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Who’s afraid of bitcoin?

Breaking the bank

BitMEX co-founder Sam Reed tells Damian Reilly what it took to create the world’s largest bitcoin exchange

10 November 2018

9:00 AM

10 November 2018

9:00 AM

Sam Reed, 29, is co-founder and chief technology officer of the Bitcoin Mercantile Exchange (BitMEX), the largest crypto trading platform, and the 26th-largest exchange of any type in the world.

His story — of how he went from itinerant web developer to co-founder of what some have called the ‘Goldman Sachs of bitcoin’ — is both inspiring and a bit jealousy-inducing. Living, he says, a relatively quiet life in Hong Kong in 2014 after trying, and failing, to launch a series of internet start-ups (‘I was doing a ticketing start-up to compete with Ticketmaster, which is kind of a dumb thing to do’), he started giving workshops and presentations to aspiring web developers.

One of these presentations changed his life. ‘I was telling these young graduates they could pretty much get a high-paying job if they had a pulse,’ he says. ‘There’s just so much demand for web developers. Everyone needs one. Everybody’s got a product, everybody’s got an idea. There’s just not enough developers to make all these things. So I was telling them, don’t worry you’ll be fine.’

Reed says he told the students to be wary of working for low pay unless the project was an astonishingly good idea — a white elephant event. In the crowd that evening was Arthur Hayes, the man who had the idea for what would become BitMEX. From the back of the room, Hayes asked how an entrepreneur could find a chief technology officer without paying a high salary. Reed responded: ‘You have to find some bozo who’s willing to trade easy money for big risk. In this job market, good luck with that.’

At the end of the talk, Hayes approached Reed. ‘He told me about the coin derivatives exchange he wanted to build. I thought, “Oh man, I’m going to be that bozo. I’m going to be exactly that guy I said didn’t exist.” Because I loved this idea.’

Reed admits that he had no background in finance: ‘When Arthur first started talking about derivatives, I thought he meant derivatives of the idea of bitcoin, other cryptos, not financial derivatives.’


Reed told Hayes he could build everything needed to make BitMEX a first-rate web portal, but he didn’t have the finance skills to develop a trading engine. Hayes replied he already had someone to do that in Ben Delo, a Brit with a background in computer science, mathematics and high-frequency trading. Together, the three set about making Hayes’s dream a reality. ‘In the evenings and at the weekends we worked out of the Starbucks in Jardine House. We got something going pretty quickly. In two or three months we could run basic contracts. It was pretty phenomenal. We got the design almost completely right from the beginning.’

Ahead of launch, the BitMEX co-founders invited would-be traders and hackers to do everything they could to cheat the exchange, using pretend money. ‘We did a two-month trading competition. I said: “Whoever has the highest balance at the end wins the money. I don’t care how you win. I don’t care if you find some way to put in a phoney order that screws up the trading engine. I don’t care if you hack the site. Just tap on the pipes a little bit and tell us what happens. If you get something good, we’ll pay you.” It turned out there was nothing major wrong.’ The winner was paid ten bitcoin, then worth about $4,000 (about $65,000 today).

Importantly, BitMEX is not a ‘spot market’, where fiat currency (dollars, euros, etc.) can be exchanged for bitcoin. Rather, it is a derivatives exchange. Users deposit bitcoin and use those deposits to speculate on the price of bitcoin via futures and options contracts (‘Using bitcoin to speculate on bitcoin sounds counter-intuitive, but it works really well,’ says Reed.)

BitMEX launched in 2014 and was originally targeted at institutional traders. But after some initial excitement, the number of users dwindled to virtually zero over a period of six to nine months ‘because they didn’t have anyone to trade with except for each other’. Reed explains: ‘Exchanges are like social networks. No one is there unless everyone is there.’ It was time for a rethink.

The upshot of that rethink was for BitMEX to broaden its appeal to retail traders — individuals trading their own money. ‘We democratised bitcoin trading,’ Reed says. ‘When we pivoted, we delivered professional-grade, Wall Street-level trading systems to everyone in the crypto universe, something no other exchange had done.’

One of the big things BitMEX offered was leverage — lots of it. For traders, significant leverage is wildly attractive because, although the risks of failure are considerable, the opportunity for reward is high.

But achieving this high-leverage capability was no simple task, says Reed. ‘Traditional markets can issue margin calls, making traders put money on the table or see their position liquidated. But bitcoin markets are a little different because we don’t have the ability to come after these customers for the money they may owe us. It’s bitcoin, right? We can’t just pull more bitcoin from their bank accounts. We don’t even interact with bank accounts. It’s very deliberately not possible for us to do that, and people like that that’s impossible. But it means we have to use some very sophisticated mathematics and some very fast systems to regulate the order books and guarantee nobody can ever lose more than the collateral they’ve put up.’

This innovation and the launch of an immensely popular swap product resulted in BitMEX’s popularity with traders soaring almost instantly. Reed says throughout last year, the exchange experienced 70 per cent growth, every month. ‘It was dizzying.’ Today the daily value of perpetual swap trades on BitMEX is between $2.5 billion and $8 billion — bigger than the entire traded volumes on the Australian stock exchange and not far behind Hong Kong’s stock exchange.

Reed says: ‘BitMEX is a 24/7 global platform that never quits, offering high-frequency leveraged access, in a safe way, where the exchange is not open to risk and users have the power that they need to get in and out quickly. That’s the true innovation. There are no other markets like this. We are greatly democratising access to these kinds of markets.’

Not such a bozo after all.


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