Bitcoin and other virtual units have grabbed the attention of everyone in the financial world since mid-2017, sparking a boom in cryptocurrency exchanges in markets worldwide and prompting a host of investors to rush into crypto asset trading.
EJ Insight recently sat down with Arthur Hayes, CEO and co-founder of BitMEX, aka the “Bitcoin Mercantile Exchange”, a cryptocurrency-based derivatives exchange, to discuss the exchange’s business model, derivatives trading and the future of crypto units.
BitMEX offers centrally cleared futures and swaps on bitcoin versus fiat and other cryptocurrencies. According to information posted on its website, the Hong Kong-based exchange recorded US$83 million in revenue in 2017, and about US$21 million during the first 30 days of January this year.
The company is said to rank No.1 among cryptocurrency derivatives exchanges worldwide in terms of bitcoin versus US dollar trading volume.
Excerpts from a conversation with its 32-year-old chief executive:
EJ Insight: Can you tell us more about BitMEX and its major business?
A: BitMEX is a peer-to-peer crypto-products trading platform. We offer our leverage contracts on crypto coins versus fiat currencies and crypto coins versus other crypto coins.
Our most popular contract is the bitcoin versus US dollar product, with about US$1 billion to US$2 billion worth of average turnover on any given day.
The company was incorporatedin the Republic of Seychelles. We have offices in Hong Kong, San Francisco, New York and Milwaukee, and obviously we are expanding.
Q: What is your background? How did you become interested in cryptocurrencies, and what prompted you to launch BitMEX?
A: I worked at Deutsche Bank and Citibank in Hong Kong. In 2013, I heard about bitcoin and started studying it. I thought the technology was really cool, so I started trading with my own money and learnt about the market. After six months, I decided to use my experience in trading derivatives to offer crypto coin trading products for the market.
I found two potential partners and pitched them the idea: offering trading products as opposed to a traditional crypto exchange. For regular exchanges, as a customer, you send in some fiat currencies to exchange for a bitcoin or ether or other cryptocurrencies. But for us, we wanted to focus purely on trading derivative products, because we think that has a bigger potential market, and we can do more innovative things on those products.
I come from an equity derivatives trading background. We know that inside the investment banks, the biggest profit is from trading derivatives, because you don’t have to actually move money between counterparties in trading. So I applied this thinking to the landscape of the crypto-coin trading, and that’s why I focused on trading crypto derivative products.
We have a much-targeted base of users; however, these users trade the most volume. These people are not the buy-and-hold type of investor; they are actively going in and out of their position.
As of now, our largest demographics seem to be from South Korea, which accounts for around 15 percent to 20 percent of total users. BitMEX has experienced record growth in user base in recent months. In last December alone, our user base grew by 50 percent compared to one month before.
Q: How does trading on BitMEX work? And how does the firm differentiate itself relative to other crypto exchanges?
A: BitMEX offers a variety of futures contracts that let investors make leveraged bets of up to 100x on the direction of the digital currencies. But what’s different from regular crypto exchanges is that there is no actual money or coins changing hands on BitMEX platform; it’s just purely a contract obligation.
We offer traders the ability to trade with very high leverage on our products, but unlike other high-leveraged foreign exchange trading platforms where actually you can owe your broker money, you can only lose what you deposit on our platform. You can get liquidated and the position closed out, but after that, your liability is over.
Besides, all contracts on BitMEX are bought and paid out in bitcoin. We don’t handle cash, or fiat money, someone has to have bitcoin before they can trade on BitMEX.
Q: So how does BitMEX make money?
A: Through a trading fee. We charge a fee on every transaction a user trades our products, in bitcoin. On average, we take 0.05 percent of the value of the trade.
Q: Bitcoin reached its all-time high of close to US$20,000 late last year. However, the unit has lost over half of its value at the beginning of 2018. Did it have any impact on trading on your platform?
A: Our business loves volatility. The market goes up or down, and we have more people trading on the platform; we want a volatile market.
In general, as the market cap of an asset goes up, the volatility would go down. But I think volatility is beneficial for the entire [crypto] space, because it gets people to write articles about it. The price and volatility drive adoption by users and speculators, and drives smart engineers to enter this ecosystem.
This is the first of a two-part series on a conversation with the BitMEX co-founder
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