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Arthur Hayes felt the golden days of finance had gone by the time he got started in investment banking in Hong Kong – until cryptocurrency gave him the opportunity to establish platform BitMEX, now one of the most successful bitcoin exchanges in the world.
Arthur Hayes had a bad first day in finance, on the trading floor at Deutsche Bank.
“I joined on the day Lehman went bust,” he says.
And it didn’t get much better after that. Hayes stuck with finance for a while, later moving to Citi, but throughout, he had the sense that he had missed out on the golden age of investment banking.
“I have experienced a secular decline in finance since the day I started, and for people in my age cohort that’s pretty much been the story,” he says.
“You’re not making the money you thought you were going to make, automation is coming to financial markets, you see fees getting sliced every year in different business lines, and you have this impression: how long is my job going to exist in its current form?”
He was right about that: he lost his job at Citi in the summer of 2013.
So Hayes decided to do something different.
By the time Citi axed him, bitcoin had started to gain attention. Hayes, a confident, gregarious man with a laugh that makes windows vibrate, is a skilled ETF and index arb trader, but also the sort of person who knows how to spot the low-hanging fruit that is so obvious everyone else is somehow missing it. In 2013 the bitcoin price in China was 20% to 40% higher than the rest of the world, because of the restrictions on the renminbi and the impeded ability of Chinese to buy things from outside China.
So Hayes, who had an account at a local Chinese exchange and an RMB bank account, would purchase bitcoin outside of China, hop across the border from Hong Kong, and sell it domestically in China for renminbi.
Since he couldn’t wire the money back to Hong Kong, he would instead take a bag of banknotes – the legal limit for taking currency across the border each day was RMB20,000 ($2,895) – and bring it back, earning his spread in cash. It was simple, bold, and entirely legal.
Thinking about what else he could do, Hayes noticed there was a very nascent futures market for the cryptocurrency, “with one exchange run by two Russian guys that no-one knew, who were located somewhere in the Caribbean.” He also noticed the futures on this exchange were trading at a heavy premium to the underlying spot price of bitcoin.
“I thought: I can sell this future, buy the cash – aka bitcoin – and earn the difference in the basis.” He tried it out, it worked, and for the next six months or so he continued to trade the arbitrage.
But what about something bigger, more institutional? “I thought to myself: I really enjoy crypto. What kind of business can I build besides trading? As you know, it’s very difficult to make money very consistently over time from trading, and I know I’m not that good.
“I thought: I’d rather have a real business rather than trying to trade my way in this industry.”
The obvious answer, given his banking background, was derivatives. “I knew that derivatives trade in much greater volumes than underlying spot markets. That’s where I wanted to go.”
The result is BitMEX (Bitcoin Mercantile Exchange), a trading platform for bitcoin offering up to 100 times leverage, bringing something like institutional norms to the crypto world. At its Cheung Kong Center offices in Hong Kong, its T-shirted executives rub shoulders with investment bankers from Goldman Sachs and Bank of America Merrill Lynch in the same building. It boasts the greatest bitcoin/dollar liquidity in the world and has traded $936.88 billion of contracts in the last year.
