Unchained - Arthur Hayes of Bitmex on Why Countries Will Turn to Digital Cash - Ep.63

Episode Date: June 5, 2018

Arthur Hayes, CEO of Bitmex, describes how traders on his platform can make great gains but experience limited losses, how Asia's crypto markets differ from those in the U.S., and why he makes money whether or not crypto prices go up or down. He also describes why ICOs are crap now but why he fully supports the idea in theory and how they should get back to their roots. He also explains why he believes governments will issue digital cash, and why he believes everyday people will be surveilled through these transactions, but will give up this privacy for the sake of convenience. And where does he see this leaving cryptocurrencies? To become needed to transact privately. Bitmex: https://www.bitmex.com/ Arthur Hayes: https://www.bitmex.com/app/aboutUs Bitmex blog, with detailed research reports: https://blog.bitmex.com/ Arthur's Crypto Trader Digest: https://us3.campaign-archive.com/?u=db45c09bdf20e1866bb32123f&id=ac43da8d18 Thank you to our sponsors! Blockchain Warehouse: https://www.blockchainwarehouse.com/ Preciate: https://preciate.org/recognize/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone, welcome to Unchained, your no-hyped resource for all things crypto. I'm your host, Laura Shin. If you've been enjoying Unchained, pop into iTunes to give us a top rating or review. That helps other listeners find the show. Blockchain Warehouse is an international blockchain accelerator, offering a wide range of token sale advisory services to promising blockchain-based ventures. With the leading advisor network, BCW is at the forefront of building landscape-changing blockchain companies, and hosting successful token sales with more than $20 million raised so far. Unchained is sponsored by Appreciate.

Appreciate is building most valuable relationships on Earth. In each episode of Unchained, Appreciate recognizes an individual or group in crypto for an achievement, because kindness is contagious. Who and crypto will be recognized today? Stay tuned to find out. I'm recording today from the CoinDest Consensus Conference in New York City, and my guest is Arthur,

co-founder and CEO of Bitmex. Welcome, Arthur. Thanks for having me. What does Bitmex do? We are a crypto coin trading platform, and essentially we give retail investors access to the financial markets using crypto, Bitcoin right now, and financial products. But you don't actually trade Bitcoin itself, right? Correct.

So you can't actually buy and sell physical Bitcoin on our platform. You can't send us US dollars or some other fiat currency to buy Bitcoin or another crypto coin. You can't change Bitcoin into ether or another coin as well. So we are purely a contracts-based exchange trading derivatives. And how does it work exactly? I buy some Bitcoin. I send it to BitMex.

You put in cold storage. Then what happens? Then you're basically credited with margin on the platform. And each contract has a initial margin, which is the minimum amount of cash you need to put up to trade that contract. And then you're allowed to trade. And your profit and loss is also denominated in Bitcoin. And I know that there's leverage.

So how does that work? I can trade with like 100x leverage. Correct. So we have leverage specified in the contract details. There isn't actually anyone borrowing or lending money on the platform. It's purely synthetic. So it's long versus short. So one side puts at 1%, the other side puts at 1%. And then Bitmax moves the variation margin or the P&L between longs and shorts. So I don't even fully understand what that means. Can you sort of maybe speak in a more kind of every day? Sure. So let's say that we made a $100. a notional bet, but each of us only put up $1 against this bet. Now, the Bitmex's role is we're sort of like the judge and we set the rules of the game. We ensure that there's fair play on the platform. And as the underlying price moves on which we bet, we move the profit and loss between you and I.

Oh, interesting. Okay. And why 100x leverage? Because it's great. Because everyone knows 100x. It's a nice round number. I'd say very few people actually use the full 100x leverage. It's more of a headline number. The average is about eight and a half times levered last time I checked. But the good thing about it is you can place very short-term trades and potentially profit pretty quickly. And on the downside, your losses is limited to what you have put in.

So unlike trading traditional CFDs or maybe trading on margin on a, a, equity brokerage account, you actually, in the traditional world, put up your whole collateral base against any trades that you do. So remember when the Swiss National Bank moved their peg, there are actually people who were underwater to their brokers, and their brokers had to resuming them in court to recover those assets. Now, at Bitmex, even if a trade goes wildly against you, the maximum you can lose is what you put in. And so someone else explained this to me. I interview Jesse Powell of Cracken. So it's that if I have, let's say, you know, $100 and then I want to bet 10x or something like that, if it drops, what percentage does it have to drop for me to get liquidated? So on 100x leverage, it would be half a percent. Now, obviously, if you trade with less leverage, that buffer between what you initially put in and where we stop you out is greater. But the maintenance margin on our most popular product that Bitcoin U.S. dollar perpetual swap is what.

is a half a percent. So you put it at 1 percent. If the price moves against you by a half a percent, then you liquidate your position. Okay. Okay. And yeah, so that's how the losses get limited. And you said that only very few people actually leverage 100 X. Like what percent of people actually leverage that amount? I don't have the full breakdown, but just on an average basis in the pool, it's about eight and a half times leverage. But people use 100 X4 is usually either one they're trading on very small size and they're trying to learn. the platform or they're saying, hey, I think in the next, say, 10 or 20 minutes, the price of Bitcoin is going to go up. I'll put a small amount on 100x, and so almost like a small

call option. And if it hits, yeah, I'm going to, you know, make some good return on equity. But if my bet is wrong, then I only lose a little bit. Interesting. I wonder what would make anybody think that they could know what's going to happen to the price of Bitcoin in the next 10 or 20 minutes? I don't know. I mean, people have their own strategies. They have. charting indicators. They have the change of how the order book, bids and offers are stacked. So, you know, there are systems. Some work, some don't. But, you know, with study and care, some people actually are able to, on average, make money. Interesting. And what's your trading

volume? So in May now, last month, in April, we did about $3 billion U.S. dollars a day on average on our platform. So we have the most liquid platform in the world. Wow. And how does that, how did those numbers compare to like, you know, a year ago or at some point in the past? So year on year between 2000 and 16 and 2017, our volumes went up about 8,500 percent. Wow. And that was just all these retail investors coming in that we saw like during the ICA craze? Yeah, absolutely. So, you know, we're primarily a North Asian platform in terms of where our customers come from. And obviously you have, you know, especially in Korea, Japan, these places where retail investors have really taken to the crypto markets and are

driving volume. Interesting. And you also recently launched these first, your first options products. What are these products and what enables you to launch them now? So in Asia, well, at least in Hong Kong, where most of us are from, the Asia, the retail warrants market is very vibrant. So what a warrant is essentially, say an investment bank will issue a call. option on, let's say, 10 cent. And as a buyer, as a retail investor, you can only buy this product.

You can't go net short. So the bank will issue the warrant and they'll make a market on the stock exchange for this particular warrant, this particular option. Now, this is probably the most popular product that trades in Hong Kong, Korea, and Japan. And, you know, we are a retail house. You know, we're very Asia-focused. So contrasted to some of the other optionality products that they're out there, we wanted to focus on our core constituency. So we launched these, what we call them, ups and downs. So up for upside-profit contract, down for downside profit contract. So it's in the form of a 110% call option that expires in one week and a 90% put option with a 50% barrier knockout that expires in one week. Okay, so I don't fully understand this. So call option, put-opt-brior,

What are these terms? So a call option basically means you have the right, but not the obligation, to participate over a certain level. So let's say the price of Bitcoin is $10,000 and the strike is $11,000 by the end of the week. So you pay a premium because essentially if the price goes over $11,000, you get exposure from $11,000 to where it settles. But you can't get liquidated on this position. So let's say that the price goes from $10,000 to $5,000 and it settles in the minimum.

money at 12,000, you paid your premium in full. You would not get stopped out if the spot price moves against you. And that's why this optionality comes at a price and why some people like to trade options rather than what we call the Delta One product, which is a futures contract or a swap contract. Okay. That's the one where you get liquidated if it does go down to 500. Okay. So what's your vision of the full suite of products that you would like to offer and what needs to happen to be able to offer each of them? So our goal as a company is to be the largest exchange in the world. So we have a long way to go, but we really want to make Bitmex a household name for trading of financial products in the crypto sphere.

But we think the crypto sphere is going to eclipse the trading volume and other asset classes as, you know, Bitcoin, maybe it's not Bitcoin. All these coins gain value. They're useful. They do things. And we have a whole ecosystem. and people purely trade on a digital basis in this sort of framework. And so we want to offer the full suite of financial products you would find in traditional finance in crypto.

So we've started out with speculative futures and swaps and options. Now that we've just launched our first volatility product, we want to start helping people save. So a big problem today is that interest rates globally are very low, but asset prices, food, housing, all these things keep going up. savers, they need somewhere to put their money to earn a good yield so that they can provide for themselves. Now, one way to do this in the structured product world is Bitcoin is most volatile liquid asset in the world right now. So traditionally in the equity space, you could walk into

your bank and they would sell you a product that gives you a yield because what you're actually doing is you're selling volatility. Now, a very volatile stock might be a 30 to 40 to 40, percent annualized volatility. Now at Bitcoin, we're talking in 100, 120 percent annualized volatility over the last few months. So you can get very good yield pickup by selling Bitcoin volatility and thus earn income on your Bitcoin in Bitcoin, which is very hard to do, is to earn money on Bitcoin that is relatively safe, right?

Unsecured lending in Bitcoin, not usually the best idea. as many people have found out. But, you know, so we're working on this, the savings component to help people save in crypto. One thing that we want to, that we'll be rolling out later this year is the ability to use Bitcoin as collateral to trade single-stock equity features.

Single-stock equities. So imagine you're sitting in a country where, say you want to invest in Facebook. And, you know, use this product every day, but you're not that wealthy. So you don't have, you don't have private bankers offering you a foreign brokerage account. or you just don't meet the minimums to start trading into the United States.

What we can do is we can use your Bitcoin and allow you to trade very small amounts of stock with no leverage, fully collateralized. And so you can actually participate in some of the blue chip companies that you use every day, even though you don't have direct access into the U.S. stock market. So we hopefully will have this product out Q3 or Q4 of this year. That's really interesting. But the way that works is when you see fully collateralized. So I want to buy, you know, some, let's say a share of Facebook.

I don't know what, do you know what the price is? Maybe $100. I'm not sure. Okay. So let's say it's $100. So then I have to put $100 worth of Bitcoin up for as collateral. Correct. And then if the price of Facebook falls, then what happens?

So your Bitcoin is collateralized. We will take that Bitcoin converted in to a dollar credit. So you no longer have Bitcoin, U.S. dollar price exposure. You don't have a synthetic US dollar that exists on the Bitmex platform. You use these synthetic dollars to then purchase a swap contract from the entity that we'll be using for this product. And this swap contract basically tracks a share of Facebook plus any dividends or corporate action. So you'll actually receive the total return of the stock, not just the price appreciation.

So as if you were holding a share of stock. stock, but actually you hold a derivative. Wow, that's really interesting. And I just wanted to go back also to the savings. You were saying that you were going to offer people interest on the Bitcoin that they put up. So how do you manage that? How do you make that happen? So initially that we'll be working with on a wholesale basis.

So there are various companies around the world that do this in the traditional equity space. And now we're moving into crypto. Now, because we have volatility that we can buy as a platform because we're selling it on the other end on this retail product, we can, on a wholesale basis, structure a deal whereby we give somebody, say, I don't know, 1% a week income on a fully collateralized Bitcoin Notional that they provide to us. And now this platform will have clients and they will repackage that and then they will sell this savings product onto them. Interesting. So just to go back to the recent options products that you started offering, those came about because you had the liquidity that you needed to offer them, as far as I understand, from what I read. So in order to offer these other products that you're mentioning, like, how does the space need to develop further in order to be able to offer those? It's really just about structuring at the end of the day and putting in place the proper legal entities, working with the right companies to push these out to the market.

And so really it's just it's boxes, arrows, and lawyers at the end of the day, which as a banker we're all very familiar with. Okay. And why not do a more typical crypto exchange where you're actually just trading the assets? Well, if you look at the traditional world, in FX trading, for example, derivatives trade three to four, maybe three to four trillion dollars a day or something, something crazy. And a amount of derivatives that trade in the FX markets versus the spot market. And so when you're actually not constrained by moving assets between counterparties, you actually can do many more things. And in my opinion, you have a much more defensible business and you have the ability to actually charge money for things. I think that spot trading of crypto will tend to zero in terms of the fees.

Because at the end of the day, it's a commoditized product. If you look at banks on the wholesale basis, trading cash effects is not that profitable. But the derivatives on top of that is insanely profitable. And so we want to move into a derivative space, better defensive business. It's our wheelhouse in terms of risk management and where we come from in our past professions. Maybe this is what we're seeing play out with Robin Hood announcing that they're going to offer services that will be competitive to Coinbase. And Coinbase, as you know, offers or charges somewhat high fees. So maybe that's what's happening there.

So one other thing I wanted to ask you about was the leverage trading you said, or I've seen that other people say that the kind of levered trading you offer is more like gambling. What do you say to them? Well, it's not like gambling because there is not a predetermined notion that you will lose money. So if you walk into a casino and you play a certain game, you know with 100% certainty that you will lose money over time in that game. Now, in our particular situation, number one, bitmax in our main markets is not. making the market. It's a two-sided marketplace. There's buyers and they're sellers. So it's essentially like a perimutual pool of people trading against each other. It's more like a game of poker. And we take a slight rake or trading commission from matching trades. So technically speaking,

it is not gambling because you don't know that you're going to lose money the second you step onto the platform. All right. And who are your customers and how have they evolved over time? It's retail. It's still a retail lead for a moment. I think, you know, while there's a lot of hype about investment banks getting into crypto, they're not there yet. You do have a smattering of some of the more smaller prop shops who basically manage just the partner's money so they don't have outside LPs, which makes it easier to do things. But the end of the day, what drives crypto is retail traders. It's people who like the volatility, they like the stories, the personalities, the price appreciation, and then the falls. So it's still a very retail phenomenon. They're the

one's driving the volume. They're the ones who are on Reddit and Telegram and all these other places talking about crypto. The banks, the hedge funds, the insides do investors, they're just not involved yet. And why do you primarily focus on Asia? I was where I'm from. That's where I'm from in terms of my career progression. I've been in Hong Kong for 10 years. But at the end of the day, I think Bitcoin itself in a Western context, say U.S., Western Europe, does not really present that big of a value proposition for people because things work. Maybe don't work the best, but you can use a credit card, you can open a bank account, you can go on your e-trade or stock trade or whatever account and trade in the most liquid retail stock market in the world. You can buy and sell options. You can do all these nice things in this context. move to Asia, Latam, Africa, these markets where you have very low banking presence, but you

have a thirst for people who want to trade, who want to get involved in financial products. So when you have something that comes online, which is a 24-7 market, low barriers in terms of amount of capital that was required to enter the market, you really have something that people don't have. And so when they can trade however they want, trade financial products. that they don't get in the traditional sense. Trade something else other than overvalued equities and property, which in a lot of developing markets, you know, when you get some money, what do you do?

You go and buy an apartment. Now, as, you know, apartment prices relative to median income are very, very high, especially in, you know, China, for example, or Hong Kong, where I spend most of my time. So any chance that the population can actually buy and sell something other than stocks and property, they gravitate towards. So that's why I think that Asia and some other developing markets is we're really going to see the soul of crypto develop. Interesting.

One other thing I wanted to ask you about was, I feel like some people say that the crypto world in Asia is different from that of the West. Do you think that's true? And if so, what trends do you see in that regard? Absolutely. I think the crypto world in the West is obviously very VC-dominated, the types of people who are involved.

You know, there's obviously the early movers and they're very eccentric in the way they are, but, you know, you come to New York, everyone knows what crypto is. We get to the financial center, you go in the valley. Those type of people who are involved. But in Asia, it's very organic. It's very, it's raw.

It's, you know, people just trying to make a living, trading crypto, new projects. There's no VC funding to be had because there are no VCs, maybe outside of China that are that active or that forward thinking to invest in these sort of things because most of the money is from tycoons or families. They know property. I buy a building.

I know my cap rate. I'm going to make this percent relatively low risk. And if you tell them, well, invest in this crypto startup that may go to zero pretty quickly, they don't really have that risk appetite. So it has to have been a very grassroots movement from the get-go. There's no DCG or... But there's Fembushi. Isn't Fembushi like a big force out there?

That's a new thing. They're primarily active inside of China. But, you know, if you're talking two or three years ago in terms of who was around to help jumpstart things, these guys weren't there. And any of the brand name, West Coast, U.S. VC. outfits were definitely not investing in Korean, Chinese, Japanese. And you name it, Asian country. crypto startups. Oh, interesting. So you're saying that those startups out there, they're getting funded, how so, like, through ICOs? And when you say grassroots, you just built a real business and made money. So there wasn't, you know, either you built a product that the market wanted or you

failed, whether, you know, if you come to the U.S. and Western Europe, you can build a shitty product, but you can keep raising A, B, C, D, E, right? Maybe IPO and then dump the shit on the retail. Like, that's the, that's the model. So you really don't actually have to build a real business over here to be successful. Yeah, I won't name names, but there's a company I'm thinking of the ones that maybe I went through a number of pivots and still raised a ton of money, but didn't gain in a lot of traction. What's your background? How did you come to launch bitbacks? So I used to be an ETF trader in Hong Kong. I started out at Deutsche Bank, and then I moved to city. And around, I think May of 2013, I got called to my boss's office and I was fired.

job cuts. And so I had a lot of time on my hands, and I really wanted to do something different because I could recognize that there's a secular decline in what you can do at the bank. You know, there weren't traders making $10 million a year anymore. You're lucky if you're... You mean after the crisis. After the crisis. You know, if your management, you're lucky to make $1 to $2 million.

And you're busting your ass and you're looking at all the politics. and I was like, well, I need to do something different. And so, you know, I happen to have heard about Bitcoin earlier in the year when it went to 250. And then so I started researching, read the white paper. And then obviously, because I'm a trader, I thought, well, what are the financial products out there to trade? What's the exchange ecosystem like? And I stumbled upon an exchange called Icy Bit, which was, I think, the first futures platform that launched in 2000. I love under 2010, not really sure.

But they had a Bitcoin U.S. dollar futures contract and myself and a lot of other people who have come to actually meet in real life over the years, we were trading heavily on this contract. So I was like, wow, this is a very inefficient market. The strategies that I used to employ at the investment bank are definitely still relevant in this market. And over the next six months, they became a little dissatisfied with the progress. that that platform was making. And I thought, well, if I want to make a real business out of being a crypto, being a trader is very difficult to do profitably over a long stretch of time.

So I need to build a real business out of this. And so I thought, well, I know derivatives. And I reached out to my network. I found my other two co-finders, Ben Dilo and Sam Reed. Ben is a background in HFT technology. Sam is a more of a full-stack, web developer, cloud architect. And we came together. I pitched them this idea for a derivatives-only platform in crypto.

And we started in 2014. And, you know, we've been doing this for four years now. And what were your revenues last year? I think we were in Bloomberg. I think it's something around 80-something million dollars that we made last year. Doing quite well. Yes. We've caught the wave.

And I'm very fortunate that we got involved when we did. and we've built a platform that people actually like trading on. How does that feel to just create something out of nothing and have it be so successful, especially kind of early in the crypto wave? Yeah, I think it's gratifying more so than the money to hear people come up to you and say, like, you know, they love your platform and they trade on it every day, or people who have changed their lives in terms of what they've been able to make because they've been trading crypto and successfully.

And I think doing it right by our clients is the first thing we want to make sure that we run a fair and honest platform because you don't want to be, if you want to come to consensus and walk around and feel proud about what you've built and you don't want people trying to come up to you saying you stole money from them or this is not. The other thing, you want people to come up and shake your hand and say, I really appreciate what you've put out there. So I think that's something that we really appreciate when people come up to us and talk to us about the platform.

That's great. And I think something else that's really interesting about your business is that I've heard you say that you make money even when the market's going down. Can you talk about how that works? So essentially we match trades. So for every long, there's a short. So whether or not the market goes up or down, as long as there's trades, we take commission on that. Now, obviously, in Bitcoin, in most assets, it's a staircase up and an elevator down.

So when things go down, obviously, people, all the things that they were told about Bitcoin of why they shouldn't get involved, those thoughts are ringing in their head like, oh, this is a scam. I'm going to lose all my money. my wife and my partner said this thing my other co-worker said you're an idiot for getting involved and all this emotion this makes them panic sell and it's everyone rushing for the exit at the same time that generates all this volatility and obviously the more volatile the market the more trades that happen on the platform so you know on intensely down days we usually do the best in terms of trading volume on the platform oh wow and what are your fees on a most popular product

we had taken that five basis points. Great. So in a moment, we're going to talk about the Bitcoin price and BitMex's really well-done research reports. But first, a quick break to tell you about our fabulous sponsors. Blockchain Warehouse is an international blockchain accelerator, offering a wide range of token sale advisory services to promising blockchain-based ventures. With access to heavyweight technology leaders, the accelerator is heavily involved in crafting the blockchain technology, token sale, and regulatory landscape. On May 25th, Blockchain Warehouse launched the first ever Crypto Shark Tank, a new series exhibiting Blockchain Warehouse's review of candidate projects chaired by Adrienne Guthridge, CEO of Blockchainwarehouse.com. This week's episode features Mesmer, a decentralized media ecosystem, offering digital collectibles

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Why do you think that? I like big round numbers that people talk about them, number one. number two if we go by last year we went from about a thousand to 20,000

at the peak so about a 20x uptick if you know if really this whole narrative of traditional players

dipping their toes into crypto people putting $1 million and $5 million into this space and obviously as a marginal

buyer that should lift prices and I don't think we have the potential to appreciate as fast as we did

last year so I chose around a number of you know, 5x of 10,000, 50,000. Oh, interesting. Okay. So, okay, so it's not like based on any kind of prognostication around like how much institutional money will come in or anything like that. I have no idea at the end of the day. And no one, anyone who claims that they do,

you know, have them trade for a while and they'll probably lose all their money. So, you know, I'm in the game of expected value, not in being right or wrong on a particular price target. Okay. And I want to hear about the year of 2017 from your perspective. This is actually question I'm asking a number of people because I think it was such a pivotal year and you have this unique vantage point of having been in Asia and also at Bitmex, which, you know, as we were just talking about, has such high volumes. So what did the year look like from from your point of view and how did things change? I think it was the start of the year was amazing because we had hit $1,000, which was a massive milestone for the industry. We had broken, it started in about 2015 when we

had broken through $300, which was a massive resistance point. And to clip set a $1,000 mark, we thought, okay, we're almost back to the high of empty gocks, which was in 2013, yeah. Yeah, late 2013. And so as a psychological number for Bitcoin to have gotten back above water versus 2013 was as everyone was ecstatic. And then, you know, right after that, you had all of the prognostations from the PBOC trying to calm down the market and the fever of buying in China. So, no, I just thought, you know, maybe we'll get to 2,000, 3,000 by the end of the year because, you know, 1,000 was such, it was so hard to get to 1,000.

And so usually you'll spend some time consolidating before the market ratchets higher. But what actually happened is that, you know, the media finally took a notice to crypto. And they started to publicize what was happening in this space. And sort of this awareness building of, oh, holy shit, like Bitcoin's back to where it was. It didn't die. It's not full of a bunch of criminals and scammers. There might actually be something here. And that really started the positive momentum of 2017 in that, you know, conferences.

started, you know, getting filled, 10-E-levels were up. You have major financial media outlets basically doing a crypto story every day. I remember back in 2013, 2014, if Bloomberg Wall Street Journal on New York Times wrote one article about Bitcoin, everyone was like, holy shit,

they just wrote an article about Bitcoin. And we'd be talking about it for like a week. And now you have essentially, you know, a crypto section on most of these online properties where, you know, They're talking about all sorts of things related to mining, crypto, trading, ICOs, all this sort of stuff. So that started it. Then we had the ICO boom.

Everyone finally caught on to this method of raising money. And that further fueled the attention that was coming to this space and then took us into the summer of 2017. Now, obviously, we had the issue surrounding the software. fork and the creation of Bitcoin cash and this contentious moment of how are we going to self-scaling and will segue it get activated. And so the market thought, okay, well, this is the major hindrance to us moving even higher. I think we're around $3,000 or something at that point. And everyone's, oh, my God, if Bitcoin hard forks, like, what's going to happen?

People are going to know what to do. you log on to your training account, like some newbie, how do they know which Bitcoin to buy? And everyone's like, oh, my God, if we have two things named Bitcoin, it's like the end of the world. And that was proven false. We had a hard fork, Bitcoin Cash was created, Bitcoin was there, and trading volumes on both rows. And so that fear vaporized. And so then we moved higher again. and even as regulators try to tame this market with their words,

there was just too much attention and people were feeling too positive about the different narratives that had fallen and impediments to why Bitcoin or any other crypto coin couldn't move higher. So as he moved into the fall, these roadblocks just kept getting kept kept away. And then we had the Segwit 2X debacle. and where, or as I called it, shitcoin 2X.

And at the last minute, the miners pulled in about face and said, actually, no, we're not going to support this. And that was another roadblock removed from Bitcoin going higher. And then I think the coup de grace for 2017 was the CME and CBOE futures launch. The fact that they would stake the reputation of their exchange to do this product meant that people really thought there was something here. that they're willing to go through all of the reputational issues associated with Bitcoin when you were talking very conservative financial institutions for the largest exchange in the world to launch a futures product in terms of sentiment was a game change. That's what took us to 20,000.

And as everything in trading, by the rumor, saw the fact. Right after that, we fell about 50% down to 10,000. So I think 2017 was a year of strawman narratives that had been in people's minds of why Bitcoin, couldn't move higher where there was a, you know, catharsis around this level, we moved past it and people, you know, there's no reasons why you wouldn't own Bitcoin if, you know, these different narratives were proven not to matter. Interesting. I like it. I agree with a lot of what you said. Your company releases a lot of really well-done research reports in crypto, and they really go into, you know, kind of a deep level of detail. And it's a, it's a lot of. It's a lot of

level of research that I wouldn't say is really necessary for someone that does the kind of trading that is available on your site. So why do you even publish them at all? I mean, at Bitmex, we want to create a brand of being thought leaders, of being correct, of actually educating rather than just giving sound bites. And so when I think of why a lot of people trade with a particular investment bank is because they have excellent research. I pay a lot of money, personal money, for particular financial authors because they write thoughtful and insightful research. And I want Bitmex to be known as a brand where we support intellectual curiosity, intellectual

honesty. And I think a lot of what is written in the crypto space is trash. And so we wanted to actually go into the details. I mean, I know a lot of people are too busy to read 1,000, 2,000 word paper all on something related to crypto. But if you actually want to understand what you're trading, if you actually want to make informed decisions, you need to put in the time.

And so we want to give people all the tools that if they do want to invest in themselves and educate themselves, they can find true and correct information presented in a well-thought-out manner. And so that's why we've created this research property. That's great. I definitely agree with everything you said there.

I was just in my panel at Consensus, and we were talking about how people buy things that they don't understand. And as journalists, a lot of people, because we all already know it, like we assume that the reader already knows it, but, you know, they don't. And I agree that if you're going to buy anything in this space, you should definitely know what you're buying. And you also, you have a lot of really salty opinions in the crypto space.

And I wanted to find out what you think is one of your more controversial opinions. Maybe I think some people were not happy with our public stance. against hard forks. It came out very strongly against... Like all hard forks or just the second two X one? No, I think what we were, what we didn't like is that people were forcing the technical work onto the exchanges, rather than building a good tech stack, taking the time to make something good, and then coming to say, to the market saying, hey, we're doing an error drop, here's this new coin,

and we want the exchange to support it. But when you hack together some code really quick and then expect every exchange to run around like headless chickens getting their back-end ready and their wallets ready to support you, I guess felt that that was a very bad precedent to set. And that's why we came out so strongly against it. Because at the end of the day, what we don't want to happen is for customers to lose money because the exchanges were not prepared enough to deal with a new iteration of a coin with different blockchains and all these things. different things that make it very difficult to keep customers funds safe. Because the end of the day we don't want to end up ever having an event where we lose customer funds because we weren't able to properly prepare for a new coin. And is that, are you talking about like Bitcoin gold and Bitcoin private?

Okay. Yeah. So what does happen like if I am trading on Bitmex and I've given you, you know, like five bitcoins or something? And then Bitcoin gold comes out. What happens at that moment? Can I not get those back? Correct.

So we've made a very public stance in that, you know, if you have Bitcoin on the platform, we will give you back Bitcoin. You are not entitled to get any of these other coins should they happen. We encourage people to withdraw their money, split their coins, and then come back to the platform. Now, there's some very interesting derivative trades around these different forks, because our futures contract will settle on Bitcoin. But if you hold a portion of your Bitcoin is not needed for the margin off the platform, you can essentially receive this almost like ex-dividend event. So if you, you know, say the futures contract is trading at par,

or the same value as the spot index, I can buy Bitcoin before the hard fork happens, put a portion of that on Bitmex's margin, sell the futures contract at, at par, take my Bitcoin in my own wallet. Now, when the X dividend or the fork happens, I split my coins and I receive essentially this income from this coin because it'll have a non-zero value. I sell that for more Bitcoin. And now my futures contract should also dip in price relative to the index to reflect the dividend that was just paid. So what we saw is the futures contract maybe a few weeks before we'd be trading at par or premium to the spot index. But right before the heart fork happened, the futures contract would go into a deep discount

in some cases. And so this is a very profitable basis trade to put on for people who, you know, thought a bit about what was happening and the implications of splitting coins and how people would hedge. So let's say that something fucked up and the market negatively reacted to this particular heart fork, they'd want to be hedged. So people would overhage with futures contracts would have caused them a trade to trade in advance of that. You could take advantage of what we call the basis moving into a discount. Okay. So I don't know if I fully understand that. I think what you're saying, though, is that like basically you can make money from both. You can do a kind of trade

where you both get the, let's say it's Bitcoin gold, but as well, you also benefit. fit from the margin trade that you've done. Correct. Okay. Wow, that's really interesting. Do you know how many, like what percentage of your users figured that out? Not really sure. But, you know, we published, I think I published a play-by-play of this trade in one of the

the crypto-trader digest. Your news, and, you know, it happened, it firstly happened with, I think, Bitcoin Cash, and then subsequently for the other forks that happened later in the year, this same trade worked again. And the best part about this trade was even after it was announced that the fork would happen and you knew the date, the future's contract would not reflect that's in the basis. So you could actually wait to you were certain of when the event was happening, put the trade on at par, and then still make a profit. It's amazing how inefficient the Bitcoin market is. Well, yeah, this trade may not work like in a year or something.

Correct. Okay. Interesting. You have also said that you foresee a battle between. between true decentralized cryptocurrencies and digital fiat currencies. How do you see that fight playing out? I wouldn't say it's a battle. I think they're going to coexist. So I think I've coined, well, not coin, but I say a digital society needs digital cash.

We're moving into the digital age. Digital cash is needed. And so governments will respond because from a policy perspective, banks, commercial banks don't always follow the direction of the central bank or the government. it's very inefficient that the government has to rely on commercial banks to issue currency effectively and make loans. Because maybe the government wants to target a particular group of people or assets to provide credit to, but the banks don't want to do that. Right. So why shouldn't the government of the central bank issue currency directly to the people and have the commercial banks operate nodes on this essentially private blockchain?

And so I think that is what we're going to move to as a system where you all have an app, loans and our credit. And what we spend is directly, everything's monitored by the government. They can tax every single financial transaction and know exactly what you spend your money on. And they can shut you out from the financial system if you don't behave. And we're seeing assemblance of this starting in China with Sesame Credit where people are being blocked from buying flights or insurance or anything else because maybe they have said something. that is not in agreement with the central government, or even one of their friends have said something. And so I think other governments are going to look to this. And in effect, China is already almost to the point where everything is digital cash because of WeChat Pay. But obviously, WeChat Pay is a private company. And I think the PBOC, what we know, the PBOC is working on electronic rim and B.

So you'll see a country like China or Russia or one of these, you know, developing. countries who have massive issues with what is said at the top with actually what policy is implemented from the commercial banks. It makes sense of them to issue currency directly to the people and completely control everything and cut the banks out of all these other actions that they do against the wishes of the government. And so you will have a wallet in the future where all of your financial transactions will be in an electronic fiat currency. Now, obviously, many people want to have financial. privacy and or they want interoperability between different domiciles and that's where I think

crypto will fit in or Bitcoin you know some coin will be that medium where people who want financial privacy or who want to make a payment to someone that isn't recorded by the government will use one of these systems so I do not think that it will replace electronic fiat but rather they'll serve two different purposes interesting so then we will have certain coins that are kind of like, what's the word, adversarial to governments. Maybe it's not adversarial. They just serve a different, because they serve a different function. And then, but then we're also going to have these sort of like surveillance coins, I guess I might call them. But do you see the surveillance coin model taking off in a place like the U.S.? I really don't?

I think it'll be a fight, but at the end of the day, the U.S. government controls the issuance of money. if they all of a sudden say now everyone must get, if they pull in India. So India, last year, Modi basically said, I want to digitize the Indian financial system. They've rolled up this system. I think it's called AdPAR, which is they put biometric data in a centralized database for something like one billion people. And so what he's trying to do is basically move India, which is a very cashier's economy, very inefficient, there's no oversight in terms of what taxes are paid or not paid.

to a digital world. And overnight, he said, in one month's time, these bills are now worthless, and you must tender them to the bank and bring this money into the banking system. And now we want people to use digital payments. I remember my squash coach is Indian, and he was complaining that he had to go to the consulate

and turn in his passport and get this electronic version because they're trying to move everything to an electronic basis so they can track it better. Now, this is very disruptive to the Indian economy. The effects of it are still being felt many older and poor people who didn't have access to queue in line all day and forego income to tender their money and now finally had stacks of worthless paper in their bed. So the U.S. and countries, if they really want to ramshod this down the throats of the people, we'll just do it. And at the end of the day, once it's convenient enough for middle income people to pay all their bills using an app, the convenience will trump any of this notion of financial freedom. Interesting.

I still feel like the way that our political system works, there will be a big brouhaha if some of this stuff goes down here. So I can't imagine people like just rolling over and allowing it to happen. Well, I mean, people post other data on Facebook and they see what happened. And that was a voluntary situation. So I think people, if it's convenient enough. I feel like if it's with the government, though, it's like a little bit different. Yeah, but at the end of the day, if you go to China, it's extremely convenient. Wechat pay.

You literally do not use cash for anything. Whether you're buying a piece of watermelon on the street or buying a drink at a bar, no one's using cash anymore. No one's even using credit cards or any sort of plastic. It's a QR code. It's WeChat Pay. And so this is the future of digital payments. And when you experience this,

convenience, you will wonder why do we have to deal with credit cards and cash and all these different things from a convenience perspective. Yeah, I agree with you on the convenience perspective. What I am not certain about is that China doesn't have the same kind of press that we do here in the U.S. So I feel like maybe the Chinese are not aware about the kind of privacy issues of using WeChat, whereas I feel like in the U.S. because of the role that the press pays, people might have more awareness. but you're right that so far they've been happy to sign away all their privacy rights. But there's more awareness now. So who knows?

Hopefully. We'll see. We will see. Which are positioned better to capitalize on the growth of the crypto space? Institutional players that are entering crypto now, like the Goldman's and the intercontinental exchanges or pure crypto businesses. I think they'll both succeed relative to what their expectations are. So obviously, a bank and a financial institution looks at crypto and they see, okay, can I bring on a hundred million U.S. dollar a year business onto my, onto my bank.

And maybe I staff five, ten people in this desk. That is, as a management decision, okay, that's a decently profitable desk. Now, if they've seen the asset appreciation, the interest from their clients, from their employees for this new space, maybe they make a view that, okay, well, maybe this asset class is going to be a thing, and I'm going to invest some time and money overcoming some of the issues in the crypto space from a financial institution perspective. Now, from, you know, a pure crypto business, those players getting involved is great because, you know, a lot of the problem with a lot of pure crypto businesses is they rely on some way, shape, or form of

liquidity. And the cost of that business is essentially the hedging costs or the transaction fees or all these sort of things that are baked into that product that they're trading. The more liquidity in the market, the cheaper it becomes for them. to offer their service, the more people that they can hit with a very low price point. And so I think it's sort of, they'll help each other in that respect. And they'll both achieve the goals for their constituencies. Yeah, I interviewed once as Gassaras of Zopo, and he was telling me about how in a previous business of his that they did not see competitors as hurting them at all. And in fact, they just saw their business grow and grow because it created like a category, like people began to

recognize, you know, they might have been the first movers, but that once all these competitors came And then suddenly, like, people recognize that this was a legitimate thing to do was bank online. I also want to ask you about ICOs. What problems do you currently see with ICOs and how do you think ICOs can be revived? So I think most ICOs are dog shit. And the bigger problem, what I've seen happen is I actually fully support the premise that someone should be able to put up a website, a Bitcoin or Ether address. People will voluntarily give them funds and receive a token in a project that will be used in some way. reform. But what is what this has morphed into is essentially another way of private block funding.

People are using these saffed agreements, sale. Simple agreement for future tokens. Yes. So this has become a very popular document. And essentially what you have is all the same players are against investing in these new technology projects. And instead of a series A, you just do a massive saft and collect $10 million. dollars like you don't actually need to do a public sale you've gotten the money it's not is non-dilutive and so everything that really goes against what the iCO is good at and the way i see this correcting is right now you have way too much paper out there relative to product that's being built

or organic demand in the secondary as people as a you know the rake-and-file traders keep buying these shitty deals and seeing the price underperform almost immediately versus their ICU price, they're going to be less reticent to purchase into whatever the small public round is of these what's majority is saffed raised issuance. And so as that happens, these VCs are going to see immediate market losses on these agreements that they put in place. Now, for a traditional VC, they don't really have a mark to market because their investments don't really get any liquidity or any real objective price.

Only have you like once one or two years when they do another round. Now if you're going to your LPs and everything, holy shit, I'm down 30% on all these different positions. They're going to say, fuck this token shit. Let's go back to doing what we usually do

because the token, one of the good things about ICOs is it gives transparency to what the project is actually worth. relatively quickly. And that will not go bode well for most VC firms, who in general matters are pretty bad at investing money. They lose money. They take their two and 20 or whatever. But once it's being shown that one month after they've signed this saft, coins trading, it's down, then they'll be reticent to put money into these things where the liquidity event is so immediate and is down. And that will scare them away from, I think, this SAFT-style investing.

And ICOs will move back to building a community, organically trying to get people to donate money to a product that they really believe in because the founding team has invested time and effort building a real product. Meaning that you think it should go the realm of not selling to accredited investors, but to retail investors again? I think that that is, I think that is accomplishing something revolutionary. But what about the regulatory issues? Because the reason why they are shifting is because there's concern about regulators coming in.

I think that there's going to be more and more regulators who will be ICO friendly. Because at the end of the day, there are jobs to be had in this field. And the service right of law firms, accountants, all these sort of people are making a lot of money on this ICO. Well, not the government. No, not the government. But some governments, this may be a very U.S.-centric context. when you say ICER regulations, but you have places like Japan, South Korea, who are enacting ICO bills.

They're putting in place, okay, here's, you know, what we think is not super fucked up about an ICO. If you abide by these guidelines, we're okay with it. Whereas when you move to certain other countries, you know, they're just like sitting there, like with, on two minds. Like, do we regulate this out of existence in our territory or do we become business-friendly because we want the jobs and we want the lawyers and everybody else to get paid off all this. So I think there's that tug and governments usually who are much smaller in terms of the

amount of population they command who have to create new industries for their people will think, let's bring this type of thing to our jurisdiction and these essentially you can provide them cover. Because at the end of the whole point of an ICAO is that anyone with an internet connection and an address and a wallet, they put up a website, say they're going to do something and see if, the market wants to contribute to their product. That I think is powerful. Yeah, and we are seeing the smaller jurisdictions like Singapore and Malta and Gibraltar and stuff

be welcoming. So we'll see how that plays out. I read that you don't personally own any crypto. Is that still true? Correct. Yes. Oh, that's interesting. And why?

Because I'm already very long crypto as a industry because of my ownership stake, my position at Bitmex. So as a risk management, you don't need to lay a risk. risk on risk. And so for everyday people, would you recommend that they trade crypto or that they buy in a hotel? It depends on the amount of effort that they're willing to invest in this. If you just want to, you know, dip your toes and see what's going on by a very, very, very small amount of, you know, whatever few coins that you think are are worthy of your investment. Put them away, forget them by them for five to ten years. Either they're worth zero or a lot. For those who want to

invest in learning about the crypto markets, I would say, yes, trade. But don't think that you're just going to watch a chart or you're going to log on to your account and all of a sudden you're going to start making money immediately just because you heard your friend down the street or you saw his Lambo because he's been trading Bitcoin and shitcoins very profitably in the last few years, that you're going to do that without putting in the time and the effort to learn a new craft because you do have to, if you want to be a full-time trader, you need to be in all the chat rooms, the Reddit, reading, talking to people. It's a full-time job. And so I don't want to disabuse people that people think it's easy to make money in crypto. Maybe you get a few wins, but if you

want to create a real income stream out of this and lower the volatility of your earnings, you actually have to do the work. We're in this phase right now where there's kind of a number of technical obstacles that need to be overcome, like around scaling and maybe the, you these transitions from proof of work to proof of stake. What technical changes do you see coming that you're either most interested in or that you're most doubtful of or that you think are most exciting? I guess I don't really spend too much time looking at the super technical aspects of relevant blockchain because number one, I don't have that sort of background to fully understand what is going on on that front. But I think that obviously everyone recognizes that

if we want to build a new financial services system in this cryptosphere, that, you know, Bitcoin's too slow, Ethereum's too slow, all these, and there's differing ways of doing that, and some people are building a completely new ways, consensus algorithms, maybe they'll work, maybe they won't. But I don't really have a particular thing that I'm super excited about, but I know that there's very smart people working on this, and that the best thing about this is there's a huge financial reward for someone who can solve the issue. Where can people get in touch with you and learn more about your work? We have a blog that bitmex.com where we have our research and my crypto-trader digest and obviously

our main website for people who are lawfully allowed to trade on bitmex, www.com. Right, which is not Americans, right? Correct. All right, great. Well, thanks for coming on Unchained. Thank you for having me. Thanks so much for joining us today. To learn more about Arthur, check out the show notes inside your podcast episode. New episodes of Unchained come out every Tuesday.

If you haven't already, rate review and subscribe on Apple Podcasts. If you like this episode, share it with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me, Laura Shin, with help from Elaine Selby, fractal recording, Jenny Josephson, Rojo-Singeredi, and Daniel Ness. Thanks for listening.