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Bitcoin Mercantile Exchange has already turned profitable
Exchange lets investors take synthetic positions in stocks
It was after Arthur Hayes got laid off from Citigroup Inc. in 2013 that he stumbled across one of the simplest ways to make money he’d ever seen. He was living in Hong Kong and saw the price of bitcoin across the China border was much higher. He hopped on a bus, opened a China account and started buying low in one market and selling high in the other. “It was too easy,” he says.
The price discrepancy eventually disappeared, but it gave him an idea: He could make more money if he gave others the means to take advantage of similar trading opportunities between countries. So in early 2014, he started the Bitcoin Mercantile Exchange with two friends. The mission is to create an institution like the Chicago Mercantile Exchange that will let people use the cryptocurrency to bet on securities not easily accessible in their home markets, especially China.
China restricts the ability of companies and individuals to exchange their yuan for other currencies, part of the government’s strategy for managing its economy. That can make it complicated and expensive for citizens to invest in overseas securities, while foreign investors face restrictions in trading China stocks. Hayes’ idea is to let Chinese investors use bitcoin to buy synthetic versions of offshore stocks that would normally be off-limits, like Apple or Facebook. Conversely, foreign investors could effectively short a basket of the country’s shares not typically exposed to such strategies.
“Our goal is to let anyone bet on anything at any time,” says Hayes, an American who is now 30 and works in Hong Kong.
BitMEX doesn’t sell bitcoin itself. Rather, traders go to sites like Coinbase or Kraken to exchange their money for the cryptocurrency. Then, they can open an account with BitMEX, deposit the bitcoin and use that money to trade. Investors don’t buy stocks themselves, rather they pay in bitcoin for derivatives, or contracts designed to simulate stocks or indexes. Any profits or losses are calculated in the customer’s BitMEX account, and they can withdraw the proceeds to convert back to cash when they choose.
Hayes and his co-founders face enormous challenges in making their vision a reality. China has closed loopholes its citizens use to move money abroad and it could do the same with bitcoin. BitMEX doesn’t have a license to market to Chinese investors and is relying on the government’s so-far permissive approach to continue. At the same time, the cryptocurrency is losing some appeal because of price volatility and infighting within the bitcoin community. There are also dozens of alternative virtual currency exchanges, including some like Beijing-based BTCC that have larger trading volumes.
Still, BitMEX is making progress, aided by the size of the Chinese market and Hayes’ experience in designing complex financial contracts. So far, 5,800 users have traded $760 million on the exchange. The company is already profitable, a rarity among startups. Hayes also said he’s not wedded to bitcoin and would let people use other digital currencies if they prefer.
“BitMEX has established itself as one of the early derivatives exchanges in cryptocurrency and is benefiting from the proximity to the Chinese market as well as founder Arthur Hayes’ experience in derivative trading,” said Gil Luria, head of technology research at Wedbush Securities Inc.
Last month, BitMEX took first place among 475 startups at a competition in Singapore hosted by the technology blog Tech in Asia. Hayes and his partners are now seeking to raise $2 million to expand the financial products they can offer. They want a partner who can help distribute their products to retail Chinese clients or an established derivatives exchange to give them access to institutional traders. “Profitability gives us flexibility in who and how we take funding,” said Hays, adding they have turned down offers.
William Bao Bean, a China venture investor, said BitMEX’s timing is fortuitous. Investors in the country are looking to diversify abroad as the economy slows and domestic investments become more unpredictable. “There are many people who want to see their money outside of China right now,” said Bean, a former Deutsche Bank investment banker who runs a program for startups called Chinaccelerator.
In summary, BTC is currently the cryptocurrency of choose for mainland Chinese to diversify their wealth away from China. And demand for that diversification appears to be quite robust. It follows that mainland Chinese BTC exchanges are going to dominate the market for BTC, which the trading volume currently clearly shows.
This trend is very standard and has been going on a lot the past several months with the coin bouncing up and down in the $350 to $450 range usually settling back in in the lower $400s.Quote: