The Bitcoin Mercantile Exchange (BitMEX), a Seychelle Island-based trading platform for Bitcoin-denominated derivatives, plans to introduce its first structured products in the third quarter.
BitMEX plans to provide US equity swaps for Chinese Bitcoin investors, Arthur Hayes, CEO, told DigFin.
“We want to encourage the use of Bitcoin as a global form of collateral, and develop financial products [for it],” he said. For example, Chinese professional investors can give BitMEX bitcoin as collateral to trade another asset class, such as US equities. BitMEX provides a total-return swap, serving as a principal to the trade and providing a synthetic exposure to US equities.
At this stage, BitMEX only wants to generate revenues by charging for transaction costs and a service charge, rather than to use client’s money for its own investments. It is targeting Chinese clients for its inaugural structured products because the biggest holdings of Bitcoin are in China, and investors there are hungry for exposure to trades outside of A shares. BitMEX is offshore and doesn’t take renminbi, so it is adhering to Chinese financial regulations. “We’re using financial engineering to create reg-lite products,” Hayes explained.
(The company is based in the Seychelles but Hayes lives in Hong Kong – and he and his colleagues pay themselves from BitMEX profits in cash.)
If the swaps contracts are a success, Hayes says, the exchange can look at other derivative products such as options, or savings products, all denominated in Bitcoin.
“It’s what investment banks do,” said Hayes, a former trader at Deutsche Bank and Citi. “It’s just in Bitcoin.”
Plus, he says, the cost to acquire a customer is far cheaper for BitMEX. A bank pays thousands of US dollars to onboard a client to trade structured products, he says, but BitMEX has almost zero cost. (BitMEX does not accept US clients, because the US is the only jurisdiction that requires Bitcoin service providers to obtain a license.)
“We don’t have to pay for KYC or AML [know your client, and anti-money laundering compliance],” Hayes said. “That’s because our products are not a value service and their not a money transfer operation, and we don’t operate in any fiat currency.”
Moreover, BitMEX operates on a blockchain, rather than in paper, so it can service very small ticket sizes without suffering from a lack of scale.
From futures exchange to structured products
Hayes, company CTO Samuel Reed and COO Ben Delo set up BitMEX in 2014 as a futures exchange for Bitcoin, with seed funding from Shanghai-based Chinaccelerator and Princeton, New Jersey-based SOSV. Customers subscribe and redeem in Bitcoin – no cash. The network went live in 2015, and since inception has seen $7.3 billion in turnover. Daily average trading today ranges from $30 million to $40 million, Hayes says.
The network’s biggest selling point to date is it allows punters to trade on 100x leverage (a Google search makes clear how eagerly this is broadcast).
Hayes says average leverage is more like 10x. “But 100x is good advertizing,” he said. The typical trader is a testosterone-pumped male who is tech-geeky (it’s Bitcoin, after all) but not financially sophisticated – although to avoid regulatory hassles, BitMex markets itself as only for professional investors.
“Clients can’t do anything with Bitcoin,” Hayes said. “Most of them are buy-and-hold. But if you believe in [Bitcoin], you can go long and short.” Speculators can also take positions against rival crypto-currencies.
Another feature of BitMEX is that its programmatic platform means it is scalable: customers can trade cents on the dollar, if they want.
This is why a service such as BitMEX is replicating what investment banks do, but not (yet) eating their lunch: it is going after customers with too small a wallet to interest investment banks, which focus their efforts on rich people trading big amounts.
Nor is Bitcoin liquid or stable enough to attract hedge funds, Hayes noted. Not today.