Cashing in on Cryptocurrency in Hong Kong
WHY YOU SHOULD CARE
Because money doesn’t grow on trees.
Late on a Monday morning, Arthur Hayes is sporting sweatpants and stubble. The ex-banker’s duds are far from what he would have been wearing at this time a few years ago. But it’s not that he turned couch potato; rather, he’s gone deeper than ever into the finance world, entering the land of Bitcoin, which, several years after the craze began, is still a “virgin, untouched market where you can do anything,” Hayes says over the downtown traffic of Hong Kong.
China is a haven for 93 percent of the world’s Bitcoin trades, which puts Hayes’ budding Bitcoin exchange, BitMEX, in a lucky spot. BitMEX allows users to trade Bitcoin and other cryptocurrencies for cash in the form of yuan, rubles and dollars. His lucrative work all happens behind a few unassuming home computers — none of them as hulking as the Bloomberg Terminal. Bitcoin, for the uninitiated, is stateless internet money — there’s no Federal Reserve or gold standard behind it. And though Bitcoin has been better known in the headlines for its association with crime and hasn’t overtaken credit cards, to say the least, Hayes reckons that cryptocurrencies will be the “future of finance,” with BitMEX as the Goldman Sachs of Bitcoin.
Users sign up for a free BitMEX account online, deposit Bitcoins — for which they’ve traded — and then bet on the value of currencies or financial derivatives that are based on real stocks, bonds and other financial products. BitMEX cuts out the middleman, allowing users to invest Bitcoins in stocks at foreign exchanges like the Hong Kong Stock Exchange. This, of course, was always the Bitcoin promise: a pipeline to democratically available money, no regulatory hoops, no emptying your wallet to an expensive broker. BitMEX may indeed give big banks a run for their money one day, says Chipper Boulas, a fintech venture capitalist in Hong Kong.
Today, the financial platform boasts more than 5,800 users and a daily volume of $2.5 to $5 million in trades. Since taking off in 2009, Bitcoin’s value has roller-coastered from $1 in 2011 to more than $500 in 2016. And so far, BitMEX has raked in north of $360,000 in revenue in the last two years, culled from trading fees. The startup also went through Chinaccelerator, China’s leading startup accelerator, and has since won pitch competitions, including Slush’s startup challenge and Tech in Asia Singapore 2016, among 475 other contenders.
Perhaps the biggest opportunity Hayes is capitalizing on is — China. To date, Hong Kong hasn’t bothered to classify Bitcoin as a currency, unlike many Western nations. That means traders can still play the game as Bitcoin evangelists originally intended it to be played: unfettered by government regulations. More important: the argument for the little guy. Average traders can, in the U.S., hop on E*TRADE and buy a bundle of Tesla stock if they have a hunch, for instance. But that’s not possible for foreign markets such as China’s, which are generally open only to those who have millions to invest and are willing to hire a middleman, like a broker, who can cut through all the bureaucratic red tape, says Boulas. So, the effectively closed nature of the Chinese stock market remains a tempting opportunity to outside investors, with its average returns of 9.41 percent in 2015 (according to the Shanghai Composite Index), compared to -2.23 percent in the U.S. (according to the Dow Jones). Exchanges like BitMEX, Hayes and others lend an opportunity to get closer to direct foreign currency trading, allowing clients who “only have a few hundred USD in their pockets instead of millions, like at Charles Schwab,” to cash in.
But Hayes isn’t alone. A handful of other Bitcoin exchanges have emerged as well, including BitVC and OKCoin. Plus, the big banking behemoths are mobilizing: Citigroup is reportedly developing its own digital currency, called “Citicoin,” whereas Goldman Sachs is filing a patent for its impending “SETLcoin” (although Citi didn’t respond to requests for comment on how its cryptocurrency scheme is faring so far). Meanwhile, UBS, Deutsche Bank, Santander and Bank of New York Mellon — four other powerful players — are also brewing their own Bitcoin alternatives, a digital cash instrument called the Utility Settlement Coin. “The underlying blockchain technology will pave the way for disruptive change in the way we process securities,” Deutsche Bank’s Frank Hartmann writes in an email to OZY.
In spite of the renewed hype, the currency’s volatility remains frightening. Recently, Bitfinex, a competitor to BitMEX, lost its store of 119,756 Bitcoins, worth around $65 million, due to a malicious hack, causing the value of Bitcoin to plummet again by more than 20 percent. The hack is a good indicator of how many points of failure there still are in the system, says Leonhard Weese, president of the Bitcoin Association of Hong Kong. So, before anyone gets their hopes up, “the [Bitcoin] ecosystem is not going to quickly outgrow all other financial markets anytime soon,” says Weese.
Hayes, a University of Pennsylvania alumnus, didn’t head straight for Wall Street after undergrad. Instead, he bought a one-way ticket to Hong Kong, off the beaten path. “Anyone who tells you they work on Wall Street because they love their job is lying to you,” he says. He found his joy in learning a little Mandarin and Cantonese alongside his gigs at Citi and Deutsche Bank as a trader. But in 2013, he got the pink slip from Citi, along with 11,000 other employees, in a bid to cut back on expenses. Still, Boulas doesn’t figure the layoff left Hayes with any ugly scars: Hayes has “entrepreneurial skills that you don’t typically find from someone who’s been in corporate America. That’s his recipe for success.”
These days, the Buffalo and Detroit native has the pitch down. He envisions BitMEX as a full-featured platform that will provide reliable, regular returns to freelance financial traders. Most of all, Bitcoin could return some of the finance world’s lost luster in the post-2008 era, Hayes says. Only time will tell whether the sheen of digital currency is fool’s gold.