• The CFTC (Commodities Futures Trading Commission) regulates futures and options markets to help prevent manipulation and fraud.
  • BitMex is the largest (and one of the only) derivatives platforms/broker for Bitcoin.

Understanding what a derivative is

Spot Derivative
You own/have it (Asset) You don’t own/have it (contract)
FOREX, physical metal, stocks, cryptocurrency Futures, Options, Swaps
Ownership executed instantly/few days Non-executable or executable after a set date
Simple Complex, generally leveraged, used for hedging

                There is a significant amount of jargon that exists within all financial markets. And for the normal Joe who wants to participate in cryptocurrencies, it is not uncommon for a person to not know the difference (or definition) of what a spot market is versus a derivatives market. An example of something in the spot market would be owning physical Gold. An example of a derivative of Gold would be a common XAUUSD (ticker for Gold/USD) CFD (contract for difference) or a Gold Futures contract (ticker: GC). For Bitcoin, whenever you buy Bitcoin on an exchange where it goes onto either an exchange’s wallet or you put it into your own wallet, that would the spot market. Examples of exchanges that would include spot market cryptocurrency offerings would be Binance, Bittrex, Coinbase, etc. An example of a derivatives market for cryptocurrencies would be Bitmex, OKEX, Bitfinex, and the CME.

Futures and Options markets have a significant amount of regulatory agencies that oversee their markets. Spot markets have a regulatory overview as well – but it is generally believed that spot markets are more ‘open’ and not under as much heavy scrutiny as derivatives markets (which makes sense). The major problem with derivatives markets is the issue of leverage – leverage gives a person the ability to ‘borrow’ money to buy or short something with a portion of their own capital. BitMex offers up to 100x leverage on their platform for their perpetual derivatives contracts. Leverage is a very, very contentious issue for regulators because too much leverage is considered too risky for the new trader/investor and is often a predatory tactic to entice frivolous and ‘gambling’ like behavior. The EU, just this year, eliminated excessive leverage and even made binary options illegal. The US has had fairly conservative leverage limits for quite some time.

 

Why going after BitMex is good

This is a personal opinion, but I feel like if you have to register a derivatives market outside of your home nation to set up shop in a country with little regulation, then you definitely don’t have anyone’s real interests at heart. Listen, I’m a free-market capitalist, I am Friedmanist through and through – but when it comes to honesty, integrity, and anything resembling anything close to fiduciary responsibility, setting up shop in the Republic of Seychelles is shady. But that’s where BitMex is setup. Oh, they have offices in Hong Kong, the US, and other places – but their primary location and HQ is in the Seychelles. Now, as a free-market capitalist, I do believe that BitMex has a right to go and do business where they want. Heck, I imagine they would love to come to the US to set up shop – but the US’s regulatory agencies create some of the most prohibitive environments for setting up a business like derivatives exchange. So I put a lot of blame on the overbearing nature of US regulators (and Congress). But it doesn’t excuse some of the behavior that BitMex employs.

BitMex does little to prevent US citizens (who are prohibited from using BitMex) from accessing its service. As a US citizen, if I try to open a Forex account in Australia or any other Forex broker that is not registered in the US – I can’t use it. Why? Because almost every single Forex broker that is registered with their own nation’s regulatory agencies have a KYC rule (Know Your Customer) – you have to provide information on where you live, address, country of residence, etc. BitMex does not do any of that. In fact, all you have to do is use a VPN and then pic a country that is the not the US (or Canada) on the list of where you’re from and you can use their platform.

Additionally, BitMex is absolutely a one-sided game. They trade against their clients, have blatantly caused massive manipulation in the spot and derivatives markets. I am usually opposed to regulatory anything, but there needs to be a way to legally go after bad actors and scammers. Bitmex is a great example of a derivatives market that takes advantage of its customers and skirts regulatory oversight in order to legally scam current and future clients. One of the best things that could happen is for BitMex to go away – and Bitfinex.