The independent cryptocurrency researcher Hasu uploaded a blog post in which he talks about different challenges that the popular virtual currency exchange BitMEX is currently experiencing.

According to this researcher, there are some issues that lead him to believe that the exchange is not acting ethically in some situations.

In order to investigate this issue, he talked with everyone ready to provide information about BitMEX and their concerns on the exchange platform. Additionally, he decided to build a mental model of how BitMEX operates and how their incentives work.

After this, there are three things that he identified. The first one is that BitMEX trades against customers, the second one is that BitMEX weaponizes their server problems, and third, the exchange monetizes customers liquidations using their insurance fund.

The first thing that Hasu analyses is BitMEX trading against its own customers. Back on April 30, the exchange launched a blog post in which they released an update to their Terms of Service. In this update, BitMEX says that it has a trading business in which it transacts products traded on the BitMEX platform. Additionally, they trade as a market maker.

This is very important since market makers provide liquidity. Makers post a quote to both buy and sell sides of the order book. As per the analyst, if BitMEX only engaged in market making activities, that would be fine, since it would help users to exchange fill orders. However, he mentions that the people he talked to say that they are skeptical about it.

He shows that BiMEX hid the desk and clarified the situation about later in April this year. On April 30, BitMEX informed in a blog post that their lead outside counsel was the law firm, Sullivan & Cromwell. However, this did not last long – at least in the blog post that they uploaded at the end of April. Between May 5 and May 22, BitMEX removed Sullivan & Cromwell from the post, as Hasu shows in his article.

Although they mention that BitMEX desk operates in order to obtain profit, they say that their revenue is not related to trading activities. However, there is no way, according to Hasu, for customers to verify the desk’s business model. BitMEX has never been open to an audit of their business structure. Unfortunately, there are several users that do not believe in the Exchange.

The author says that this is very unfair for users since BitMEX would have a clear advantage over customers. The exchange should provide fair competition to all users with equal access to information and priority of access.

For example, the exchange would be able to know the liquidation points of all other players in the market. Knowing this, the platform could place a massively large buy or sell order and trigger their call and a chain of liquidations. After it, the exchange would close their position with important profits on its side.

Hasu says that the exchange denied granting privileged information to its trading desk but it did not provide information to the trading desk, but it did not comment on equal priority of access.

Weaponizing Server Problems

BitMEX usually faces different technical problems. In general terms, it uses a very expensive trading engine that is very safe but it experiences high instability. This is quite important because if there is a bug in the system, it could lead to users lose more than what they have.

In general, BitMEX is experiencing two or three times per day a system overload. This is something that affects the overall user's experience and that an important number of traders complain about.

This is a very big problem because regular users cannot get orders through or access their accounts. In this way, orders will continue to be filled and the market moving. This has led users to believe that there are some parties that have more access to submit their orders compared to others.

In general, people believe that BitMEX trading desk has a preferred treatment over other users.

There are different ways to profit when the exchange is in ‘Overload’ mode. If the price of Bitcoin moves $100 dollars on other exchanges, users would be able to have liquidity at the older price. Once the user bought in one exchange, they can sell in another for a higher price.

At the same time, it is possible to trigger a chain of liquidations during overload periods. If there is a user with privileged access, it would be able to trigger these liquidations and sell at a higher price.

The cryptocurrency analyst explains that specific users (specially the trading desk) can have preferred information or priority access during server overloads. This is something that allows it to have better results compared to users without access to the platform during these overload moments.

Monetizing Customer Liquidations With Insurance Fund

According to the author, if there is an open position that is taken by BitMEX; they will be looking for other buyers or sellers and close that position before the margin runs out. If there is not enough liquidity available, BitMEX performs an exchange-wide ‘auto-deleveraging’ (ADL). Traders are close out in order to create liquidity.

Hasu says that if BitMEX closes a position in time, it uses the money that was left over to deposit it into an insurance fund.

The fund has grown exponentially over time, reaching 14,000 Bitcoin. However, this insurance is not necessary. However, the author explains that BitMEX views the fund as an asset on their balance sheet. This is very positive for the exchange since it would be able to liquidate it at any moment and/or use it on its balance sheet.

Supposing that BitMEX considers the fund as another asset on their balance sheet, Hasu says that it would be possible to consider it the second additional income stream other than commissions. As the analyst reports, the fund made between 50% and 66% as much money from liquidations as BitMEX from their most traded contract.

The author believes that BitMEX is performing unethical activities in order to increase its revenue and improve their economic results. As mentioned before, the trading desk could be operating against customers, the insurance fund could be monetizing customers’ liquidations.

Nonetheless, the author explains that there is not enough information to conclude that BitMEX is guilty of these things. However, it is possible to see that BitMEX has certain incentives to do so.

After the article, Has proposed a set of suggestions that would allow customers to increase the trust they have on the exchange.

The first thing that Hasu suggests is BitMEX to put a hard cap on the size of the fund they have. If it is larger than what it should be, people will believe that it is used as a third income stream.

Another proposal is to be transparent on how much money is reversed for each of the contracts. Furthermore, he says that it is important to be transparent about what happens when contracts expire. Additionally, he suggests BitMEX to stop gathering funds for the fund and give them back to the person that got liquidated.

Hasu says that BitMEX should stop accepting new signups if the problem is related to technical issues rather than ethical problems. In addition to it, he mentions that BitMEX should close the desk and act in a more transparent way.