An Interview with the Founders of Bitcoin Exchange BitMEX

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Nicholas Levenstein has been a classical musician,  IT and Strategy Consultant, and financier. Nicholas has a BA (cum laude) from Yale University and an MBA from the University of California, Los Angeles. Recently Nicholas has been bitten by the bitcoin bug and is contemplating various arbitrage and financial strategies such as the strategy described at the end of the article.

Two energetic entrepreneurs sit at the crossroads of finance, cryptocurrency, banking, securities, and technology.

I had the good fortune to meet Messrs Hayes and Delo at the Bitcoin Mercantile Exchange (’s Hong Kong office on February 21, 2017.  We spoke for about three hours and then I joined Ben Delo for dinner at the Bitcoin HK meetup group.  Over the next couple of days, I executed a trade with a lot of help from Delo.  My two-day experiment with cryptocurrency derivative trading exposed some of the opportunity and peril of a new financial age.

BitMEX’ progress is nothing short of astonishing.   Founded in 2015 this year’s monthly trading volume exceeded US$1,000,000,000 / month worth of BTC.[1]  Ben Delo joined in the beginning of 2016.  Not only has an extremely sophisticated trading algorithm been developed, but so far it seems to have been virtually error and theft free.

In BitMEX one sees the reality of a libertarian utopian vision: no government controls BTC issuance and no regulatory body controls BitMEX, due to their incorporation in Seychelles, which does not regulate cryptocurrencies.  Delo and Hayes are as nice and helpful as can be and the service you get is much better than anything one would expect from a business with very few employees, no known office address, and a bunch of leased servers.   Hayes says “the blockchain allows us to onboard and retain {clients}.  {other brokerages} make you send a wire, fill out a form, check your bank statements, and this all costs you time.”  By contrast at BitMEX you transfer in your BTC and voila you have access to derivatives without the normal tests of your suitability to trade.  In my case, I knew enough to slow it down and ask the (extremely good) customer support if I was doing what I thought I was doing.   But, basically, in this open and free-market environment, a math Ph.D. and a junior high student can get on with equal ease.

Two Very Focused Personalities

Ben Delo was born into a family of scientists and only one brother of many siblings, by his account, was artistically inclined.  Ben attended Oxford with a first in Computer Science.  Some universities have a “distribution” requirement by which students had to take classes outside of their major category; humanities for science students and vice versa. By contrast, says Ben, Oxford is very focused and rigorous on your major.    “I did a joint study of Maths and Computer Science.  Those degrees are very specialized.  You can’t take a geography or English course.  I took more theoretical computer science, studying programming languages, compilers, computation complexity and pure mathematics.”

If Ben was focused on technology, Arthur Hayes was very focused on professional and financial success.  Says Hayes “I’ve always been interested in making money.  Thus Wharton.  {in} My First 5 years in investment banking I learned about the products we offer, but I’ve never been a coder or technologies. “  Hayes “fell in love” with Hong Kong during a Junior year abroad and started his Wall Street Career in Hong Kong.

Ben Delo was quite adamant about the site being cryptocurrency only.  BitMEX takes deposits online in BTC.  It seemed both Hayes & Delo had some animus toward Ethereum, which they seem to view as less legitimate due to corporate influence as well as an early fork in the Ethereum Blockchain.

Levenstein with Hayes (left) and Delo (center) showing off a prize!

As significant as the training Messrs. Hayes and Delo received at Deutsche Bank and a London hedge fund was the time of their arrival on Wall Street.  They both arrived during a period of market volatility.  On Hayes’ first trading day Lehman filed for bankruptcy.  Similarly, Delo’s hedge fund was similar to a Goldman Sachs internal fund, which was unwinding its position and effecting Delo’s fund’s results every month.   Hayes says “nothing trades according to the {Black Scholes} model. I was a market maker.  A good trader is excellent at risk management and quoting two-way prices.”  I believe what Hayes meant was that a lot of the theoretical underpinning of derivative pricing is only good for guidelines and less helpful in periods of extreme volatility.

Delo’s experience in building execution algorithms was critically important in creating BitMEX.  Says Delo “when you get into finance it’s more about knowing how to manipulate data, because you have software packages to {retrieve and organize} data for you.  Having a math degree was a strong foundation for the hedge fund; quant based mathematics and regression analysis.   ‘Can we get a predictive signal,’ for example?  That required the intersection of math and computer science.  Databases were multiple gigabytes and terabytes of data.  You need every stock price movement for the last decade, which requires engineering and efficient algorithms.”

BitMEX’ Place in the World

Both Delo and Hayes see themselves in a bitcoin 3.0 stage.  Per Delo “There was a first generation of people with no experience in finance; their work was full of security holes and false accounting. The 2nd generation were {some prominent public exchanges}.   They went down the .com path with lawyers and engineers, but they again didn’t know much about finance.  They don’t know how to properly structure a product and their auto-matching engines are a joke.   We’re the third generation.  Our first goal was to target institutional traders, the “Bloomberg traders.”  We had to go down a more retail route, but they appreciate why we’re different. “

Adds Hayes “at the end of the day it’s all sales.  Our derivatives; there’s a slight difference, but how do you convince somebody to trade with you?  Our exchange wasn’t open until 2013 to 2014.  We were late to bitcoin.  We had to be open {and function well on all levels}.  The blockchain allows us to onboard and retain clients.  {With other brokerages} you have to fill out forms, show bank statements and send a bank wire.  It costs a lot of time.”

At this point, I just must comment that Delo and Hayes are literally correct when they say that they created a retail product.  That said, I think I’m probably more sophisticated than most with finance and derivative products and I don’t think I immediately grasped the implications of things that Messrs. Delo and Hayes were telling me.  Hayes took pride in their Bloomberg-like interface design.  What’s missing is that the vast majority of humanity have not seen a Blomberg terminal and even if they had they wouldn’t understand most of what’s on it.  That’s this new era of finance; BitMEX brings incredible products in which you can use financial products that the banking system does not offer most people.  At the same time, you can wipe yourself out pretty quickly.

BitMEX did have some regulatory and paperwork concerns and does not want US persons to trade due to concerns about treasury department regulations and possible inquiries.  In my case, I was not allowed to trade from the US.  When I showed a foreign passport (I’m a dual citizen with Ireland) and a non-US address they permitted it.

The final question to answer was how did these guys get so big so fast?  I thought I would discover a treasure trove of SEO and paid search wisdom.  What I discovered instead should not have been so surprising:  what rocketed BitMEX to the #1 spot in trading volume was 100:1 leverage to collateral ratios.  I guess in business if you have a unique product people will find you.  Still, a lot of credit has to go to the team: there is an auto liquidation function that makes sure that positions are liquidated before a counterparty is left hanging on a trade.  It appears to have worked quite well.  In addition to assuring words from Hayes and Delo I did a bit of research on the web and could not find any assertion that BitMEX was not working as advertised.

A Quick Note on Security

BitMEX can say what it wants about its own security.  For my part I found what they were doing very reasonable and reassuring.  And, I’m not a cyber-security genius, but I’ve been hit myself by a hack on a site I used three months ago. I am thinking a lot more about security these days.   At least in the way that BitMEX handles it this hack would definitely not have been successful.  But, in any case, I don’t want to give away competitive intelligence on BitMEX.  Let’s just say I was reassured.

Is BitMEX a Casino? Only in isolation.  Read below:

I would have to literally say “yes,” but that is not really a fair criticism.  BitMEX takes commissions and in the aggregate winners take losers’ money.   This is, in isolation, a negative sum game casino in which participants come out even and the house makes them negative.  In BTC-denominated commerce there is no way to deny that.

However, because the casino is so relatively not greedy and bitcoin are so efficient and incredible, there are uses for these products.  They cost money, but they are well worth it.  They are probably significantly cheaper than other portfolio insurance, for example.

I showed Delo evidence of a non-US address, a non-US passport and my account was allowed to trade.

I showed Mr.Delo evidence of a non-US address, a non-US passport and my account was allowed to trade.

The Author, Using BitMEX, solves the Retirement Savings Crisis in One Fell Swoop (Seriously)

With the help and encouragement of Mr. Delo I decided to solve the crisis facing savers; zero interest.  If you’re a small business, you have to pay loan shark interest, because banks won’t lend to you. But what do the banks pay savers in the US?  0.  Or maybe 0.06% or something ridiculous.  But, basically, somebody who saved his whole life is not rewarded for putting money in the bank.  In no way does the 0% interest reflect what private demand for capital should be.  At BitMEX you get good money for your savings, as long as you know how to put a trade on:

With some help from Delo I went through the following steps:

  1. I transferred 5 bitcoin to BitMEX
  2. I shorted a BTC/USD swap which means, I basically loaned my bitcoin to a counter-party hoping that the value would decline. Then I could repurchase the BTC for less money when I closed out the position.   However, that activity of shorting BTC relative to the dollar in itself wasn’t really my goal.
  3. I did not use any leverage and the counter-party, the long position, had to pay me interest. What I constructed was a not-so-risky way to get interest and not lose money in dollars.  Ironically, I did lose in bitcoin in the trade, because the BTC moved up in value during the 24 hours of my trade, but I received interest on my BTC.
  4. I ended up with less bitcoin than when I started, but the difference was made up in appreciation of the remaining bitcoin against the dollar: as promised by Delo.

Reading charts developed by Hayes it appears the interest rates for margin lenders (short positions on swaps) average about 37.62% per annum per Delo.  So, basically, if I were allowed to take Senior’s savings, using BitMEX I could deliver 37% interest!  Actually, I looked at the same chart and, if the compounding function were used, I calculated 64% annualized interest, compounding the average returns every 8 hours when funding occurs.    Furthermore, it’s seemingly risk-free.  What are your risks?

  1. BitMEX runs off with your money. There’s no FDIC to protect you.  The guys seemed pretty legit, so I was good with that.  What’s crazy is that they handle billions of “OPM” without the other people having met them.  The fact that there is no deposit insurance warrants mention.
  2. Counterparty risk – the guy on the other side of the trade. Delo thinks that is BitMEX, the counterparty.  Linguistics aside it’s unfair to compare BitMEX to, say, AIG who turned out to be woefully undercapitalized to pay out on derivative contracts in 2008.  There is actually an opposite side of the trade on BitMEX.  The real issues are whether BitMEX can properly liquidate positions before they are out of the money.  There is no evidence that the algorithm or programming will fail, at least as reported on the web.  Hayes has insisted that I am wrong and BitMEX is the counterparty, but quickly points out that BitMEX does not take the opposite sides of trades from its clients.
  3. You could totally screw up the trade. I think for a professional trader this is a cakewalk.  But, I had never entered a derivatives contract (as a principal anyway).  So, I could have done the opposite of what I thought I was doing, for example, and lost money.
  4. The biggest risk is you don’t know what you really want. Read below.

The trade performed as promised and demonstrated that, had I kept it on for 364 days more and rates had stayed constant with those of the beginning of the year, I could have locked in a very high-interest rate relative to the USD.  Of course, if institutional debt investors piled on to this trade, it’s not abundantly clear that interest rates would stay so high.  That said, at least with a small amount of money it appears to work!

What must be mentioned is that even though the trade proved it would work, I lost money in BTC (and in dollars as an opportunity), because BTC rallied while I was in the trade.  My philosophy is to have a diversified pool of hopefully uncorrelated assets, which recently has included BTC.  I broke my strategy and was poorer for it.  That said, writing the article was really fun, trading the bitcoin, in reality, was indispensable and the $150.00 or so I lost on an approx. $5,000 trade was worth it. If you’d like screen shots on what I did, please feel free to contact me.


As coders and a team, BitMEX performed really well out of the box.  I don’t know what Bitcoin 4.0 will look like, but count on BitMEX to be there.

Nicholas Levenstein has been a classical musician,  IT and Strategy Consultant and financier. Nicholas has a BA (cum laude) from Yale University and an MBA from University of California, Los Angeles. Recently Nicholas has been bitten by the bitcoin bug and is contemplating various arbitrage and financial strategies such as the strategy described in the end of the article.

Jonas Borchgrevink edited this article for CCN - Capital & Celeb News. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Author: Nicholas Levenstein

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