Options Exchange.
[2] The CFTC is the Commodity Futures Trading Commission, the regulatory body responsible for regulating derivatives in the United States. CME stands for the Chicago Mercantile Exchange.
[3] ADV represents average daily trading volume.
[4] Futures contracts expire in March, June, September and December, i.e. each quarter.
[5] I will use XBT and BTC as currency symbols to refer to the cryptocurrency Bitcoin.
[6] Short sellers create price-neutral positions by buying Bitcoin and selling Bitcoin/USD derivatives, thus supplying synthetic dollars to the crypto market. They profit from the basis between the derivatives and the spot; this is essentially what Ethena is doing today. Please read my May 2016 Crypto Trader's Digest, where I introduced this concept.
[7] Our marking system is a little more complex than this, but for the sake of discussion, let’s just assume we mark by spot.
[8] Before we switched to funding rates determined by the premium index, we also shortened the funding rate cycle from 24 hours to 8 hours in early June.
[9] DCM is the Designated Contract Market, which you can think of as an exchange where users trade. DCO is the Designated Clearing Organization, which you can think of as a clearinghouse. [10] PAC is the Political Action Committee.
