Bitcoin has made great strides during the past five years, particularly in the area of trading activity, increased liquidity, market transparency, and reduced fraudulent activity. These days, traders can choose from a cornucopia of different exchanges to meet their demand for daily cryptocurrency trading.
It wasn’t long ago when the only game in town was Mt Gox. We all remember the infamous Mt Gox exchange from the early years of 2013 and 2014. The days of Mt Gox were truly the “wild west” of Bitcoin trading. There were very few (if any) rules in place to protect traders and investors from fraudulent activity. Of course, this is what ultimately caused the complete demise of Mt Gox. The exchange collapsed under its own weight, as account holders tried to escape the sinking ship all at the same time.
BitMEX Exchange (Derivatives Versus Spot)
Thankfully, Mt Gox is a distant memory to most digital currency traders. These “dinosaur” exchanges have been replaced by a new class of cryptocurrency exchanges. Arguably, the most popular exchange among traders and investors is BitMEX, which stands for Bitcoin Mercantile Exchange. BitMEX is a wholly owned subsidiary of HDR Global Trading Limited.
There appears to be some confusion within the digital currency community concerning the role BitMEX plays in regard to cryptocurrency trading. Very briefly, let’s review the underlying trading model of BitMEX. Additionally, we will discuss the features and characteristics of the BitMEX exchange.
Before we dive into the details concerning BitMEX, it would be a good idea to outline the two main trading vehicles among the digital currency crowd. Basically, there are two ways to trade cryptocurrencies. These include spot trading and derivatives trading.
Spot trading involves the buying and selling of the cash market (or “spot” market). In the early years of Bitcoin trading, the spot market was the only available means of acquiring Bitcoin. There was no derivatives market for Bitcoin (or any other digital currency market for that matter).
Bitcoin derivatives trading was introduced by ICBIT in June 2011. However, daily volume was practically non-existent and the ICBIT exchange was constantly in a state of turmoil. ICBIT was eventually purchased by Safello, a Swedish-based Bitcoin exchange, in October 2016.
Many people are confused by the term “derivatives”. What is a derivative? It is simply a fancy word used to describe a financial security that derives its value from an underlying asset or group of assets. For example, a futures contract is a derivative because the value of the contract is linked to the value of the underlying asset (e.g. soybean futures contract).
The price of the contract is derived from the price of soybeans. Therefore, it is a derivatives contract. Other examples of derivatives include stock options, forward contracts, options on futures, and swaps. Take some time to learn the difference between futures and options before deciding which you want to trade.
Now, let’s turn our focus back to BitMEX. As I mentioned, some traders are confused about the BitMEX trading model. BitMEX is purely a derivatives exchange. They do not engage in the activity of exchanging a fiat currency for Bitcoin (or any other cryptocurrency). The exchange is not involved in spot trading.
BitMEX was launched in Q1 2014, as one of very first Bitcoin derivatives trading exchanges. Almost immediately, BitMEX began to generate a substantial amount of daily volume from its customer base. Today, the exchange trades $5 billion in daily activity.
Features and Characteristics of BitMEX
In terms of fees, BitMEX utilizes a rather complicated method for charging trading fees to its customer base, known as maker fees and taker fees. Let’s briefly discuss the difference between maker fees and taker fees (along with maker orders and taker orders).
A maker order is nothing more than a limit order to buy or sell at a specific price. If you place an order to buy below the current market price, this is a buy limit order. Conversely, if you place an order to sell above the current market price, this is a sell limit order. If the maker order is eventually filled, you are charged a maker fee.
A taker order is essentially a market order to buy or sell immediately at the best available price. When the taker order is filled, you are charged a taker fee.
Customers who place maker orders are rewarded with a smaller fee because they are actually adding liquidity to the market. In regard to BitMEX, the exchange provides a small credit balance of 0.025% for maker orders.
Customers who place taker orders are penalized with a higher fee because they are draining liquidity from the market. BitMEX charges a hefty 0.075% taker fee to its customer base. These fees are charged on the buy side and the sell side. For example, if a BitMEX customer places a taker order to enter and exit the position, she/he is charged 0.15% (0.075 x 2).
At first glance, these fees don’t appear to be too onerous. However, over a long period of time, trading fees will dramatically reduce your rate of return. In order to become a successful trader, it’s critically important to reduce (or eliminate) fees as much as possible.
BitMEX allows its customers to use leverage when trading digital currencies. However, many customers may not be aware that taker fees are increased in direct proportion to the customer’s leveraged position. For instance, if a BitMEX customer initiates a 10x leveraged BTC transaction, BitMEX will charge a 10x taker fee. Therefore, the standard taker fee will increase from 0.075% to 0.75% (which is ¾ of 1%).
Remember, this steep fee is charged on the buy side and the sell side. At the end of the day, a 10x taker trade on the BitMEX exchange will cost an astonishing 1.5% (0.75 x 2 = 1.5). In effect, the BitMEX customer must generate a 1.5% rate of return on the trade just to break even! This is a perfect example of how excessive fees can destroy a trader’s long-term rate of return. It’s virtually impossible to generate a positive rate of return if your trading exchange is charging excessive fees.
Quickly, let’s address the issue of the BitMEX maker credit of 0.025%. It is true that BitMEX issues a small 0.025% maker credit to traders who employ a maker trade. However, very few active cryptocurrency traders use a maker trade. Why? Because maker trades require the customer to place an order away from the current market price action (with the hope that the trade might receive a fill price at some point in the future).
Seriously, how many active digital currency traders are going to patiently wait for a fill price on their BTC trade in an effort to collect a small credit of 0.025%? In reality, cryptocurrency traders can’t afford to wait for a possible order execution on a maker trade (while the volatile markets are moving at lightning speed). The BitMEX maker credit is a nice gesture. However, it will not apply to most traders.
One of the most important characteristics on any trading exchange is the trading interface. What is a trading interface? In the context of trading, the interface enables your software to connect with a broker to obtain real-time pricing or place trades. In regard to BitMEX, the firm employs a trading dashboard which allows the user to select the instrument to be traded along with the amount of leverage. Additionally, the dashboard is used to place trades, cancel orders, and view other important account details.
Next, let’s briefly discuss deposits and withdrawals. Of course, all customers are concerned about deposits and withdrawals. They are particularly concerned about the speed of these transactions. Concerning deposits and withdrawals on the BitMEX exchange, there are no fees which emanate from BitMEX. However, there are certainly fees involved which originate from other sources.
For example, BitMEX only accepts deposits and withdrawals in Bitcoin. Therefore, when the Bitcoin network is busy customers sometimes have to wait hours for their deposit transaction to confirm and may have to pay very high network fees. In December when Bitcoin transaction costs were very high it could cost $25 in network fees to withdraw from Bitmex. If you’re withdrawing $25 that’s not so good.
BitMEX states on its website that withdrawals can be initiated 24/7. This is certainly true. However, BitMEX withdrawals are processed by hand once per day. Consequently, the withdrawal process has a tendency to be somewhat delayed.
Finally, in regard to tick size for its Bitcoin contract, BitMEX offers a minimum price increment of $0.50. Generally speaking, a smaller tick size creates reduced liquidity and less price stability. Customers prefer larger tick sizes because it provides tighter spreads at all times, even during periods of extreme market volatility.
The Digitex Futures Exchange
Although the exchange has not yet opened its doors for business, the Digitex team has certainly laid the groundwork for providing a remarkable trading experience for its customers. Let’s compare a few of the characteristics from the BitMEX exchange against the Digitex Futures Exchange.
First and foremost, the Digitex Futures Exchange is a commission-free trading exchange with its own native cryptocurrency.
This places Digitex in a league of its own. Digitex compares rather favorably against BitMEX with respect to trading fees and commissions, particularly when you consider the fact that Digitex is commission-free. It’s hard to beat “free”.
As we mentioned earlier, BitMEX engages in maker fees and taker fees. Without question, novice traders in the cryptocurrency arena will have a very difficult time understanding this type of fee structure. Why? Because there are a number of different variables to consider when trying to determine the true cost of placing a trade with maker fees and taker fees. These variables include market liquidity (or lack thereof) and order type. Certainly, maker fees and taker fees were not designed with the best interests of the trader in mind.
The Digitex Futures Exchange is 100% commission-free. It doesn’t get much easier than that. Therefore, if you are a digital currency trader searching for a simple fee structure, the Digitex Futures Exchange has you covered.
Another comparison between BitMEX and Digitex is the user interface. The Digitex Futures Exchange uses a one-click ladder trading interface. What’s so special about a ladder interface? If you are an active trader, you know that multiple clicks of your mouse on a trading platform can cause delays and lost opportunities. Digitex provides its customers with one-click trading capability. You can place trades without needing to take your eyes from the price to use the keyboard or move your mouse.
As the price moves you can literally see it moving up and down, helping you to visualize the price action and get in the trading zone in a way that’s impossible when submitting trades by using the keyboard and moving your mouse all over the screen. The Digitex trading interface is another example of the firm’s desire to enhance the trader’s experience.
As we discussed previously, BitMEX only accepts deposits and withdrawals in the form of Bitcoin. This leads to fees and expenses from high network-transaction costs. Digitex deposits and withdrawals are denominated in DGTX tokens which are a custom token built on the Ethereum blockchain. What’s so great about Ethereum in comparison to Bitcoin? In the simplest terms, Ethereum transactions take 10 seconds or less and cost a fraction of the amount that Bitcoin transactions cost.
At the end of the day, Ethereum simply provides a better means of handling customer deposits and withdrawals versus Bitcoin. Digitex is committed to being “first in class” concerning all areas of its operation, including customer deposits and withdrawals.
If we turn our attention to tick size, Digitex appears to have a more favorable structure. Tick size is defined as the minimum price fluctuation of a specific contract or trading instrument. The BitMEX tick size for its Bitcoin contract is $0.50. The tick size of the Digitex Bitcoin contract is $5.00. This represents a difference of 900%.
The Digitex tick size is substantially bigger than BitMEX. What’s so important about tick size? A larger tick size promotes increased liquidity and more price stability. Typically, traders prefer larger tick sizes because it provides tighter spreads, even during periods of increased volatility.
Digitex Will be Unleashed in Q4 2018
Currently, BitMEX is one of the leading providers of Bitcoin derivatives trading. This demonstrates how much interest there is in Bitcoin futures trading and how large the potential market is for Digitex. The Digitex Futures Exchange will pose a formidable challenge to BitMEX (and all cryptocurrency exchanges) when the exchange begins live trading in Q4 2018.
Digital currency trading is still in the early phases of its life cycle. We will continue to see tremendous innovation during the next decade, particularly as it relates to commission-free trading. And the leader of the pack will be the Digitex Futures Exchange.
Brief Summary of BitMEX Versus Digitex
- There are two methods for trading digital currencies; spot trading and derivatives trading.
- A derivative is a financial security that derives its value from an underlying asset.
- BitMEX is purely a derivatives exchange.
- BitMEX utilizes maker fees and taker fees.
- The trading interface at BitMEX is essentially a trading dashboard.
- Deposits and withdrawals at BitMEX can only be initiated through Bitcoin.
- The tick size of a BitMEX Bitcoin contract is $0.50.
- The Digitex Futures Exchange offers 100% commission-free trading.
- Digitex uses a one-click ladder trading interface.
- The Ethereum blockchain is used to handle Digitex deposits and withdrawals.
- Digitex offers a $5.00 minimum price fluctuation as it relates to its Bitcoin contract.
- Digitex will pose a formidable challenge to BitMEX when trading is launched in Q4 2018.
- Cryptocurrency trading is still in the early phase of its life cycle.
Join the Waitlist
Stay tuned as we continue to keep you informed about our company news, including the Digitex Futures Exchange development progress. If you haven’t already done so, be sure to join our waitlist to get early access to the zero-fee futures exchange launching at the end of this year.