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On Bitmex and the Current Global Crypto Markets Conditions

As someone who spent most of her past life working for banks and observing markets in both China and the US, I appreciate it when someone is able to talk about financial markets sophisticatedly on a global level. 


I was particularly impressed with Arthur Hayes, the founder and CEO of Bitmex, when he alluded to the market dynamics between US and China during a conference call with The Information, which we made available for our premium readers as part of our collaboration with them.

 

We will also start offering The Information’s quarterly conference calls for our premium subscribers on an ongoing basis now, share with your friends and encourage them to subscribe.
 


Despite being American-born, Arthur has worked in Asia and Hong Kong for a long time and has seen the markets and crypto scene evolve in Asia. I found his opinions and perspectives refreshing and pragmatic, and frankly, more global than most finance person in the crypto space because he understands and sees the market dynamics in US AND China. 
 

For example, he highlighted how China’s recent reserve requirement ratio (RRR) cuts for banks and the loosening of its shadow banking ecosystem is creating a risk-ON market environment in China, with ripple effects in the rest of Asia, which I certainly believe is going bolster the crypto market locally and subsequently globally.
 

As a quick background, China’s mainland stock market was established relatively recently and is dominated by primarily retail individuals (>60%), while Hong Kong’s stock market historically has been the largest for institutions in Asia, with Singapore coming second. For any individual working in the finance sector within Crypto, understanding the economic happenings in Hong Kong and in China is crucial for the space, because for one, we see Hong Kong as having one of the most friendly and transparent regulators in crypto, and secondly, we are seeing increasingly more projects going to market in Asia and looking for adoption, which would drive even more crypto ownership in Asia than what we already see now. 

 

Arthur says that Asia is the epicenter of crypto
 

And why do you need to care about Asia again? I’ve been saying this for a while but it’s nice when it comes from someone else for a change 🙂 Arthur says that Asia is the epicenter of crypto:
 

A (Arthur): “I mean the large-scale platforms essentially pivoted, but they still exist. OKEx, Huobi, BTCC , they’re all still around, they do different things now, maybe they’re not so blatantly doing things in China, but the Chinese diaspora is large, right? Not just in China, but overseas, Chinese are everywhere around the world. And if you just service them, you will have a very successful business and just forget everybody else. So I would say that the platform in Asia, maybe the volumes shifts around in the different countries, but this still is the epicenter of crypto.
 

Q (Question)Asia is the epicenter of crypto.
 

A: Correct.
 

Q: Not New York, not London, not Silicon Valley.
 

A: No.
 

Q: Interesting. But it seems like the intellectual leadership….
 

A: Well I mean, we’re talking in English, you’re American English newspaper; Bloomberg, Reuters, take your pick of a large financial media, they’re all your Western European or American. 
 

They obviously are very good at being a mouthpiece, I’m sure you know most journalists out here [in Asia] just do a copy-paste, maybe a little translate, and that’s their journalistic style. If you will just take it from New York Times and translating and publishing and that’s what they call journalism out here. So yes, obviously the thought leadership was going to be very American bent or West European bent, but the actual content they are talking about and the people who are really doing things are all out here in Asia, not in the traditional bastions of technology.
 

Q: Interesting. So even on your platform BitMEX, you know where the volume is coming from?
 

A: Most of our volume comes from North Asia, so that’s just a fact.
 

Q: Interesting. So are we missing the bigger picture of that?
 

A: Well I mean, in what terms?
 

Q:Given the fact that it’s got this Western bias.
 

A: I would think that a lot of people are, because obviously, you know, say you’re an American venture capital firm right. You’re obviously going to feel more comfortable putting your US dollars in a Delaware LLC,with some dudego drive down a co-working space in SOMA ( South of Market Street in San Francisco); it’s just human nature, who went to Harvard or Stanford or one of these universities. Oh yeah, this dude knows what he’s doing. So it’s the whole social signal, the accreditation of universities.

But the people who build the best platforms didn’t take venture platform money. If you look at you know, take Binance, in 3 years, they essentially just destroyed every other spot platform, are innovative, understand what the market wants and are doing some cool and creative things. And CZ didn’t go around the Stanford road and raise money from Andreessen Horowitz, he understood his clients and built the real products for them. So it’s a different sort of mindset out here because there isn’t this institutional capital available for people to tap into.”

 

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On Current Market Conditions


And when discussing the current market conditions, here’s how Arthur thinking about it:


Q: What kind of price environment is BitMEX projecting for the next 12–18 months?

“So personally I think that… and I’ll probably write about this in my newsletter coming out in a week or so, that I think by the end of the year we’ll be able to call that up to 10 000. And I based that primarily on a shift in the global monetary policy conditions.
 

Obviously in the States, [Fed’s] Powell, either he’s caved to Trump’s pressure or the S&P 500 dropping 20% in one month was too much for the Fed, but from what it sounds like they’re pausing on rate increases, they will now start to reinvest the runoff of their Treasury and mortgage-backed securities portfolio, which basically means their balance sheet will instead of declining, will start to flatline and tick up, probably by the Q3 or Q4 of this year. 
 

Well, obviously that’s extremely important because the entire world is essentially, outside of the United States, short dollars, and when dollars become more expensive, then all sorts of funky things start happening. Especially in emerging markets, you have currencies going haywire because basically nobody trusts global currency bonds, they want a US dollar bond and you have balance sheet inversion for all sorts of different emerging markets and the cycle repeats every 7–15 years.
 

And then you also have China. Obviously, China recognizes that they need to rebalancetheir economy away from fixed asset investment and property. However, it’s very difficult politically from what I’ve seen, for Xi to push through the changes that need to be made, and where it sounds like the PBOC says fuck it, we’re going to raise, we’re going to start printing money again. And so you’re seeing more Triple R cuts (RRR), you’re seeing more liquidity, you’re seeing a return to shadow banking.
 

The NDRC has released the recent reports saying they’re going to loosen up the restraint on shadow banking to allow the local governments to get more money to essentially finance property. So China is back to its old trick, the Fed is going to be either flatlining or I think reducing interest rates into the end of the year. And so now we’re going to have more liquidity in the global system and that means investors can get back to doing silly things. 
 

So we have Uber going IPO, Lyft IPO IPO. We have always negative gross marginbusinesses that have never made money in their entire history that will go IPO. And if their IPOs perform well, if Tesla is able to raise more money, we know that investors have lost or marbled again and at some point they’ll get around to crypto.
 

Q: So you’re basically risk is back on.
 

A: Right.”
 

Going back to our January 2019 book recommendation, I highly highly recommend everyone who is in crypto finance to read China’s Economy: What Everyone Needs to KnowIts’ a fascinating read into China’s economic history and its nascent financial markets, with its retail-dominating traits drawing many parallels with the current crypto market.

— — 
 

On recent happenings in Crypto
 

On the JPM Coin:
“I would say that JP Morgan is not getting into crypto. JP Morgan is upgrading how they trade the US dollar value inside their ecosystem. So to call it a cryptocurrency is a misnomer, there’s nothing crypto about what JP Morgan are doing, what Facebook or IBM or any of these companies. They’re taking a US dollar that maybe is held by their external Treasury or in some sort of bank and representing that by a digital token that will move along some sort of database; that’s not a cryptocurrency at all. It’s basically just a US dollar money market fund moving in a faster way on a better database essentially. So yeah you put the name coin after, then we get is stock pricing over a few basis points, but in no way, shape or form is Jamie Dimon endorsing cryptocurrency or Bitcoin.”
 

On CBOE and CME:

“well, CBOE and CME got into bitcoin futures; CBOEthrew in the towel last week and said we’re no longer releasing any new contracts because they got their lunch eaten by the CME, the CME does I don’t know 300–500 million U.S. dollars a day maybe on their contract. Just as a comparison, the CME does something like 1.5–1.75 trillion US dollars of the contracts trading every day. So Bitcoin for them is not even a basis point of what they do on a daily basis, it’s irrelevant to the revenues. Yes, it generates a lot of buzz because everyone’s talking about the new thing, but in terms of something that is going to trulyaffecting the bottom line at any time in the near future, it has zero effect.
 

— — 

Other highlights
 

Here are some other interesting highlights from the interview that I took away, relating to Bitmex and Arthur’s strategy:


Q: Are you a crypto believer?
 

A: Absolutely.
 

Q: Do you hold crypto?
 

A: No.
 

Q: That seems to be a contradiction.
 

A: Well, I have a company that essentially prints Bitcoin every day. I don’t need to hold crypto. My financial well-being is very tied to Bitcoin and the whole ecosystem growing, so as a prudent risk manager, I should not put my personal savings in the Bitcoin.
 

— — 
 

On Bitmex’s strategy and positioning:
 

Serving the retail market: “I love retail because no one’s serving retail in the right way. That’s why these crypto platforms are so popular and probably because they’re serving a segment of the market that large exchanges banks and financial institutions refuse to serve because it’s too expensive to do so.”
 

Bitmex’s investing approaching: “So now we’re not looking at raising any external capital. Yes, we do have a venture capital arm run by somebody out of San Francisco and we’re investing in exchanges around the world especially in emerging markets in Asia, wallets, portfolio monitoring tools, all sorts of things; anything that we think that is tangentially related to trading or could help develop the technology set.
 

[…]Yeah. And then if you are creating a protocol, and I’ve not been able to see how a protocol is a real business, it’s charity, but it’s charity that will lead to hopefully further things. Whatever you’re building has to really have some sort of long-term secondary application be built on top of it for people willing to fund you rather than just an ICO like it’s their lunches.
 

[…] we invested in equity only, we don’t invest in token, we don’t invest in protocols like I want control, I want a real business, I want cash flows. Which is in some respect the antithesis of venture capital investing, which I think is mostly bullshit because they always fail most of the time like their portfolio overtime, hopefully goes on over time except for the very large successful funds. So it’s more about picking things that we think we’re going to have a real chance of actually generating free cash flow.”
 

Bitmex’s new product offerings: “so one thing that obviously a lot of exchanges do and may not be able to see me, but some of the other exchanges make the majority of their revenue by selling either their market data or selling privileged access to the matching engine. And right now, we’re giving away all on marketing free and we have a core corporate value of a fair play at BitMEX which means that every client has the same access as everybody else. So there’s no virtue to those who have a few millisecond faster speed in the colocation facility of the exchange and then will rip off all the clients. That’s not something we want to get into and that’s not how we want to make our money; which basically means as a trading platform, we make our money when we match trade.
 

On upgrading Bitmex’s trading engine, would there be any significant increase in the number of tokens that Bitmex have on the platform?: “So hopefully we can start listing anything we want to list. So obviously the head of our financial products division is always pestering me to list these things, but we know we can’t do anything right now. So yeah, we would like to list all 20 different tokens on a platform if there were enough liquidity and the new trading architecture is definitely being expected to support that type of trading.”
 

If Arthur was not working on an exchange, what would he work on?: “So I think I would be working on a coin brokerage product. And obviously that’s directly related to exchange trading but I think it’s an essential component. Basically, there’s a lot of traders who want to take their dollars and borrow crypto to trade on BitMEX and a host of other platforms. And they want somebody else to take the counterparty risk of the exchange. I think there’s definitely, room for somebody to analyze that risk to the best of their capabilities and offer some sort of lending product where hedge fund A puts in dollars, on the coin broker will then lend them Bitcoin or some other cheap coin on the exchange to trade with, charge them a rate of interest and then that client has access to trade and doesn’t actually have to touch crypto. And obviously this requires a lot of sophistication in terms of being able to assess the risk that the exchange steals your money, but I definitely think the perception of how risky crypto trading is from maybe a compliance department at a hedge fund versus the reality is a big disconnect. And is the dumpiest of space is for somebody to step into that middle ground and proceed to take on that risk. And then educational resources, I think that the best place is you know probably just the messaging boards, being in the chat rooms, just hearing what different people are talking about, if you don’t understand something, go look it up.”

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