BitMEX’s fall from grace — and what the exchange's next moves may be

The exit of Arthur Hayes from cryptocurrency derivatives exchange BitMEX's leadership truly marks the end of an era.

The news development also encapsulates something that's been obvious for a while now: BitMEX is just a shell of what it once was during the heady days of 2017.

Last week, BitMEX was rocked by announcements from the Commodities Futures Trading Commission and U.S. Department of Justice filed legal charges — including criminal charges from the DOJ — against the firm's co-founders and one early employee. This morning, the firm said Hayes was no longer BitMEX CEO.

According to BitMEX, "it is business as usual for us and we thank all clients for their continued support."

But if volumes or open-interest offers any indication, however, the business is not functioning as usual. Open interest in BitMEX's bitcoin futures market has collapsed from more than $1 billion to under $600 million. Volumes have also compressed. 

BitMEX has fallen far from the position it held in 2017, when it was arguably the center of liquidity in the fledgling bitcoin derivatives market. Three years ago, traders didn't have many options aside from the Seychelles-registered, Hong Kong-based venue. 

Now, the crypto derivatives marketplace is much more diverse.

Competitors like Binance, Bitfinex, and FTX have emerged and offered compelling new derivatives offerings. 2020 was also the year in which DeFi derivatives marketplaces like dYdX emerged. Between September 2019 and September 20, BitMEX's market share in terms of open interest on bitcoin futures fell from nearly 50% to 20%, according to The Block Research. 

The biggest blow to the exchange came on March 12, dubbed Black Thursday. Bitcoin crashed by more than 50% and exchanges like BitMEX and Gemini suffered outages.

The event was likely a wake-up call for some traders. BitMEX, unlike many of its competitors, doesn't allow traders to use assets aside from bitcoin as collateral for its bitcoin futures. Traders who only used BitMEX were likely "awakened" to the option of using "multi-collateral futures," according to one trading firm executive. 

"Like FTX will count BTC as collateral and OKEx and Binance both have BTC and USDT collateralized futures," the person said. Having more options for collateral can de-risk a trader in the event of a liquidation. 

Since the crash, BitMEX has failed to see liquidity return to normal — even as competitors saw their markets go on to grow larger. 

The trading firm executive said BitMEX hasn't been able to "keep innovating and competitors came out with more compelling offerings."

"Between BitMEX releasing their ETH quant swap in 2018 and XRP quant in 2020, competitors just created much better offerings with more features, better collateral and enough liquidity. Just look at FTX, Binance, and Bybit." the executive said.

So, BitMEX has fallen from grace. Can it recover?  

It's not immediately clear what impact DOJ and CFTC cases will have on the firm's operations. BitMEX is still in the process of rolling-out its KYC program, which executives at the firm have told The Block in previous conversations has been successful up until this point. That might help the firm avoid the further ire of regulators. But the charges — particularly the DOJ's allegations of Bank Secrecy Act violations — are undoubtedly serious, and BitMEX's chief technology officer was arrested last week as well. 

Yet BitMEX will also likely continue to try to launch new products. In September, it launched its first two new futures for the first time in over two years, as first reported by CoinDesk. The firm has told The Block that it is focused on the derivatives market and is likely not going to venture into DeFi. But there is a possibility that it could roll out new products that look similar to products that exist in traditional markets, such as a eurodollar contract but for the bitcoin world. 

But will any of this help BitMEX return to its former glory days?

When asked if there's a reason to trade on BitMEX in 2020, another trading firm executive was blunt: "Don't think so."