Has Arthur Hayes Destroyed the Ethereum Market and Bankrupted ICO Treasuries?by@BambouClub
525,168 reads
525,168 reads

Has Arthur Hayes Destroyed the Ethereum Market and Bankrupted ICO Treasuries?

by BambouClubAugust 4th, 2018
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<strong><em>TL, DR:</em></strong>

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Save on BitMEX fees with this coupon**. (**BitMEX fees are much higher than on conventional exchanges because the fee applies to the entire leveraged position, not just your margin. You pay $250 fees on trading with $1,000 margin on the ETH Futures at 50x at BitMEX compared with $2 on a $1,000 Spot trade at Binance.)


This tweet went viral and was ridiculed. An educated analysis of the data suggests he might be right.

On 2 August 2018 BitMEX introduced the new ETHUSD Perpetual Swap with a maximum 50x leverage. It was announced with a great deal of scorn for the Ethereum ‘shitcoin’. The product is a hit and one month later (12 September) 24h volume stands at 66,467 BTC ($414 million), making it the most heavily traded ETH/USD pair globally.

And this happened:

Has Arthur Hayes’ ETHUSD swap been the catalyst to destroy the Ethereum market and bankrupt the Treasuries of the ICO companies?

The ETHUSD swap appears similar to the XBTUSD swap on first examination. Both have prices pegged to the underlying spot price by incentives to traders provided by the Funding rate. And the XBT swap is a well-established product used both by whales to hedge their Bitcoin and by speculators. But ETHUSD is unsuitable for hedgers as its contract value is affected by the Bitcoin price as well as ETH price, and because there is no ETHUSD Future. This has created a febrile and unstable ETHUSD swap market consisting entirely of unsavvy over-leveraged speculators with a heavy Long bias. The evidence for this lies in the chart of the ETHUSD swap funding rate. In such circumstances it was easy, cheap and profitable for large players to crash the market. The winners are BitMEX and possibly BitMEX’s trading / market-making arm, the BitMEX Insurance Fund, and the whales who executed the block shorts. The losers were amateur traders with Long positions.

There is a counter-argument that the collapse in the ETH price is disconnected from trading at BitMEX. The ETHUSD swap is a derivative which derives its price from the Spot ETH prices at Bitstamp, GDAX and Kraken. And not the other way round.

However the price of the derivative at BitMEX CAN influence the underlying spot prices via arbitrage bots.


Previously BitMEX only offered trading in ETHBTC, and the trading of ETHUSD on leverage was only available at OKEX, Kraken and Bitfinex.

The came the ETHUSD perpetual swap. Full contract specs are stated here.

As Hayes said, ‘You never have to touch that shitcoin called Ether’ .

Meaning, the only collateral you can deposit at BitMEX is BTC. You cannot deposit ETH. They cleverly designed the ETHUSD swap and ETH Futures so that no ETH is required to trade it Long or Short.

Contract Value Depends on ETH AND XBT Prices

It is imperative to understand that the contract value of the ETHUSD swap depends on both the ETH price and the Bitcoin price. This is because it is a Quanto derivative: it is quoted in one currency (USD) and settled in another currency (BTC). This characteristic makes the ETHUSD swap almost useless for the purpose of hedging Spot ETH holdings and might be responsible for the destruction of the Ethereum market and the bankruptcy of the ICO company Treasuries.

If you trade 1,000 Contracts of ETHUSD how much is your position in units we understand like XBT or USD?

The USD value of a ETHUSD Contract is not shown in the Place Order box.

ETHUSD Contract = 0.001 mXBT x 174.15

= 0.17415 mXBT

= 0.00017415 XBT

= 0.00017415 x 6235

= $1.085

Value of ETHUSD swap contracts depends on both ETH price and Bitcoin price. ETHUSD swap is like BTCUSD swap on steroids. If both Bitcoin and ETH rise vs. USD the gains on the ETH swap are the product of the two gains. And if they both crash …..

Want to hedge your Spot ETH with the ETHUSD swap? Forget about it because the value of the ETHUSD swap also depends on Bitcoin price. If BitMEX settled ETHUSD swap in ETH that would solve this problem. But they never will.


On superficial analysis, the mechanics of the ETHUSD swap are similar to the BTCUSD swap. But while the XBTUSD swap works like a well-oiled piece of German engineering, the ETHUSD swap works like a helicopter spiralling crazily out of control with Elon Musk at the controls. While taking a call from his creditors.

Both have prices pegged to the underlying spot price by incentives to traders provided by the Funding rate. (In fact the underlying is the .BETH Index: 33% Bitstamp, 33% GDAX, and 33% Kraken). Both are quoted in USD, settled in XBT. (i.e. Quanto derivatives.)

They have the same fees. Market makers (those who trade with Limit orders) get a 0.025% Rebate. Takers (those who trade with Market orders) pay 0.075%.

One difference is that the XBTUSD contract value is simply $1 .The ETHUSD contract value is ETHUSD Price * Bitcoin Multiplier (100 Sat/$1). [About $1.07 at time of writing.]

So far so boring.

A significant difference is that the XBTUSD swap can be used to hedge Spot Bitcoin holdings. But the ETHUSD swap is not helpful for hedging Spot ETH as its dollar value depends as much on the Bitcoin price as it does on the ETH price. So there is no natural population of whales wishing to Short the swap to hedge their Spot ETH. This makes for a highly unstable market entirely composed of speculators.

Another difference is there are XBTUSD Futures on BitMEX which can be used to hedge swap positions. Traders can build 2-legged trades, one in the swap and one in the Future, to obtain the XBTUSD funding income without market risk. This has a dampening effect on funding rates and strengthens the peg to the Spot Index and stabilises the market. But there is no ETHUSD Future. So it is very difficult to build hedged ETHUSD swap positions to get the Funding. So there has been no inflow of more savvy traders shorting the ETHUSD swap when Long speculators drive the Funding rate up to crazy levels. (There are ETHBTC Futures on BitMEX but these are unsuitable for hedging the ETHUSD swap.)

There is funding fee or rebate every 8 hours with the ETHUSD swap, as with the XBT swap. But the funding rate on the ETHUSD swap is much more volatile, and can vary from min/ max limits of -0.75%/+0.75% per 8-hour session versus the limits of XBTUSD Funding of -0.375%/+0.375%.

So we have the ingredients for a highly unstable ETHUSD market and a major clusterfuck.

Funding rate cap on ETHUSD swap is double that on XBTUSD swap

What Happened?

This sounds plausible. But there is no long/short ratio at BitMEX. ‘Bitmex’s contract is P2P — For every long, there must be a short, for every sell there must be a buy. Each position is 1:1. Funding is not indicative of which side has more positions open, it’s entirely about the premium/discount that XBTUSD develops to the Index. ‘ [[Quote from BTCAurelius.]

Well, it quickly became evident from the consistently high positive funding rates that there was more buyside pressure on the ETHUSD swap than sell-side pressure and as a result the BitMEX price was consistently greater than the index.

Chart of Annualised Funding Rate on ETHUSD Swap from 10 August to 12 Sept. Rates have commonly been > 50%. This shows speculators driving the price above the Index and is a sign of an out of whack market in disequilibrium. The ETHUSD swap is just broken.

This was probably amateur speculators with excessive leverage thinking ETH was cheap. And whales were not shorting because the product is no good as a hedge and because there is no means to short it risklessly to get funding income.

I tried this unsuccessfully. The funding rate at the time was 0.1383% which is 356% compounded p.a. that Longs were paying Shorts. I tried to lend out $20,000 of other people’s money at that rate. In the absence of a hedge at BitMEX, I tried to make a Long ETHUSD hedge at Kraken but it turned out Kraken’s trading fees and funding fees made it unviable.

So we have an unstable market with mainly speculative, highly-leveraged amateurs taking positions with a Long bias and no institutional or whale hedgers to provide deep-pocketed stability. We have crazy funding rates typically exceeding 50% annualised resulting from excessive buy-side pressure and no way to get at that income. And we might have institutional players coming in and savaging the market with very profitable block short orders.

The winners? BitMEX. Possible BitMEX’s market-making arm. The BitMEX Insurance Fund. The whales who did the block shorts. The losers? The amateur traders with Long positons.

Use the AntiLiquidation Tool to Trade ETHUSD Swap

Surpluses from Liquidation of ETHUSD swap trades at BitMEX get paid into the same Insurance Fund as all the other contracts.

The Balance when ETHUSD swap was introduced 3 Aug: BTC 10,640

Balance today: BTC 12,388.

If you want to trade the ETHUSD swap efficiently then use the AntiLiquidation tool. It is free. There is a tab for trading the ETHUSD swap.

Avoid Liquidation trading the ETHUSD swap using the AntiLiquidation tool.

Trade ETHUSD Swap with up to 150x Leverage Using

There is a limit of 50x leverage when you trade the ETHUSD swap using the Slider Bar. You can trade with 150x leverage when you create it from tight stops using

Note about Fees

Note the ETHBTC futures has a different fee structure to the ETHUSD swap. It has no funding cost or rebate.

Look at the taker fee on the ETH Futures: 0.25%. So if you trade 50x leverage at Market with $1,000 margin, creating a position of $50,000, your fees are [50 x $1,000 x 0.25% x 2] = $250 on a $1,000 trade!

That’s it.

Save on BitMEX fees with this coupon**. (**BitMEX fees are much higher than on conventional exchanges because the fee applies to the entire leveraged position, not just your margin. You pay $150 on a $1000 trade at BitMEX compared with $0.2 on a $100 trade at Binance.)