The Future of BitMEX, Trader Topics, and Bitcoin Outlook with Arthur Hayes: CEO of BitMEX
Forecasts BitMEX issuing Bitcoin-denominated bonds, development of Bitcoin fixed-income market, and leveraged trading of Bitcoin interest-rate derivatives
Equity index perpetual swaps by Summer 2019
More quanto ALTUSD swaps like ETHUSD swap Q3/Q4 2019
No plans to curtail growth in $120 m. Insurance Fund
Plans for options platform in 12–18 months to compete with Deribit
Predicts Bitcoin $10,000 by end of 2019 as result of central banks injecting more liquidity. ‘$50,000 or materially higher’ in five years as reaction against clampdown on cash.
N.b. Comments by BambouClub in Italics.
2:09 Beginning in 2013
Hayes started with Bitcoin Futures Arbitrage in 2013. He sold BTC Futures on a Futures Exchange which traded at a premium to spot (i.e. contango), and hedged with (cheaper) spot at Mt.Gox, rolling it every month for 100–200% annualised return. He noted that there was a larger basis (Futures price — Spot price) than today.
Comment: There is an arbitrage when Bitcoin Futures are in deep contango and your hedge is free if you already own Bitcoin and are prepared to forego exposure to any increases in price. But Bitcoin Futures markets currently trade in moderate backwardation, meaning Futures price < Spot price but not by much. So the arbitrage practised by Hayes is no longer available. What if you buy the cheaper Future at BitMEX and hedge with Short Spot Bitcoin at Bitfinex or Kraken? The small basis and the interest you pay to short spot rules out the possibility of arbitrage.
5:05 Advantages of Bitcoin collateral vs USD cash collateral
On-board customer in 10 minutes at no cost
Process deposits and withdrawals with zero human intervention and without depending on bank and independent of bank’s policy about BTC leveraged trading.
Comment: There are pluses (as outlined by Hayes) to BTC as collateral at Bitcoin futures exchange. But there are also minuses to do with all Bitmex derivatives being quanto.
A quanto is a type of derivative in which the underlying (e.g. Bitcoin) is denominated in one currency (USD), but the instrument itself is settled in another currency (BTC). Quanto derivatives are convex a.k.a. non-linear. Here is the PnL for 5,041 $1 contracts of BTC Futures shorted at current price ($5,041). Sheet made by @Cryptarbitrage.
The main problem is when you successfully short you get paid out in devalued Bitcoin. In an extreme bear scenario this can be a problem. Contrast with CME where collateral is USD and Bitcoin derivatives are not quanto. If Bitcoin goes almost to zero, shorters at CME get settled in USD and receive full benefit.
Another problem with BTC collateral is traders need to put up much more collateral than CME traders. IMO Coinflex might steal BitMEX’s lunch because collateral will be Tether — making it independent of banks and available worldwide excl. USA — and the maximum collateral to open a $250,000 leveraged position will be $250,000.
6:45 Ambition to become biggest financial exchange in the world, not just biggest crypto exchange
Generational analysis. Baby boomers & Gen-X now disposing of assets. Millennials earning assets. Digital natives. Comfortable without human interaction e.g. Uber. Want 24/7 internet financial trading not 5-days a week.
Martin: BitMEX geared to speculators & short-term trading. What about savings & investment products, interest on Bitcoin?
Development of Bitcoin debt market
How to generate income natively on Bitcoin? Can only do this by lending. [This Zerohedge article explains how to derive income from your Bitcoin by lending at Bitfinex and BitMEX.] Problem is default rates on lending Bitcoin are currently high. In traditional fixed-income high quality corporates issue short-term paper for funding — more financially efficient to borrow money than using retained earnings. Hayes sees exchanges and miners e.g. BitMEX / Kraken / Bitmain / Canaan issuing 30-day zero-coupon Bitcoin paper paying interest reflecting market’s view of their credit risk. This will maintain integrity of these companies by demonstrating they service this debt and don’t spend all income on hookers and narcotics. This will establish risk-free curve and riskier borrowers can price themselves against large companies. People then select their own risk/reward debt to buy.
Fixed-income markets are larger than FX markets. Largest contract at CME is Eurodollar futures contract. Foresees Bitcoin interest rate derivatives based on risk-free credit curve.
15:05 Equity index perpetual swaps on BitMEX
Interviewer ask is BitMEX plans to enable investment of Bitcoin in equities, single-stock derivatives like 1Broker. Hayes states they plan Equity index product. BitMEX has funded a start-up in seed round — summer 2019 use BTC to trade S&P 500 & NASDAQ QQQ indices. No BTCUSD risk, send BTC, sell for USD, and trade EquityIndexUSD swap. Exit, close swap position for USD and back to BTC. Will enable people in EMs to trade traditional equity indices. n.b. completely separate entity, not on Bitmex platform.
17:05 More ALTUSD swaps like ETHUSD swap Q3/Q4 2019
Launched ETHUSD swap in August 2018 and quickly became most traded ETHUSD instrument. Added quanto feature, i.e. BTC as margin currency & PnL currency to trade ETH risk. Convex/ non-linear because of co-variance of BTC & ETH. Opportunity to earn funding. People prefer USD pair futures to BTC pair futures, plans to add more ALTUSD swaps when overload issue solved. Q3/Q4 2019.
Comment: The ETHUSD swap at BitMEX is quanto. Collateral and PnL settlement are in Bitcoin. This means when you Short ETHUSD you are also Short BTC automatically. See how the ETHUSD contract value in USD falls as BTC price falls even when ETHUSD price does not change. So to short ETHUSD with no BTCUSD risk you need to run a side-trade Shorting BTCUSD.
ETHUSD Contract = 0.001 mXBT x 162.83
= 0.16283 mXBT
= 0.00016283 XBT
= 0.00016283 x $5,055
The Deribit ETHUSD swap and Futures are superior.Collateral is ETH and there is no quanto effect. Also there is a ETHUSD Futures contract so you can hedge ETHUSD swap with Future to arbitrage funding which you cannot do at BitMEX.
20:44 Martin: More ALTUSD swaps might drive down prices of ALTs by enabling shorting as with ETHUSD. Hayes does not answer question. Says competitors’ swaps are different with ALT as margin (He is talking about Deribit which uses ETH margin for ETH swap, futures and options.) Hayes says BitMEX ALTUSD swaps with BTC collateral are better as you can trade without your equity being exposed to ALTUSD risk.
Comment: This post, Has Arthur Hayes Destroyed the Ethereum Market and Bankrupted ICO Treasuries?, sets out the argument that the ETHUSD swap had profound negative effect on the ETH price when it was introduced in August 2018.
21:45 Martin East vs West will BitMEX add lots of token like Asian exchanges do? Hayes says no because derivatives require sufficient liquidity in spot market, spreads too wide, terrible for client. Wants liquid markets with full books where market-makers can make tight prices.
23:55 Martin ask about competitors. CME did record volume on 4 April of $500 m., also Deribit / Bybit? Hayes says CME has different client base — institutional in US — Bitmex is mainly retail in Asia. And different product, lower leverage, USD margin. And it adds arbitrage opportunities between CME and BitMEX.
Comment: Volume at CME referred to in tweet is 15,000 contracts x 5 BTC per contract x $5,050 = $380 m. BitMEX does > $2 b. on a good day.
26:18 Martin Binance API showing plans to add leverage. Will BitMEX make own token? Hayes says no, he respects Binance’s $BNB model, but token might be security, legal risk. Don’t need money.
28:01 What is overload and why does it happen?
In traditional finance exchanges they have seat-holders. Only they directly access market, & they provide brokerage services to end-clients. Retail traders not trade directly on NYSE/ CME. Send order to broker, broker checks collateral and pushes order to exchange and exchange matches. Bitmex retail client directly accesses matching engine with up to 100x. Trade engine has to risk-check order for enough margin. Can’t pause, match, re-start cos 50 bp maintenance margin. Ben Delo built system to get it to market asap & be mathematically correct, not optimising for speed & capacity. System being re-designed. Overload is better than delayed order — then limbo & learn in 10 minutes fill or no fill. Target 3–5 seconds of latency between pressing button & response. Overload provided quick certainty on if order is filled or not.
33:48 Are some people getting filled during overload? Is there some process of selection? No. Some clients have offered to pay to trade during overload.
35:00 Martin asks about Insurance Fund. Refers to February report by BitMEX Research. Does it need to be so large?
Hayes says fund is not large enough. (Currently $120 million.)
Hayes says current volatility has been low since late-November 2018 at 20–30% annualised volatility.
Hayes refers to 10 March 2017 when Winklevoss ETF disallowed, price fell 30% in 5 minutes. [Price fell from $1,350 to $980.] Fund was wiped out. There was then automatic de-leveraging (ADL). Shorters did not benefit from full down move. Did not get full profit because their counter-traders were bankrupted. Fund ensures traders receives full profit.
Auto-deleveraging (ADL): BitMEX offers high leverage on volatile asset. Unlike CME no seat-members putting up collateral bonds to guarantee winners get paid. Bitmex balance sheet on line if they guarantee all trades get fully settled, they would not then offer 100x. Socialised losses system invented on Chinese commodity exchanges. If losing party does not have enough money then BitMEX will close him early in profit. Trading is P2P, exchange is not stepping in to support trading pool. It close you out in profit at bankruptcy price of another trader.
Hayes says they want to avoid ADL incidents. Insurance fund is to achieve this. In traditional finance if I short $TSLA and Elon tweets funding secured and I get liquidated, money left in account is mine.
But in BitMEX that money is not yours, it goes to insurance fund. Liquidation engine takes maintenance margin left after closing position and gives it to fund. Larger fund allows for larger and longer-term trades. The larger the fund the less likely ADL and better for everyone. Venture capital arm is funded by earnings not by Insurance fund.
Comment: The Insurance Fund is financed by noob traders. You can’t trade seriously at BitMEX without understanding relationship between Liquidation Price, Bankruptcy Price, and the Insurance Fund. It is possible to avoid liquidation altogether, and to avoid charity payments to the Insurance Fund, by use of Stops. Read How BitMEX Stop-Losses Can Save you 70% of your Capital, and How to Set up a Stop.
Risk Limit. Hayes states that there are no plans to limit the growth of the Insurance Fund. If fund grows they may increase risk limit. Current risk limit: 100x is available up to maximum 200 BTC position. To take a position > 200 BTC must trade with smaller leverage than 100x. Some traders want larger risk limit, i.e. 100 x with larger position than 200 BTC. Hayes states BitMEX have to reduce moral hazard problem.
Comment: Moral hazard can exist when a party to a contract can take risks without having to suffer consequences. A moral hazard occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party. The decision is based not on what is considered right, but what provides the highest level of benefit, hence the reference to morality.
43:35 Up & Down options. BitMEX only has up and down knock-out contracts, traders can’t write / short. Deribit offers options. Plan?
Hayes states there are plans for options platform in 12–18 months. Looking at new way of portfolio margining (no seat-holders).
Comment: The meaning of Martin’s question is explained in Trading Bitcoin Options at Deribit (Part 1).
Bitcoin Options are available at three exchanges, Deribit, BitMEX, and Ledger X. You have to go through relentless KYC at US exchange Ledger X which is anathema to most privacy-loving Bitcoin derivatives traders.
At time of writing [14 April 2019] daily volume at Deribit is exploding.
BitMEX options volume is about 2 BTC/ $10,000 per day! The main reason for this failure is that BitMEX only enables the buying of Options; only the BitMEX ‘anchor market maker’ can write Options (i.e. be net short). One entire side of the market is off-limits to mex clients and the absence of competition on the writing side means Bitcoin Options at BitMEX are over-priced.
Another disadvantage of BitMEX options is the lack of choice — currently, with the Index at 5054, they only offer one weekly Call (which they call an UP) with 5250 Strike and one Put (which they call a DOWN) with 4750 Strike. And another minus: their Put Options are knockout barrier options; there is a limit placed on the potential profit of the buyer of the DOWN options and on the potential losses of the writer (BitMEX anchor).
45:10 Price Prediction $10,000 at 31 Dec 2019
Hayes states there is noise around MMT — print as much money as you like — free healthcare — AOC — central banks will not allow markets to fall. S&P fell 20% in Dec 2018 with talk of tightening, Fed freaked and enlarged balance sheet, PBOC too. Narrative has shifted. More silliness in financial markets which will eventually flow into riskiest crypto — Lyft UBER Pinterest will soak up liquidity then BTC $10 k by year-end.
Comment: The Deribit Options Market assigns 20% probability that Bitcoin will be > $10,000 by 27 Dec 2019. (Blue curve.) If you think this estimate is too high, buy Dec-19 $10,000 strike Puts. If you think it is too low, buy Calls.
BTC Long term? Financial privacy dead in 5 years. Cash in China not accepted. TenCent has all data. PBOC bringing this in-house. Govts hate cash. Hard to tax. Black economy. Outlaw cash? Lock you out of financial system if you don’t abide by rules. How to buy weed? They know what I’m buying e.g. Porsche, how did I afford it? How to get financial privacy? $50,000 in 2–5 years ‘or materially higher’.
How long will volatile cycles continue? BTC marketcap is small so small amount of buying or selling creates big volatility. Cure for large volatility is large asset base. If it goes up, volatility fixed, takes more money to move it. Then if you want volatility use higher leverage.