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.


Arthur Hayes:

Bitmex blog, with detailed research reports:

Arthur’s Crypto Trader Digest:

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Laura Shin:
Hi everyone and welcome to Unchained. Your no hype 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: 00:16
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.

Preciate: 00:44
Unchained is sponsored by Preciate. Preciate is building the most valuable relationships on earth. In each episode of Unchained, Preciate recognized as an individual or group in crypto for an achievement. Who in crypto will be recognized today? Stay tuned to find out.

Laura Shin: 00:52
I’m recording today from the Coindesk Consensus Conference in New York City and my guest is Arthur Hayes, co founder and CEO of Bitmex. Welcome Arthur. What does Bitmex do?

Arthur Hayes: 01:02
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.

Laura Shin: 01:13
But you don’t actually trade bitcoin itself, right?

Arthur Hayes: 01:15
Correct. So you can’t actually buy and sell physical bitcoin on our platform. You can’t send 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.

Laura Shin: 01:33
How does it work exactly. I buy some bitcoin. I send it to Bitmex. You put it in cold storage. Then what happens?

Arthur Hayes: 01:38
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.

Laura Shin: 01:51
And I know that there’s leverage. So how does that work? I can trade with like 100x leverage.

Arthur Hayes: 01:58
Correct. So we have leveraged specified in the contract details. There isn’t actually any one borrowing or lending money on the platform. It’s purely synthetic. So it’s long versus short. So, oneside puts up one percent, the other side puts up one percent and then Bitmex moves the variation margin or the PnL between longs and shorts.

Laura Shin: 02:19
So I don’t even fully understand what that means. Could you sort of maybe speak in a more kind of everyday.

Arthur Hayes: 02:26
Sure. So let’s say that we made a bet a $100 notional bet. But, each of us only put up $1 against this. Now 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 moved the profit and loss between you and I.

Laura Shin: 02:50
And why 100x leverage?

Arthur Hayes: 02:54
Because it’s great. 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 8.5 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 treating traditional CFDs or maybe trading on margin on 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 we’re suing 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.

Laura Shin: 03:53
And so someone else explained this to me, I interviewed Jesse Powell of Kraken. So it’s that if I have, let’s say, a $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?

Arthur Hayes: 04:13
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/US dollar perpetual swap is a half a percent. So you put it one percent. If the price moves against you by a half a percent, then we liquidate your position.

Laura Shin: 04:36
So that’s how the losses get limited. And you said that only very few people actually leverage 100x. Like what percent of people actually leverage that amount?

Arthur Hayes: 04:42
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 100x usually either one, they’re treating on the very small size and they’re trying to learn the platform or they’re saying, “Hey, I think of the next 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 make some good return on equity, but if my bet is wrong, then I only lose a little bit.

Laura Shin: 05:16
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?

Arthur Hayes: 05:23
I don’t know. I mean people have their own strategies that have charting indicators. They have the change of how the order book. Bids and offers are stacked. So, there are systems, some work, some don’t, but, with study and care, some people actually are able to on average make money.

Laura Shin: 05:43
And what’s your trading volume?

Arthur Hayes: 05:49
So, last month in April we did about 3 billion US dollars a day on average on our platform. So we have the most liquid platform in the world.

Laura Shin: 05:59
And how do those numbers compare to like, a year ago or at some point in the past?

Arthur Hayes: 06:03
So year on year between 2016 and 2017, our volumes went up about 8,500 percent.

Laura Shin: 06:10
Well, and that was just all these retail investors coming in that we saw like during the ICO craze?

Arthur Hayes: 06:15
Yeah, absolutely. So, we’re primarily a north Asian platform in terms of where our customers come from and obviously you have, especially in Korea, Japan, these places were retail investors have really taken to the crypto markets and are driving our volume.

Laura Shin: 06:31
And you also recently launched your first options products. What are these products and what enables you to launch them now?

Arthur Hayes: 06:46
So in Asia, 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 ten cents. And, as a buyer, as a retail investor, you can only buy this product. You can’t go net short so that the bank will issue the warrant and they’ll make a market on the stock exchange. For this particular this particular option. Now, this is probably the most popular product that trades in Hong Kong, Korea and Japan. And, we are a retail house. We’re very Asia focused, so contrast to some of the other optionality products that are 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 percent call option that expires in one week and a 90 percent put option with a 50 percent barrier knockout that expires in one week.

Laura Shin: 07:49
So I don’t fully understand this. So call option, put option, knockout barrier. What are these terms?

Arthur Hayes: 07:54
So the 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 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, the Delta one product, which is a futures contract or a swap contract.

Laura Shin: 08:41
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?

Arthur Hayes: 08:52
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. Bitcoin, maybe it’s not bitcoin. Its 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.

Arthur Hayes: 09:42
So a big problem today is that interest rates globally are very low, but asset prices, food, housing, all these things keep going up. So 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 assets 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, it might be a 30 to 40 percent annualized volatility. Now at Bitcoin, and 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 to earn money on bitcoin that is relatively safe, right?

Arthur Hayes: 10:48
Unsecured lending in bitcoin. Not usually the best idea. As many people have found out, but we’re working on this savings component to help people save in crypto. One thing that we’ll be rolling out later this year is the ability to use bitcoin as collateral to trade single stock equities. So imagine you want to invest in facebook and you use this product every day, but you’re not that wealthy. So you don’t have private banker is 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 US stock market. So we hopefully will have this product out a Q3 or Q4 of this year.

Laura Shin: 11:57
But the way that works, when you say fully collateralized. So I want to buy a share of Facebook, I don’t 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. But, and then if the price of Facebook falls, then what happens?

Arthur Hayes: 12:11
So the bitcoin is collateralized. We will take that bitcoin converted in to a dollar credit. So you no longer have bitcoin exposure, bitcoin USD 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 will be using for this product and this swap contract basically tracks a share a facebook plus any dividends or a corporate actions. So you’ll actually receive the total return of the stock, not just the price appreciation. As if you were holding a share of stock, but actually you hold a derivative.

Laura Shin: 12:54
And I just wanted to go back also to the savings you were saying that you are going to offer people interest on the bitcoin that they put up. So how do you manage that? How do you make that happen?

Arthur Hayes: 13:06
So initially we’ll be working with on a wholesale basis. So there are very various companies around the world that do this in the traditional equities 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, one percent 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 on onto them.

Laura Shin: 13:46
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, how does this space need to develop further in order to be able to offer those things?

Arthur Hayes: 14:07
It really is 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. 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.

Laura Shin: 14:24
And why not do you want more typical crypto exchange where you’re actually just trading the assets?

Arthur Hayes: 14:30
Well, if you look at the traditional world, in fx trading, for example, derivatives trade $3-$4 trillion a day or something, something crazy amount of derivatives that trade and the fx markets versus the spot market. And so when you actually not constrained by moving assets between counter parties, 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 commodity. It’s a commoditized product. If you look at banks on the wholesale basis, treating 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 defensible business. It’s our wheelhouse in terms of risk management and where we come from in our past professions.

Laura Shin: 15:29
Maybe this is what we’re seeing playing out with Robin Hood announcing that they’re going to offer services that will be competitive to Coinbase. And Coinbase as you know, offers 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 lever trading you offer is more like gambling. What do you say to them?

Arthur Hayes: 15:54
Well, it’s not like gambling because there is not a predetermined notion that you will lose money. So, you walk into a casino and you play a certain game, you know with 100 percent certainty that you will lose money over time in that game. Now in our particular situation, number one, Bitmex in our main markets is not making the market, it’s a two sided marketplace. There’s buyers and there’s sellers, so it’s essentially like a peer mutual 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.

Laura Shin: 16:35
And who are your customers and how have they evolved over time?

Arthur Hayes: 16:43
It’s retail and 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 managed the partner’s money, so they don’t have outside LPs, which makes it easier to do things. But at the end of the day, what drives crypto is retail traders. It’s people who like the volatility, they like the stories, personalities, the past price appreciation and the falls. So it’s still a very retail phenomenon. They’re the ones driving the volume. They’re the ones who are on Reddit and Telegram and all these other places talking about crypto. The banks, hedge funds, institutional investors, they’re just not involved yet.

Laura Shin: 17:26
And why do you primarily focus on Asia?

Arthur Hayes: 17:33
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 US, western Europe does not really present that big of a value proposition for people because things work. Maybe they don’t work the best, but you know you can use a credit card, you can open a bank account, you can go on your E-trader, Scottrade 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. You 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 wants to get involved in financial products.

Arthur Hayes: 18:21
So when you have something that comes online, which is a 24/7 market, low barriers in terms of the 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 finance 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, when you get some money, what do you do? You go and buy an apartment. Now, as apartment prices relative to median income are very, very high. Especially in China for example, or Hong Kong where I spend most of my time. So, any chance that the population could 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 where you’re really gonna to see the soul of crypto develop.

Laura Shin: 19:17
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?

Arthur Hayes: 19:30
Absolutely. I think the crypto world in the West is obviously very VC dominated. The types of people who are involved in this. Obviously the early movers and they’re very eccentric in the way they are, but when you come to New York, everyone knows what crypto is because it’s a financial center. You know in the valley, those type of people who are involved. But in Asia it’s very organic. It’s rawer, it’s 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 present a relatively low risk, and if you tell them I’ll 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…

Laura Shin: 20:41
But there’s Fenbushi. Isn’t Fenbushi like a big force out there?

Arthur Hayes: 20:43
That’s a new thing. They’re primarily active inside of China. But you know, if you’re talking two, 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 US VC outfits, were definitely not investing in Korean, Chinese, Japanese, you name it, Asian country crypto startups.

Laura Shin: 21:07
So you’re saying that, those startups out there, they’re getting funded. How so? Like through ICOs?

Arthur Hayes: 21:16
You just built a real business that made money. So either you built a product that the market wanted or you failed. Where if you were to the US 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 model. So you really don’t actually have to build a real business over here to be successful.

Laura Shin: 21:39
Yeah. I won’t name names, but there’s a company I’m thinking of it. I went through a number of permits and still raised a ton of money, but it didn’t [inaudible]. What’s your background? How did you come to launch Bitmex?

Arthur Hayes: 21:51
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 into my bosses office and I was fired. Job cuts. 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 the traders making $10 million a year anymore.

Laura Shin: 21:51
You mean after the crisis?

Arthur Hayes: 22:27
After the crisis. If you’re in management, you’re lucky to make $1-2 million. And, you’re busting your ass and dealing with all the politics. And I was like, “Well I need to do something different.” And so, I happened to have heard about Bitcoin earlier in the year when it went to $250. So I started researching, read the white paper and then obviously because I’m a trader, I said, “What are the financial products out there to trade?What’s the exchange ecosystem like? And, I stumbled upon an exchange called Icybit, which was I think the first futures platform that launched in 2011 or 2010. Not really sure. But they had a bitcoin/US 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 I became a little dissatisfied with the progress that that platform was making. And I thought, “Well, if I want to make a real business side of being a crypto, being a trader is very difficult to do profitably over a long stretch of time.” So I need to build real business out of this. So I thought, “Well, I know derivatives.” And I reached out to my network. And found my other two co founders, Ben Delo and Sam Reed. Ben has a background in HFT technology. Sam is 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, we’ve been doing this for four years now.

Laura Shin: 24:13 And what were your revenues last year?

Arthur Hayes: 24:15
I think we were in Bloomberg. I think it’s something around 80 something million dollars, that we made last year.

Laura Shin: 24:15
Doing quite well.

Arthur Hayes: 24:26
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.

Laura Shin: 24:33
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?

Arthur Hayes: 24:40
Yeah, I think it’s gratifying. More so than the money to hear people come up to you and say like, they loved your platform. 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 had been trading crypto successfully. And I think, doing 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. You don’t want people trying to come up to you saying you stole money from them or this, that the other thing. You want people to come up and shake your hand and say, I really appreciate what you’ve, 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.

Laura Shin: 25:22
That’s great. And I think something else that’s really interesting about your business is, I have heard you say that you make money even when the market’s going down. Can you talk about how that works?

Arthur Hayes: 25:31
So essentially we matched trades. So for every long there is the short. So, whether or not the market goes up or down, as long as there’s trades, we take a commission on that. Now obviously in Bitcoin and 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 and 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 coworker said, you’re an idiot for getting involved.” And all this emotion, 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, on intensely down days, we usually do the best in terms of trading volume on the platform.

Laura Shin: 26:23 And what are your fees?

Arthur Hayes: 26:29
On our most popular product, we had taken that five basis points.

Laura Shin: 26:31
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 telling you about our fabulous sponsors.

Blockchain Warehouse: 26:42
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Preciate: 27:32
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Arthur Hayes: 28:11
I’m speaking with Arthur Hayes, CEO of Bitmex. You’ve predicted that Bitcoin will hit $50,000 by year’s end. Why do you think that?

Arthur Hayes: 28:19
I like big round numbers so people talk about them. Number one. Number two, if we go with last year, we went from $1000 to $20,000 at the peak, so 20 x uptake if, really this whole narrative of traditional players dipping their toes into crypto. People putting $1 million to $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 a round number of 5x of $10,000. so $50,000.

Laura Shin: 28:55
So it’s not like based on any kind of prognostication around like how much institutional money will come in.

Arthur Hayes: 29:02
I have no idea at the end of the day and anyone who claims that they do, have them trade for a while and they’ll probably lose all their money. I’m in the game of expected value not in being right or wrong at a particular price target.

Laura Shin: 29:16
And I want to hear about the year of 2017 from your perspective. This is actually a 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 how such high volumes. So what did the year look like from your point of view and how did things change?

Arthur Hayes: 29:39
I think the start of the year was amazing because we hit a thousand dollars, which was a massive milestone for the industry. We have broken. It started in about 2015 where we had broken through $300, which was a massive resistance point and to eclipse the thousand dollar mark. We thought, okay, we’re almost back to the high of Mt. Gox, which was in 2013. And so, as a psychological number for bitcoin to have gotten back above water versus 2013. Everyone was ecstatic and then right after that, you had all of the [inaudible] from the PBOC trying to calm down the market and then the fever of buying in China. So I just thought, you know, maybe we’ll get to $2000 or $3000 by the end of the year because a $1000 was such, it was so hard to get to a $1000. And so usually you’ll spend some time consolidating before the market ratchets hirer. Like what actually happened was that 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 “Holy shit like bitcoins back to where it was.” It didn’t die. It is 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 getting filled. You have major financial media outlets basically doing a crypto story every day. I remember back in 2013, 2014 at Bloomberg, Wall Street Journal and 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 a crypto section on most of these online properties where they’re talking about all sorts of things related to mining and crypto trading, ICOs, all this sort of stuff. So that started it. Then we had the ICO boom. Everyone finally caught onto this method of raising money and that further fueled the attention that was coming to this space and and then took us into summer of 2017. Obviously, we had the issue surrounding the soft fork and the creation of Bitcoin Cash and this contentious moment of how are we going to solve scaling and will SegWit get activated?And so, the market thought, “okay, well this is the major hindrance to us moving even higher, I think we were around $3,000 or something.

Arthur Hayes: 32:34
At that point everyone was, “oh my god, if if bitcoin hard forks, like, what’s going to happen? People aren’t gonna know what to do.” Like you log onto your trading account. Like some Newbie. How do they know which Bitcoin to buy? And it’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 got a hard fork. Bitcoin Cash was created, Bitcoin was there, and trading volumes on both rose 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 chipped away. And then, we had the SegWit2x debacle or was that called that Shitcoin2x. And, at the last minute the miners pulled an about face and said, “Actually, no, we’re not gonna support this.” And that was another roadblock removed from bitcoin going higher. And then I think the coup de grâce for 2017 was a CME and CBOE futures launch. The fact that they would stake their 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 changer. That’s what took us to $20,000 and as everything in trading, buy the rumor, sell the fact. Right after that, we fell about 50 percent down to $10,000, so I think 2017 was a year of straw men narratives that had been in many people’s minds of why bitcoin couldn’t move higher, where there was a catharsis around this level. We moved past it and there’s no reasons why you wouldn’t own bitcoin if you know these different narratives were proven not to matter.

Laura Shin: 34:48
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 know kind of a deep level of detail and it’s a level of research that I wouldn’t say is really necessary for someone that does the kind of training that is available on your site. So why do you even publish them at all?

Arthur Hayes: 35:12
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 offers because they write thoughtful, 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 a 1000-2000 word paper 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.

Laura Shin: 36:19
That’s great. I definitely agree with everything you said there. I just did my panel at Consensus and we were talking about how like 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 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. 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?

Arthur Hayes: 36:53
I think some people were not happy with our public stance against hard forks. We came up very strongly against…

Laura Shin: 36:53
Like all hard forks or just the SegWit2x one?

Arthur Hayes: 37:06
What we didn’t like is that people were forcing the technical work onto the exchanges rather than building a good tech stock, taking the time to make something good. And then coming to say to the marketing, “Hey, we’re doing an airdrop. Here’s this new coin and we want the exchange to support it.” But when you hacked together some code really quick and then expect every exchange to run around like headless chickens getting their backend 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 different things that make it very difficult to keep customer’s funds safe. Because at 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.

Laura Shin: 38:12
And are you talking about like Bitcoin Gold and Bitcoin Private?

Arthur Hayes: 38:12

Laura Shin: 38:15
Yeah. So what does happen? Like if I am trading on Bitmex and I’ve given you, like five bitcoins or something, and then Bitcoin Gold comes out, what happens at that moment? Can I not get those back?

Arthur Hayes: 38:27
Correct. So we’ve made a very public stance in that, 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 a very interesting derivative trades around these different forks. Because our future’s contract will settle on Bitcoin. But, if you hold a portion of your bitcoin, it is not needed for the margin off the platform, you can essentially receive this almost like x dividend event. So, if you 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 par. Take my bitcoin in my own wallet. Now when the the ex 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 will be trading at par or premium to the spot index, but right before the hard fork happend 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 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 negative reacted to this particular Hard fork. They wanted to be hedged. So people would overhedge with futures contracts becuase it would be traded at a discount. But, if you put on this trade a little bit in advance of that, you could take advantage of what we call the basis moving into a discount.

Laura Shin: 40:42
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 from the margin trade that you’ve done.

Arthur Hayes: 40:42

Laura Shin: 41:00 Wow, that’s really interesting. Do you know how many, like what percentage of your users figured that out?

Arthur Hayes: 41:06
I’m not really sure, but you know, we published, I think I published a play by play of this trade in one of the Crypto Chitter Digests. It first happened with Bitcoin Cash and then subsequently for the other forks that happened later in the year, this same trade work again. So the best part about this trade was even after it was announced that the fork would happen and you knew the date. The futures contract would not reflect this in the basis. So you could actually wait to use 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.

Laura Shin: 41:48
Well, this trade may not work like in a year or something.

Arthur Hayes: 41:48

Laura Shin: 41:52
You have also said that you foresee a battle between true decentralized cryptocurrencies and digital Fiat currencies. How do you see that fight playing out?

Arthur Hayes: 42:00
I wouldn’t say it’s a battle. I think they’re going to coexist. 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, 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. So why shouldn’t the government or 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. They’ll know exactly what you spend your money on it and they can shut you out from the financial system if you don’t behave. And we’re seeing a semblance 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’s 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… we know the PBOC is working on electronic [inaudible]. So you’ll see a country like China or Russia or one of these developing countries who have massive issues with what is said at the top with actually what policies implemented from the commercial banks. It makes sense for 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, some coin will be that medium where people who want financial privacy or who wants to make a payment to someone that isn’t recorded by the government, will use one of these system. So I do not think that it will replace electronic Fiat, but rather they’ll serve two different purposes.

Laura Shin: 44:49
So then we will have certain coins that are kind of like, what’s the word? Adversarial to governments.

Arthur Hayes: 44:56
Maybe it’s not adversarial, they serve a different function.

Laura Shin: 45:01
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 US? I really don’t.

Arthur Hayes: 45:11
I think it’ll be a fight, but at the end of the day, the US government controls the issuance of money. If they all of a sudden say, “Now everyone must get…” If they pull an India. So India, last year Modi basically said, “I want to digitize the Indian financial system.” They rolled up the system, I think it’s called at par. Which is they put biometric data in a centralized database for something like 1 billion people. And so, what he’s trying to do is basically move India, which is very casual 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 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.

Arthur Hayes: 46:01
I remember my squash coach is Indian and he was complaining that know the, 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 was very disruptive to the Indian economy and the effects of it are still being felt. Many older poor people who didn’t have access to queue in line all day and forego income to tend to their money now found they had stacks of worthless paper in their bed. So the US and other countries, if they really want to ram shop this down the throats of the people will just do it. And at the end of the day when 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.

Laura Shin: 46:52
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 it like people like just rolling over and allowing it to happen.

Arthur Hayes: 47:05
Well, I mean people post all the data on facebook and they see what happened and that was a voluntary situation. If it’s convenient enough…

Laura Shin: 47:12
But since it’s with the government though, it’s like a little bit different.

Arthur Hayes: 47:15
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 you’ve been using credit cards or any sort of plastic. It’s a QR code. It’s We Chat 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.

Laura Shin: 47:48
I agree with you in the convenience perspective. What I am not certain about is that China doesn’t have the same kind of process that we do here in the US, so I feel like maybe the Chinese are not aware about the kind of privacy issues of using WeChat where it’s like I feel like in the US, because of the role that the press plays people might have more awareness. But you’re right, that so far they’ve. They’ve been happy to sign away all their privacy rights, but there’s more awareness now, so who knows.

Arthur Hayes: 47:48
We’ll see.

Laura Shin: 48:18
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 Goldmans and the intercontinental exchanges or pure crypto businesses?

Arthur Hayes: 48:29
I think they’ll both succeed, relative with their expectations are. So obviously a bank and institution looks a crypto and they see, “Okay, can I bring on 100 million US dollar a year business onto my bank They’ll have 5-10 people at this desk that is as a management decision, okay, that’s 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 time and money overcoming some of the issues in the crypto space from a financial institution perspective. Now from a pure crypto business, those players getting involved is great because a lot of the problem without a pure crypto businesses is they rely on some way, shape or form some form of liquidity and the cost of that business is essentially the hedging costs, or the transaction fees. They’re all these sort of things that are baked into that product that they are 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.

Laura Shin: 49:49
Yeah. I interviewed Wences Casares at Xapo 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, they might’ve been the first movers, but that once all these competitors came in 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?

Arthur Hayes: 50:18
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, shape or form. But what this has morphed into is essentially another way of private block funding. People are using these SAFT agreements. 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 investing in these new technology projects and so the series A, you just do a massive SAFT and collect $10 million. Like you don’t actually need to do a public sale. You’ve gotten the money. It’s non dilutive. So, that really goes against what the ICO is good at and the way I see it as 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 the rank and file traders keep buying these shitty deals and seeing the price underperform almost immediately versus their ICO price. They’re going to be less reticent to purchase into whatever the small public round is of these, what’s a majority a SAFT raised issuance. And so as it happens, these VCs are going to see immediate mark to market losses on these agreements that they’ve put in place. Now for a traditional VC, they don’t really have a mark to market because their investments aren’t really getting any liquidity or any real objective price only once one or two years when they do another round. Now if you’re going to your LPs, and you are saying,” Holy Shit, I’m down 30 percent and all these different positions, they’re going to say, no, fuck this token shit. Let’s go back to doing what we usually do. Because, 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 2 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 we’ll 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.

Laura Shin: 53:18
Meaning that you think it should go the realm of not selling to accredited investors but to retail investors again?

Arthur Hayes: 53:26
I think that is accomplishing something revolutionary.

Laura Shin: 53:29
But what about the regulatory issues? Because the reason why they are shifting is because there’s concern about regulators coming in.

Arthur Hayes: 53:34
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, in the service, you know, law firms, accountants, all these sort of people are making a lot of money on this ICO…

Laura Shin: 53:34
Well, not the government.

Arthur Hayes: 53:59
Not the government, but some governments. This might be US centric context when you say ICO regulations, but you have places like Japan, South Korea who are enacting ICO bills. They’re putting in place, “Okay, here’s what we think is not super fucked up about an ICO. If you abide by these guidelines were okay with it.” Whereas when you move to certain other countries, they’re just like sitting there with two minds. “Do we regulate this out of existence in our territory or do we become business friendly because you want the jobs and we went to lawyers and every one else to get paid off all this?” So I think there’s that, that tug and governments usually who are much smaller in terms of the amount of population they comand who have to create new industries for their people will think, “let’s bring this type of thing to our jurisdiction and essentially you can provide them cover. Because the whole point of an ICO, is it anyone with an Internet connection and an address and a wallet, they put up a website, see they’re going to do something and see if the market wants to contribute to their product. That I think is powerful.

Laura Shin: 55:01
And we are seeing this 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. So That’s interesting. And why?

Arthur Hayes: 55:16
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 risk on risk.

Laura Shin: 55:29
And so for everyday people, would you recommend that they trade crypto or that they buy and hodl?

Arthur Hayes: 55:36
It depends on the amount of effort that they’re willing to invest in this. If you just want to dip your toes in, see what’s going on, buy a very, very, very small amount of whatever few coins that you think are worthy of your investment. Put them away. Forget about them for 5 to 10 yearseith. They will either be 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 know, you’re going to log onto your account in 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 cause he’s been trading shitcoins very profitably 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, 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.

Laura Shin: 56:47
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 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?

Arthur Hayes: 57:08 I guess I don’t really spend too much time looking at the super technical aspects of relevant blockchains 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 crypto sphere that, bitcoin’s too slow, etherium is too slow. All these and there’s different ways of doing that. And how we’re building a completely new ways, a 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. What I know that there are very smart people working on this and at the best thing about this is there’s a huge financial reward for someone who can solve the issue.

Laura Shin: 57:57
Where can people get in touch with you and learn more about your work?

Arthur Hayes: 58:02
We have a blog at where we have our research and my crypto trader digest and obviously our main website for people who are lawfully allowed to trade on the Bitmex,

Laura Shin: 58:12
Right. Which is not Americans. Right?

Arthur Hayes: 58:12

Laura Shin: 58:15
Great. Well thanks for coming on Unchained. Thanks so much for joining us today. To learn more about Arthur checkout 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 liked this episode, share with your friends on Facebook, Twitter, or LinkedIn. Unchained is produced by me Laura Shin with help from Elaine Zelby. Fractal Recording, Jennie Josephson, Rahul Singireddy, and Daniel Nuss. Thanks for listening.