Arthur Hayes from BitMEX, one of the top bitcoin exchanges in the world walks us through his growth strategy and how he competes against cash-rich VC-funded competitors, how he uses real-time feedback from his customers to constantly improve his product and how he makes sure he understands his Chinese customers.

Transcript of the Interview

Arthur [Hayes], you left your job at Citi to start BitMEX. To listeners out there in more financially stable industries, such as finance, insurance and legal, what kind of tips would you give these guys if they were to consider making the jump themselves towards the startup world?

Arthur: Fortunately or unfortunately, my departure from Citi wasn't voluntary. I was a victim of the global culling of about 11,000 employees. I look back on it now and I think it was quite fortunate. At the time, I thought to myself that I wanted to do something different.

What I recognized was that due to the fact that I was in my late twenties, I didn't have kids or a mortgage, I had an opportunity to try something and fail at it and be okay. That was my motivation to look around at the different industries that I could get into that were actually growing.

What I saw was that the financial industry was undergoing a secular change, which would result in less outrageous compensation for some traders, which is why I got into the industry in the first place. That's what motivated me to get started.

Now, if you're thinking about joining a tech career after doing something in the financial services industry. I would stress to use the time you have to learn a new skill. If you identify a particular vertical or technology in an industry you're interested in, take a college course, learn something.

Get payed while learning. So that when you have an idea you're actually comfortable with, you can actually go out there with confidence that you have a skill to execute it.

That's fantastic. Is that the way you approached BitMEX as well? We read somewhere that it was personal interest. You read something about Bitcoin, you tried to pursue that interest, saw there was an opportunity. Can you talk to our listeners a little bit about that?

Arthur: Sure, I read the white paper on Bitcoin and I wasn't instantly attracted to the industry. Especially if it succeeds, it will change the way humans interact with money and that's a big opportunity for someone in the financial services industry. It's almost a carte blanche for you to create your company in the industry that you like to work in.

I started trading bitcoin first and I was successful doing that. I thought to myself: "How can I create a more successful business moving forward, using the skills that I have?" Obviously, I was a derivatives trader and I looked around and saw that there was a gap in the market for a bitcoin-based digital currency financial products and derivatives exchange and that's what brought me to go out and find my co-founders to build a bitcoin-based derivatives exchange and together start BitMEX.

That's awesome. Let's talk a little bit about your product. We see that you joined the bitcoin industry in 2014, when it was trading at around US$1,000, then it sank to the US$200 and now it's back in the US$600 range. How do you actually deal with such volatility in the market?

Arthur: The first thing is that BitMEX is bitcoin only. We as a business aren't exposed to price risks of bitcoin. Customers deposit bitcoin. They use bitcoin to get the leverage that we offer through our contracts and they make their profit and loss in bitcoin. At no point does our business touch anything other than bitcoin.

The price of bitcoin to us is relevant. It's only relevant in the sense that the higher it goes and the more volatile it is, the more willing people are to trade it. But from a financial risk and treasuries perspective, the exchange of the bitcoin is irrelevant to us.

You guys are one of the top bitcoin exchanges in the world. What is the growth strategy behind that? How did you get to that point?

We want to basically allow anyone anywhere to trade anything by using bitcoin and financial derivatives. Unlike the majority of bitcoin exchanges that many people might be familiar with, you basically send them some US dollars or HK dollars and they allow you to buy and sell bitcoin on an immediate delivery basis. We're purely a financial products or contracts exchange.

That allows us to apply leverage to the products that we offer. Which makes them a lot more attractive to retail traders. Instead of trading something where you have to fully pay for every purchase or sale, we allow you to trade with up to 100x leverage.

Now, if you look at the traditional financial services industry, leveraged trading products trade in much greater quantity than the underlying asset and that's the trend we're counting on and that's what's helped propel us to the top of the league tables.

How do you get the message out there? What some would say in the startup world is, 'you build it and people will come'. Was that the same case with BitMEX or was there a very conscious outreach strategy in getting those users there?

Arthur: We looked at traditional forms of online advertising, Google Adwords, banner ads and it's quite expensive to target bitcoin holders with your particular product. You're competing with very cash-rich VC-funded exchanges, you're competing with gambling operations, who have a lot of cash to basically acquire customers.

The strategy that we used was to provide original and relevant content to our users. We provide probably one of the most well-read blogs on trading of bitcoin and other digital assets. We're quoted almost weekly on one of the most-read bitcoin news sites, CoinDesk and we do a lot of outreach through conferences, speak appearances, podcasts like this one and syndicated articles in other media publications. That's how we build a name for ourselves as experts in derivatives-trading for the digital currency industry. When you think of bitcoin derivatives or digital currency derivatives, BitMEX is definitely going be at the top of the list.

Very cool. When you speak to other people about their inbound strategy. Instead of trying to push by going for display ads and that kind of stuff, what a lot of people feel is that, a month in they're still not seeing traction. [And that's when the doubt sinks in.] Should I stick to my guns? Should I look for other opportunities. How long did it take for you guys to get some traction and see the return from this investment?

Arthur: Initially our thesis was that traditional Wall Street banks, hedge funds and money managers would all come flooding into bitcoin and would want products they were familiar with. The product offering that we had in early 2015, is much different than the one we have today.

Our thesis on large financial institutions coming into bitcoin proved incorrect. What we were left with was a very active participation from retail traders. Because we have various channels where we listen to customer feedback, we were able to see that what our customers, who were on our platform, really wanted were highly leveraged trading products across a variety of digital currency trading assets.

That's how we pivoted to offering those kinds of products and see our growth take off.

In a nutshell, it was listening to the few customers that we did have at the time who were very committed to helping us succeed.

That's fantastic. So how did you know actually what it was that drove those customers? Did you look at data? Did you set up surveys? Did you have one-to-one conversations?

Arthur: We operate what we call a 'troll box', which is basically a real-time chat room. Anyone who has signed up for an account with BitMEX can basically talk to us and other users on a real-time basis 24/7. So you have people who are very passionate about this industry and if they feel that an organization is wiling to listen to them and is committed to safeguarding their funds, they're very free with advice.

The overwhelming advice we got from our customers was, high leverage and a different variety of products. At the end of the day, we listened to them and that's where we are today.

Brilliant. Does this tie in to the Bloomberg article which cites you guys as having 5,800 users, trading at US$760 million, that's a very niche club. Was this the result of the insights that you got from your discussion with early customers?

Arthur: The beauty of this platform is that we can increase and decrease leverage just via a configuration on the back end server. What that means is that the actual amount of money that needs to exist on our platform to generate high trading volumes is very small.

We can have a relatively small number of customers, right now, we have over 10,000 registered users, and that number generates over US$1,6 billion in turnover in the last 18 - 24 months.

As digital currencies become more accepted globally and more traded, everyone is going to migrate to trading leverage products. We should see that growth accelerate even faster in the future.

This leads us to the region that we are based out of. Even as the majority of your market lies in China, how do you break into as a tiny startup with a market niche?

Arthur: China is an interesting market, because at the end of the day, it's all about trust, especially when you're dealing with other people's money. We've got custody over the customer's funds while they trade on our platform.

And as many users are aware, some actors in the industry have defaulted on their obligations and lost their customer's funds. Especially in a large country like China, where you have trust issues with your food, the environment, with all sorts of different companies, for a foreigner to come into China and for them to trust you with their money, takes a lot of effort.

Our strategy for China was basically, number one providing original and interesting content for them to read and digest and to be present. We attend a lot of meet ups and conferences in China, we spend a lot of time interacting with the customers and listening to what they want.

Over time, as we're around for a longer period of time, we gain that trust and that will allow us to increase the trading volumes from China.

Wai Hoi: Really cool. I just love the story of how you came to find out that there was this opportunity in China, Arthur. Can you tell us a little bit about your early days in dealing with China and going to China to look for the opportunity?

Arthur: China in 2013 was red hot for bitcoin. At a certain point, I think October 2013, the bitcoin price in China was 40% above where it was outside of China. One day when I noticed this, I thought, well I need to get on a bus and open a bank account in China.

I literally went to the Wanchai bus station, got on a bus to Shenzhen and opened up a bank account in China that afternoon, and started trading bitcoin in China, basically arbitraging the difference between the Chinese price and the rest of the world.

The beauty of being in Hong Kong means that you basically have that opportunity to bust over the Shenzhen in a matter of an hour and do anything you like over there.

That's a fantastic story. After a couple of years now, dealing with retail investors on the China side, and comparing this to your previous experience at Citi and at Deutsche, how does the Chinese retail investor differ from other investors globally?

Arthur: I would say that retail investors globally are all pretty much the same. They want attentive customer service and they want to understand. The issue with our product is that we are offering highly leveraged and sometimes complicated trading products which requires a significant amount of education and simplification.

The challenge on our side is to present a complicated product in simple enough terms that someone can sign up on our website, look at the trading screen and understand immediately what they need to do to buy and sell a particular product.

That's not a Chinese-specific problem. When you're dealing with investors, who might not have that much financial knowledge, this is a challenge: education and simplification.

When you start designing your website. How do you go about that then? How do you anticipate those needs and to what extent is the current outlook of the website, based on those iterations and customer feedback?

Arthur: As I said, we operate this real-time chatroom. People are very vocal about their complaints or praise for certain things we do. We're in this chatroom 24/7 and we take the feedback they give us almost in real time and start adjusting the platform by making it simpler or removing things and adding this. It's a constant struggle to basically make that perfect UX experience so that someone can basically sign up in 10-20 minutes, be trading and understand exactly what they're doing.

Brilliant. One question, now that you have a huge segment of Chinese customers and they chat with you. Do they chat with you in Chinese/Mandarin or English? How do you come over that constraint?

Arthur: We actually have dedicated customer service personnel, purely for our Chinese offering and they traditionally interact with customers on QQ and WeChat. That's just the preferred method of communications for Chinese traders.

Now you're touching on WeChat, very interesting. How is that community working out for you? Do you have a WeChat community, a shop? How does it work for you?

Arthur: We just got our WeChat service account and we're in the middle of building our own custom WeChat app. Now, if you're familiar with WeChat, you can practically do anything in WeChat and it's a really amazing application.

What we envision in the future is that our WeChat application is going to provide customer service, relevant content about what is going on in the market, things that customers can trade, perhaps even trading to WeChat itself, connect to your BitMEX account and trade through the app itself.

Because, it's just so ubiquitous in China, you can't now ignore that WeChat is a way that most customers are interacting with each other on the internet.

You're currently raising funds. You've also turned down some investors before. What is the strategy in going forward and picking these investors?

Arthur: We have stopped raising capital at the moment. We raised a small amount of money via convertible notes in the summer of 2015, we have not done a priced, institutional or venture capital round and as we're cash-flow positive and a profitable company at the moment, it's not a pressing concern for us right now to raise outside capital.

Because, raising money is a full time job for me and it takes away from trying to grow our business. I would say that our strategy going forward is to not do it, unless there is a pressing concern or there is some item or feature that would require us to spend more money than we have in retained earnings. I don't see that at the moment as being present.