Are you bullish on AI stocks?
No. I think we're wasting trillions of dollars of capital globally.
Absolutely. I know I'm starting an AI company and I'm going to have to explain to you.
Okay. You think that we're wasting it in data center buildout or in what way? Like what are we wasting money on?
This is very at a very high level. Okay.
We're coming here from Token 2049. I have a very special guest today, Arthur Hayes. Thank you for sitting down with me.
Uh, it's I think it's fun. You live in Singapore. Um, obviously I don't think a lot of intro is needed here. Uh, but I do want to start by asking you a little bit about your background.
So, I know that you were born in Detroit, Michigan. Right.
Buffalo. Buffalo, New York. But your parents...
I lived in Detroit for a while.
You lived in Detroit for a while. Uh, your parents worked for General Motors.
That's right. Uh, and how did you end up coming from a world where your parents are working for General Motors, and you end up founding the largest crypto derivatives exchange in the world? You invented the perp itself, if I'm right. Like, take me through that journey. Like, how did you...
Yeah. I mean, if you've ever... I love Detroit and Buffalo, but they're kind of boring, at least for me in my own sense of being. And so, yeah, as a kid I always wanted to go somewhere else and travel. And obviously, you know, traveling in the early '90s is a lot more expensive than it is today. So you were limited to what you saw on the television in terms of your hopes and dreams. But I remember distinctly when I was in high school, I read a book called Ugly Americans, and it was about this guy who graduated from, I think it was Dartmouth or some Ivy League school. He was like, you know, a second-rate football player and he didn't know what he was going to do with his life. Somehow he made his way to Tokyo and started doing index rebalances on the Nikkei and different Japanese indices. And the book talks about his time in Tokyo, and I think it was like maybe the late '90s, somewhere around there. And I was like, wow, that sounds like a lot of fun. Like it's much more interesting than, you know, being like everybody else and going to New York or LA or whatever else that most Americans think they're going to do after they graduate from university. I was like, 'Okay, I want to go to China because I think that that's the new up-and-coming economic power.' You know, this is like 2000 when I read this book. And so, I made that decision in my living room right before I went to university that I was going to study Chinese and move to China. So, when I got to University of Pennsylvania, where I went to undergrad, I basically took a minor in Chinese. I studied the language. Uh, I did my first study abroad in...
Very poorly. I don't think you did all... I live in...
You got a sentence to say rather for all the Chinese listeners out there.
I'm not going to embarrass myself.
But yeah, and so I moved to... I did a study abroad in Hong Kong. Spent six months there in university. Loved it. Somehow found a job at Deutsche Bank in Hong Kong doing sales and trading for my junior year summer. Got an offer to come back and work there and I have never left. Uh, so I've lived between Hong Kong, Singapore, a little bit Japan for the last, you know, 20 years or half my life. And my entire professional career is in Greater China essentially. So I've never had a job in America.
Really? Like you've only worked out here? Wow. So you've only ever come back to America to visit?
Like see your family or hang? That's kind of nuts. Do you still feel American?
I mean, I don't like passports as a general concept. So, I don't think that you have to be American or Chinese or Japanese just because you were randomly born in some country and they have a piece of paper that says this made-up name on it. So, I completely reject nationalism as a concept. And so, I am Arthur Hayes. Whether that's American, Chinese, Japanese, like who cares? It doesn't matter.
You hate the idea of a passport. I don't think I've ever heard anyone say that.
I think it's offensive that I have to present this piece of paper to get in and out of places.
Yeah. So like if it were up to you, just like no borders, full globalism?
Yeah, that's kind of... And so how has it been? I mean, so you were at Deutsche Bank, you were trading there, and at some point I assume that you found Bitcoin and crypto. And tell me about how that happened. I mean, was it like everyone else where you owned Silk Road or like what?
So I was fired from my job at Citibank. I went from Deutsche to Citi trading ETFs in Hong Kong and Singapore. And I was like, this is after the crisis. My first day on the trading desk was the day Lehman failed. So obviously my conception of...
Your first day on the trading desk was when Lehman failed.
Yeah. When they filed for bankruptcy that Monday morning. So Asia had opened right before, obviously before New York. You know, Sunday night they had declared Lehman bankrupt and mayhem. You know, I guess a grad sitting on the desk, no idea what's going on. Uh, and then the head of trading is saying don't trade with this bank, that bank. People are... everything's blowing up. Uh, and so your concept of like this amazing future you thought for yourself in finance, you're going to make hundreds of millions of dollars in a few years because you're a rockstar trader, is like completely not happening.
And so, you know, the riches that we all thought we would make in banking evaporated with the change of the trajectory of, you know, financial services after the crisis. And, you know, I was like, okay, I need to do my own thing at some point. And I got the opportunity when I was let go from my job at Citibank in 2013. And then I happened to find Bitcoin and got sort of engrossed in the philosophy or in the white paper, started figuring out how do I trade this thing, doing arbitrage, and that's what led me into the idea to create BitMEX.
Wow. I do want to ask, like, what was your feeling at the time when you were on the desk when everything was falling apart? Like, what was going through your head? You were just like, that's over? Like, why did you stick it through in finance if...
I mean, it's a well-paid job. It wasn't like anything I did...
Well, it's like I was lucky, right? Some of my friends who had jobs at other banks, you know, didn't have a job after three months, right? Or, you know, I had friends who had Bear Stearns offers and then you were like wondering, is JP Morgan going to accept my offer? There are people who, you know, started their summers and then, you know, previously it was, oh, do your summer training program before you start work. Just get drunk and party. It doesn't really matter. But then in 2008, they started saying, okay, we don't have so many jobs because of the crisis. So, if you don't score a certain score on your aptitude test during the summer training, now you either don't have a job or you have to go to commercial banking. So, all of a sudden, you either go to like, you know, half your pay gets cut because, you know, a job in commercial banking pays way less than investment banking. So, like this is the environment that we're all in. So, we're all like, okay, well, maybe we'll have a job, maybe we won't have a job. I remember my MD one day like pulling me off to this desk. He's like, do you think you're going to have a job in three months? I was like, I don't know.
He just asked that. Yeah. What a psycho. He's actually insane. Was he doing it like genuinely or was he...
He was like genuinely asking. He didn't know.
Oh, okay. I thought maybe he was like messing with you. That like, I guess he probably didn't know if he was going to have a job either.
Like at the end of it. But I mean, do you think that like the ability to thrive on uncertainty has helped you in a way, or you just don't really think about it, or you kind of just power through?
I mean, I don't really think about it. And I think obviously if you come into crypto, especially when you started early and there's a lot less structure around it, and you only survive if you know, you're very cognizant that everyone's trying to screw you over, there's all these scammers, like you get very good at noticing like ways in which people are trying to pull one over on you. Like this is early crypto. I mean, not that there's that much protection today, but there's a lot more things that could have gone wrong back in 2013 when I started investing and trading in this space.
So, before we get into that, you got into crypto, like what were some of the craziest things that you saw in the early days of crypto? Like what were some of the scams or pitfalls that you had to get through that people today don't have to think about?
I know today it's probably like everyone knows not to do this, but back in the day everyone's so hungry for deals. Like, you know, it's like such and such famous person wants to buy, you know, 10,000 Bitcoin or something like that. Oh, can you help this person buy all this Bitcoin? And you're like, 'Oh, wow. If I, you know, I can charge a few percent, I can make, you know, 300 grand on this trade, like yada yada yada.' Like I faithfully, I never got scammed on one of those trades. But like that was like rampant back in the day.
I remember that. It was so funny. You'd always get these things like, 'Hey, I have a friend that wants to buy 10,000 Bitcoin or sell 10,000 Bitcoin at like plus four, minus four from the market.' And you're just like, 'Yeah, I can introduce them to a desk.' And like, oh, they don't want to work with a desk. They want this random guy all of a sudden all this size. And I just know it's always your least successful friend that finds this person and you're like, 'How did you find him?'
Yeah. How did you find somebody with five billion of Bitcoin to buy and sell? But I don't know. It's totally nuts.
And so those early days were crazy. So what year did you found BitMEX?
2014. And you founded it with two other guys.
Yeah. So I went out in Hong Kong and found two other technologists. One to help build a trading system, that was Ben Delo, and the other to build the web architecture, and that was Samuel Reed. They were both in Hong Kong doing other things, but they were interested in crypto. I found them through friends of friends, and then I pitched them on this idea of let's build a derivatives platform because that's where all the money is going to be made in the exchange space. Because obviously there were successful exchanges back, you know, 2013. You have Mt. Gox just crushing it up until they weren't. You know, Bitstamp, Coinbase, all the big Chinese exchanges. So, there's definitely exchanges being successful. So trying to operate a spot exchange was definitely not something that I wanted to start even in 2013 just because it was a very crowded space and there were clear winners already back then.
And so derivatives was something that didn't really exist. There was this one little exchange called ICBIT. These two guys in the Caribbean who were anonymous and, you know, it was an interesting thing. They almost went belly up because their margining system didn't work properly. But, you know, they put in place some of the bedrock like inverse futures and some of the standards that we still use today were invented by ICBIT. And so I said, I think I can do a better job than these guys, and so let's build BitMEX.
What was the problem with their margining?
So they didn't... everything didn't sum to zero.
So basically in 2013, if you remember, like Bitcoin went from like $250 to like $1,300 in four months. And obviously they were offering, I think, 3x leverage at the time. I remember the day like the December future was trading... December/March future was trading 100% outright over spot. So if you sold the December and bought spot, you doubled your money in three months. And I wish I put all my net worth in that trade, but I did put that trade on. A lot of other people put that trade on. And the problem was when the market corrected and obviously that basis collapsed, they didn't have the margin on the other side. And the exchange wasn't good at liquidating people. And so the exchange had a massive hole and one of the large traders at Cumberland actually bailed them out really to keep the exchange alive back in early 2014.
So did Cumberland then take a stake in their exchange?
I don't know. But I don't know how the arrangement worked or if it was a private deal between one of the large traders and the founders. But the only reason we all got our money back as traders on the exchange was because Cumberland bailed them out.
Okay. So, but you... Oh, you were trading on the exchange at the time. Okay. That makes sense. And so then you start this exchange, BitMEX. And what was the first product that you launched?
We launched a standard, I think, quarterly inverse-style futures contract, Bitcoin-margined, Bitcoin/U.S. dollar, and our margining system was a lot more conservative than OKX or OKCoin at the time, BTC China, and Huobi, who were the main Chinese futures platforms and our competitors by the fall of 2014 when we launched. And it wasn't very successful because the leverage wasn't high enough and all the traders complained there wasn't enough liquidity. And like, why would we trade on BitMEX? Like, we'll just trade on the Chinese exchanges because it's actually like, you know, they were offering 20x leverage at the time and it was quite liquid to trade these things. So we had to sort of, you know, pick our way through that and find our way to, you know, socialized loss margining. We, you know, took some of the concepts that were being innovated in China with the socialized losses, you know, we made our own little tweaks to that. And then because our tech was better than theirs at the time, we were able to go to 100x leverage where they were only at 20x. And that was the main thing that kickstarted getting clients to want to trade on BitMEX is we offered the highest leverage of any platform globally at the time.
And yeah, I think that's still the name of your holding group, right? 100x.
Yeah. That's... it's kind of... this is actually the ThousandX Podcast, which is... there's actually a history here which I don't know if you remember this, but I reached out to you when I was first starting the podcast and I was like, do you mind if I call it 100x? Because I thought it was such a great name. And you were like, don't do that. So I just added a zero, that's a thousand. So you did actually inspire the name of this show. Um, what was the point that you realized, oh wow, this is really working, like we're getting some real volume? Was there a moment? Was it slow growth? Was there an event?
Uh, I mean, once we went to 100x leverage and Bitcoin sort of popped from like 130 to $600 in late 2015 or Q2, Q3, Q4 2015, we were cash flow positive, making money. I mean, not a lot of money, but like at least we could pay our bills and all that kind of stuff. And so which is great because for the first year we like literally had no volume on the platform. So that was good. And then sort of, you know, we became a player in the ecosystem. You know, we were nowhere near as liquid as some of the Chinese players, but at least people were trading on our platform because we offered something different than everyone else.
Did they ever try to kill you, those Chinese players? Like was there any... I mean, not like physically, like metaphorically in a business sense, like was there any...
No, I mean, we all knew each other. There wasn't... there's no beef if you will. Like everyone had their own idea like how to build a futures market and we kind of all just did our own thing.
Interesting because I have heard some stories of, you know, especially once the industry got bigger. I think people were fighting a little bit, jostling a bit, but I was just curious if that ever happened to you.
No, it was all just kumbaya, everyone.
Oh, kumbaya. Like I was down in Hong Kong, they were up in Beijing and Shanghai, so we're not even in the same city. So it's a different sort of ecosystem.
Did you ever worry about the... I guess like eventually you had to, but the legality of what was going on? I mean, there wasn't really any rules at the time, so you kind of had to like feel, you know, cross the river by feeling the stones, right?
That's it. It's very... that's a good strong Asian metaphor.
Yeah, I don't know the Chinese... thank you for that. But yeah, that was actually going to be my follow-up question, so you read my mind too. Um, but that's cool. Well, I mean, and so when did the volume really start coming? Was that in 2017, 2018? Um, like when did you think BitMEX really became like a household name in the world of crypto?
So, we invented the perpetual swap in May 2016 to solve a problem, which was our clients didn't understand the products. And, you know, crypto people, crypto people being crypto people, they assume that you're scamming them. So, like they didn't understand expiry date. They didn't understand why the price of a futures contract is different than spot. You know, these are mostly margin traders and people who've, you know, never really interacted with a trading system. And so even like buy-sell, two-ended order book was complicated for some of the traders. And so we were like, okay, how do we make this simpler? Because we literally are getting emails every single day saying, you know, BitMEX is a scam exchange. Like why is all this stuff happening? And we also wanted to concentrate liquidity. We had all these different expiries. How do we make just one product so everyone trades one product and then we can compete effectively with the quarterlies that were offered by other Chinese players. So we tinkered around with different designs of this perpetual swap. The first one we launched was a failure. Um, the funding cost was basically referenced from Bitfinex, their dollar and Bitcoin rates, which weren't updating fast enough to reflect the change in the market. And so the derivative was trading at a massive premium to the spot because crypto was ripping back in 2016. So, you know, overnight we had to sort of make some changes and we came up with this self-referencing funding mechanism, which is essentially the key innovation that allowed the perpetual swap to have staying power. And it was basically, you know, we have this massive premium. How do we charge people for that and create an interest rate high enough to punish people who are going with the trend and then attract market makers to go against the trend? And that was the funding rate and the premium index and sort of the, you know, eight-hour lookback and all these things that everyone else has copied since then. It was to solve a problem of the derivative trading at a massive premium to the spot and how do we make it collapse.
And so what was... I mean, what was the process of building... you worked... I mean, there's some complicated math involved with this or...
It's not really complicated. It's more like, you know, can your trading system computationally do these things fast enough to process the transactions on a tick-by-tick basis, which was a non-trivial problem. And, you know, hats off to, you know, Ben and Sam, the engineers who actually, you know, implemented this stuff. But this is why, you know, perpetual launched in 2016, it wasn't really until 2020 until somebody, you know, Binance and FTX came out with their own product because it was technologically very difficult to do this and you really had to rebuild your trading system from scratch to be able to handle this type of product and margin everyone asynchronously tick-by-tick. We were able to do it because we used KDB, which is a very esoteric language that's used in trading applications at banks because, you know, Ben Delo is a KDB engineer at an investment bank. But over time everyone started, you know, figuring out how to do it and, you know, that's why, you know, call it early 2020 is when you had all these other people who now could technologically offer the perp because it took them a while to actually figure out how to build the trading engine to support the product.
Did you know at the time you were building something that is now currently eating the world? Like did you have this vision or is...
No, we just wanted to make our life easier and less customer support requests.
That's pretty crazy. Like how does that make you feel? Like you look around now, you've got the Hyperliquids of the world, you've got the Lighter of the world, you've got the CME looking at it. I mean, everyone is now thinking about perps.
