Arthur Hayes, co-founder of the cryptocurrency derivatives exchange BitMEX, shared his perspectives on the early days of crypto, the future trajectory of Bitcoin, and his reservations about the current investment frenzy in Artificial Intelligence (AI). Speaking at Token 2049 in Singapore, Hayes discussed his unconventional career path, the evolution of crypto trading, and his new venture, Flop Network.

From Detroit to Hong Kong: A Global Career

Hayes, originally from Buffalo, New York, with parents who worked for General Motors, developed an early interest in international finance and economics. Inspired by a book about a trader in Tokyo, he decided to study Chinese and move to China. After studying Chinese at the University of Pennsylvania and undertaking a study abroad in Hong Kong, he secured a position at Deutsche Bank in Hong Kong, marking the beginning of a two-decade career primarily in Asia, with no prior work experience in the United States. Hayes expressed a rejection of nationalism, stating, "I am Arthur Hayes, like you're whether that's American, Chinese, like Japanese, like who cares? It doesn't matter."

The 2008 Crisis and the Genesis of BitMEX

Hayes's finance career began at Deutsche Bank and later at Citibank in Hong Kong. His first day on the trading desk at Citibank coincided with the collapse of Lehman Brothers in 2008, an event that profoundly shaped his view of the financial industry. He described the atmosphere as chaotic, with widespread uncertainty about job security. After being let go from Citibank in 2013, Hayes discovered Bitcoin and became engrossed in its philosophy and trading mechanics, particularly arbitrage. This led to the idea of creating BitMEX.

The Birth of the Perpetual Swap

In 2014, Hayes co-founded BitMEX with two technologists, Beno and Samuel Reid, in Hong Kong. Their initial goal was to build a derivatives platform, recognizing that the spot exchange market was already crowded. They identified a gap in the market, as existing derivatives platforms had limitations, particularly in their margining systems. Hayes noted that an exchange called IC BIT had pioneered concepts like inverse futures but faced near collapse due to issues with its margining system.

BitMEX launched its first product, a quarterly inverse futures contract, in the fall of 2014. However, it initially struggled due to lower leverage offerings compared to Chinese competitors. The breakthrough came in May 2016 with the invention of the perpetual swap. This product was designed to simplify trading for clients who were unfamiliar with traditional futures contracts and to concentrate liquidity. The initial design faced challenges with funding costs, but a subsequent innovation, a self-referencing funding mechanism, proved to be the key to its success. This mechanism, which adjusted based on the premium or discount to the spot price, effectively incentivized market makers and stabilized the derivative's price. Hayes credited the technological capability to implement this complex system, utilizing KDB, a specialized trading language, as a significant advantage.

BitMEX's Growth and Closure

The introduction of 100x leverage in late 2015, coupled with a Bitcoin price surge, led to BitMEX becoming cash flow positive. The platform's volume significantly increased, particularly after competitors like Binance and FTX adopted the perpetual swap model around 2020, once the technological hurdles were overcome. Hayes expressed pride in BitMEX's accomplishments, acknowledging its closure a few weeks prior to the interview as a bittersweet moment. He highlighted that BitMEX was able to exit the business without losing any customer funds, a rare feat in the crypto exchange industry. At its peak, BitMEX employed approximately 250 individuals.

Regulatory Scrutiny and the AI Investment Landscape

Hayes reflected on the US government's action against BitMEX in October 2020, noting that Bitcoin's resilience during that period was a significant indicator of the market's maturity. He described the experience as being the scapegoat in a fight against the established financial system.

Regarding AI, Hayes expressed a strong bearish view, stating, "I think we're wasting trillions of dollars of capital globally." He argued that major AI labs like Anthropic, SpaceX, and OpenAI operate with negative unit economics, meaning the cost of training and inference exceeds customer payments. He believes that if these companies charged the true cost of their services, demand would significantly decrease. Hayes pointed to the increasing costs of data centers due to inflation in labor, materials, and energy, contrasting it with the decreasing cost of compute. He predicted that these AI companies would likely require government bailouts due to their scale and interconnectedness with the global economy.

The Future of Finance and Flop Network

Hayes maintains a significant portion of his net worth, over 90%, in cryptocurrencies, primarily Bitcoin. He views trading as an intellectual exercise and a game, with price serving as an objective indicator of value and resource allocation. He is currently working on the Flop Network, a project aimed at creating a payment network for AI agents. Hayes believes that as AI agents proliferate, they will require a currency that directly converts into compute power. Flop Network aims to provide this by rewarding miners who provide GPUs for useful inference tasks with FLOP tokens and transaction fees. He envisions this network potentially becoming larger than Bitcoin, given the exponential growth of AI agents as economic actors.

Presidential Pardon and Political Philosophy

Hayes also discussed his presidential pardon from Donald Trump, describing the process as akin to winning a lottery ticket. He emphasized that it involved employing lawyers to submit a compelling case through official channels, refuting any notion of "pardon brokers" or illicit dealings. He views political systems globally, whether in the US or China, as driven by money printing to secure votes and maintain power, rather than addressing fundamental economic issues. He believes this dynamic ultimately benefits Bitcoin, as it represents a hard money alternative.

Hayes concluded by stating that while he believes AI technology will be useful, the current business models are unsustainable. He sees the potential for a massive AI bailout as a catalyst that could further benefit cryptocurrencies.