In 2013, Arthur Hayes was biding his time as an equities trader for Citigroup Inc. in Hong Kong. His energy—he’s a fitness fanatic and an early riser—was better suited to another era in finance. Six years earlier, as a recent arrival in the former British colony, he’d gotten a taste of what the golden age in banking felt like when he worked in the “snake pit,” the equity derivatives sales desk, at Deutsche Bank AG’s office. The markets were on fire. Traders were taking helicopter trips to the casinos of Macau to celebrate their triumphs. Hayes loved the rush of the trading floor at full throttle along with the life that went with it, including nights at the Dragon-i club. At Citi, a few years after the financial crisis brought a new order to the industry, those madcap days seemed like ancient history. Indeed, he was about to lose his job in one of the periodic culls that big banks carried out after the crash. But Hayes wasn’t too distraught: He’d discovered Bitcoin.

Today, the 32-year-old is the co-founder and chief executive officer of BitMEX, a cryptocurrency exchange that operates out of Hong Kong. Unlike marketplaces that permit investors to buy Bitcoin and other virtual tokens on a cash basis, BitMEX serves up something more exotic—cryptoderivatives. Hayes offers futures contracts that let investors make leveraged bets of up to 100 to 1 on the direction of 11 digital currencies. As the value of Bitcoin multiplied 10 times in the 12 months ended Jan. 31, investors flooded BitMEX with orders worth more than $200 billion. Hayes’s firm raked in $83 million in revenue in 2017 and about $21 million during the first 30 days of January alone, according to data on the company’s website. It bills itself as the most liquid Bitcoin futures marketplace in the world.

Hayes is just one of many finance pros leaving the world of banking and plunging into a largely lawless industry. They’re putting their expertise into constructing a marketplace for virtual currencies with all the features found in traditional finance, including derivatives, leverage, short-selling, and cryptocurrency price indexes. There’s even a plan to fashion a benchmark interest rate for lending Bitcoin (hello, Bibor, as it’s called).

Hayes alone knows seven former Deutsche Bank colleagues who’ve gone crypto. Almost all them went through the lender’s graduate program around a decade ago, the same time he did, and they all came of age when the bank, like its peers, whacked bonuses and jobs and lost its swagger. “We missed out on the peak of finance,” says Hayes, who’s been known to show  up for meetings in workout gear. “Instead we got the decline. There’s not as much money, not as much risk, not as much flow. It’s boring. Bitcoin reminds us of what it must have been like trading an asset class in the late ’80s and ’90s.”

Now Hayes and his fellow millennials have as much action as they can handle. They’re wagering that cryptocurrencies, seen by many as a massive bubble that’s bound to pop, can bring the trading rush and riches they’d sought in banking. After a huge sell-off to start the year—Bitcoin plunged 41 percent over a span of 17 days in January and as of 4:15 pm today in London was at $9,110—there was anxiety that the much-trumpeted collapse was finally under way. Regulators in South Korea and China, the asset’s two biggest markets, were cracking down on cryptocurrencies, and investors worldwide were struggling to cash out of suddenly besieged exchanges. While buyers were happy to overlook the market’s opaqueness and lack of accountability in its historic run last year, those very same traits are now fanning fears that this young industry is shot through with fraud.

Hayes is not among the fearful. He says he isn’t worried about an asset notorious for its volatility. “This is a perfectly natural retracement,” he says. “This is just Bitcoin being Bitcoin.”

“We missed out on the peak of finance. Instead we got the decline. There’s not as much money. ... It’s boring. Bitcoin reminds us of what it must have been like trading an asset class in the late ’80s and ’90s”

A gregarious man with a booming laugh and a well-toned physique that he’s happy to show off in tight polo shirts, Hayes is the kind of guy who made friends easily in college and on the trading floor. He was always running off to do something, whether it was yoga or skiing or squash. Even when he went out drinking with his pals, he didn’t slow down. “When everyone else is in a coma the next day, he’s the guy in the 10 a.m. spinning class,” says a longtime friend, Nicolaas Koster.

Hayes and his 40-person staff are building a trading firm well-suited to a marketplace where pesky things like borders don’t matter much. BitMEX may manage its exchange out of a high-rise in Kowloon, but it’s wholly owned by a company domiciled in the Seychelles, an island nation in the Indian Ocean that doesn’t require companies to meet minimum capital requirements, pay income taxes, or undergo audits. The only know-your-customer requirements Hayes asks of his clients are an email address and a deposit in Bitcoin. He makes no apologies for his model. “We will comply with all regulation, when that occurs,” he says.

Bitcoin’s Wild Price Ride

But questions about the ultimate costs of the cryptocurrency phenomenon are mounting. Bank bosses are wringing their hands. Casper von Koskull, the head of Nordea Bank AB, the biggest Nordic lender, even went so far as to ban his employees from trading cryptocurrencies. Regulators who spent the last decade taming the banking industry—and ushering in the least volatile market in memory—aren’t about to let cryptocurrencies run wild. Yet the authorities can’t even agree on a definition of Bitcoin—Is it a currency? A security? An asset?—let alone a comprehensive approach to controlling it.

Amid spreading concern and consternation, China has outlawed new coin offerings and brought pressure on the so-called mining companies that produce Bitcoins. The European Union has agreed to bring virtual currencies under the jurisdiction of anti-money-laundering legislation, which will require marketplaces to verify the identity of their customers. In late January the theft of about $500 million in digital tokens from Tokyo-based Coincheck Inc. prompted calls in Japan for stricter oversight. South Korea is considering shutting down crypto exchanges. In December, the U.S. Commodity Futures Trading Commission sent subpoenas to Bitfinex, a virtual-currency venue, and Tether, a company that issues a widely traded coin by that name, Bloomberg News reported on Jan. 30.

The onslaught of leveraged Bitcoin derivatives and other exotic instruments evokes the financial engineering of the housing boom of the 2000s, says Rainer Lenz, the chairman of Finance Watch, a Brussels-based public-interest group. It’s not just wildcatters fashioning these instruments. In December, the Chicago Mercantile Exchange and the Chicago Board Options Exchange started offering synthetic Bitcoin futures with the approval of the U.S. Commodity Futures Trading Commission and the clearing prowess of Goldman Sachs Group Inc. and Morgan Stanley. “Futures on Bitcoin are pure speculation on an already speculative investment without any connection to the real economy,” says Lenz, who’s also a member of an advisory committee to the European Securities and Markets Authority. “This is a casino game, and it should be stopped.”

Then there’s the link between Bitcoin and the criminal underworld, which has global enforcers scrambling to figure out how to break it. Terror groups are increasingly using Bitcoin and other digital assets to hide their funding sources, according to the Financial Action Task Force, or FATF, a Paris-based group representing 37 governments. Cybercriminals who engage in identity theft or launch ransomware attacks demand payment “almost exclusively” in Bitcoin, according to Europol’s European Cybercrime Centre.

Relying on cryptocurrencies, AlphaBay Market, a bazaar on the restricted-access darknet, sold more than $1 billion in narcotics, firearms, fake identification documents, and hacking tools before it was rolled up by a multinational police operation in July. Europol says AlphaBay’s activities wouldn’t have been possible without the anonymity that cryptocurrencies bestowed on the e-market’s 200,000 customers. “There are obvious benefits for criminals and terrorists,” says FATF Executive Secretary David Lewis. “They’re not theoretical.”

Few will benefit more from Bitcoin’s shift from the fringe to the mainstream than money launderers, says Joanna Torode, a lawyer with Ropes & Gray LLP in London. As the use of digital assets grows, law enforcement will have to spend more time and resources to distinguish lawful transactions from illegal ones. “When an asset class becomes increasingly legitimate, it’s easier to hide illicit proceeds in the monetary system,” says Torode, who’s prosecuted and defended money-laundering cases.

Hayes rejects the contention that turning cryptocurrencies into a bona fide asset class will be a boon for criminals. He says the blockchain, an open digital ledger that records and reveals every transaction executed with Bitcoin, ensures greater transparency than the crooks’ usual offshore legerdemain. Philipp Amann, the head of strategy at the European Cybercrime Centre, says that while cryptotechnology is undoubtedly a powerful new way to conceal ill-gotten gains, the blockchain could help police investigators monitor money flows even if an asset’s owner remains hidden. Criminals embrace a new technology; law enforcement follows suit, says Amann: “It’s an age-old cat-and-mouse game.”

Besides, Hayes asks, don’t money launderers overwhelmingly prefer the U.S. dollar? And when it comes to banks criticizing Bitcoin as the go-to currency for money launderers, Hayes says, “I don’t think banks have a leg to stand on.” (In a 2012 case, HSBC Holdings Plc admitted to lapses in its anti-money-laundering program that allowed Mexican drug cartels to hide $881 million.)

Ten years ago, Hayes was pumped to be joining a world-beating bank. He grew up in a middle-class household in Buffalo. His father worked on the assembly lines of General Motors Co. and parts maker Delphi Automotive; his mother was a purchasing manager at GM. Hayes considered a career in real estate but opted for finance and earned a place at the University of Pennsylvania’s Wharton School. He spent part of his junior year in 2006 studying business in Hong Kong before returning to Philadelphia. But he longed to go back, so the following year he applied to 12 banks in Hong Kong for a summer internship, landing one at Deutsche Bank. He was thrown into the fray as the global bull market crested in the summer of 2007. “It was a blast,” Hayes says.

After graduating from Wharton in June 2008, Hayes, then 22, jetted off to London to attend Deutsche Bank’s graduate program. Despite the subprime mortgage crackup that summer, these were heady times for Hayes and dozens of other trainees. The bank put them up in swank corporate suites near St. Paul’s Cathedral on the edge of London’s financial district. After sitting through six-hour finance classes, they had the run of the capital’s pubs and dance clubs. Hayes recalls a time when one trainee got so drunk he broke a rib throwing up.

Hayes liked to party, but what he truly savored was the eat-what-you-kill culture inside the bank. The German lender, having shed decades of restraint, had by this time brought in hard-charging traders from Merrill Lynch and other Wall Street stalwarts to help it battle for supremacy in the capital markets. The company wrested business from its rivals and showered its stars with fat bonuses and platinum-plated expense accounts. “Unlike more demure banks, no one at Deutsche was shy as to why they were in the game,” Hayes wrote on a blog last November. “Making money was the goal, and no one was censured for being too flashy.”

And then, during Hayes’s first week as a full-time employee at Deutsche Bank’s Hong Kong operation that September, Lehman Brothers filed for bankruptcy. Whatever career he imagined was washed away in the wake of that epochal event. Over the next few years, Deutsche Bank slashed bonuses and repeatedly reorganized its global trading operations to rein in risk and comply with a phalanx of new capital restrictions. Hayes, who worked on the team that made markets in exchange-traded funds, figured he was earning 30 percent to 50 percent less than he’d expected when he signed on. Amid the downsizing, he clung to a goal he set for himself: “Survive the next cut.”

By early 2013, Hayes had jumped to Citi but encountered the same malaise he’d left behind at Deutsche Bank. Then that April he twigged to Bitcoin in an article on the web. Just four years old, the cryptographic breakthrough had been embraced by cypherpunks and tech-savvy criminals. It would be another year or two before Wall Street luminaries such as Blythe Masters, a onetime JPMorgan Chase & Co. executive who helped develop the credit default swap, would bolster the credibility of the blockchain as a tool for making the capital markets more efficient.

After Citi let Hayes go in a round of cuts in May of that year, he started playing around with Bitcoin in the spot market and with futures contracts introduced by a Russian company called ICBIT. He received a quick lesson in the market’s pitfalls that autumn when he had trouble extracting his cash from Mt. Gox, the Japanese exchange that would collapse in February 2014 following hacks that relieved it of hundreds of thousands of Bitcoins. Above and beyond those kinds of hazards, Hayes, as an arbitrage trader, found the notion of buying and holding Bitcoin pretty dull.

About five months after he left Citi, something else caught his eye: the gaping disparity between prices on different crypto exchanges. Hayes saw that exchanges in mainland China were trading the digital currency at 20 percent to 40 percent more than on Bitfinex, based in Hong Kong and one of the world’s biggest cryptobourses at the time. Hayes started buying Bitcoin on Bitfinex, selling it in the Chinese venues, and pocketing the difference.

It was easy money, but there was a catch: Under Chinese law, Hayes could deposit his proceeds into a local bank account, but he couldn’t wire the money back to Hong Kong. So he started making the one-hour bus ride to his mainland bank in Shenzhen. He’d withdraw the maximum amount allowed, which was 20,000 yuan ($3,100), have a slap-up lunch at the Grand Hyatt Hotel, and return to Hong Kong with bags of cash. He brought his friends into the trade, and soon enough they, too, were on the bus, increasing the amount of cash they could move.

One of them was Andrew Rizkalla, then an equity trader at JPMorgan who’d met Hayes at Deutsche Bank: “One day, Arthur just tapped me on the shoulder and said, ‘Check this out, there’s this thing called Bitcoin,’ and he showed me the arb opportunity. I said, ‘I don’t even care what it is, I could do that all day.’ ”

From the moment Hayes decided to become a trader, he says, he wanted to make tens of millions of dollars. If he’d learned anything during his stints at Deutsche Bank and Citigroup, it was that trading derivatives was far more lucrative than playing the spot markets: You could apply leverage and make mammoth bets on whatever direction the securities moved. Hayes believed Bitcoin had the potential to become a digital global currency, even if it took decades. That, he bet, was a surer path to riches than chasing another trading job in banking, especially if you could create Bitcoin derivatives. “I just loved the fact that with Bitcoin, there wasn’t much out there at that time,” Hayes says. “That’s what excited me. It was an opportunity to do something on my own, to take some risk, rather than going to some structured, monolithic corporation.”

Rather than play the markets himself, Hayes decided to build the venue for others to do that. In January 2014 he set up BitMEX with two partners: Ben Delo, a University of Oxford-educated computer scientist from the U.K. who developed high-frequency trading systems for JPMorgan Chase, and Samuel Reed, a U.S. programmer who specialized in designing superfast web applications. They spent the next 11 months developing and testing the site before going live. By matching buyers and sellers of futures, BitMEX makes money no matter which way cryptocurrencies move. The site—which is translated into five languages, including Chinese, Korean, and Russian—charges settlement fees of 0.05 percent on Bitcoin and 0.25 percent on less liquid offerings such as Litecoin and Monero.

To bypass the banking system, all BitMEX trades are settled in Bitcoin itself, with no conversion to dollars, euros, or other currencies. In its terms of service, BitMEX forbids customers from using the platform to commit financial crimes. Hayes sidesteps U.S. know-your-customer and anti-money-laundering regulations by not accepting investors based there. (BitMEX also denies service to Cuba, Iran, North Korea, Syria, and the disputed region of Crimea.)

Hayes’s approach contrasts with another Bitcoin futures exchange, Crypto Facilities Ltd. It also started up in 2014 but chose to be regulated. Co-founded by Timo Schlaefer, a German financial engineering Ph.D. who used to build quantitative models at Goldman Sachs, Crypto Facilities is based in London and submitted itself to oversight by the U.K. Financial Conduct Authority. The company performs thorough know-your-customer and anti-money-laundering checks on all its clients and must ensure they’re qualified to handle the risks of Bitcoin derivatives with leverage up to 50 to 1. As a result, Crypto Facilities is attracting institutional investors wary of dealing with unregulated entities such as BitMEX. Schlaefer even forged a partnership with the Chicago Mercantile Exchange and notched a big win by formulating the pricing index that underpins the CME’s Bitcoin-U.S. dollar futures contracts.

Still, the daily trading volume on BitMEX is 30 times greater than the flow on Crypto Facilities, according to data from both companies. Why? Catering to retail investors in Asia and Eastern Europe is a big reason. Most of BitMEX’s customers are day traders from China, Japan, and especially South Korea, where Bitcoin is so out of control it’s fetched premiums of 40 percent on local exchanges. “Koreans have two decades of experience with virtual assets in gaming, and they have taken to Bitcoin like nothing we’ve ever seen,” Hayes says. “They’re driving the rally.”

Hayes’s use of financial engineering is also spurring volume. BitMEX’s flagship product is a hybrid derivative, the XBT-USD perpetual contract, that blends features of futures and margin trading. Unlike futures contracts, which eventually expire and trigger delivery of the underlying asset, these instruments reboot three times a day and never terminate. The idea is that this enables investors to go long on Bitcoin or to short it, without interruption. It tracks an index that pairs Bitcoin and the U.S. dollar.

The product isn't cheap: The parties to the trade—whether they're going long or short—must pay a funding rate that can vary from 0 percent to 0.37 percent every eight hours.  And it can be quite risky because it lets investors lever up their bets as much as 100 times. (Hayes says the average leverage ratio was actually 8.6 to 1 during the first half of January.) Traders on BitMEX may lose their deposits of Bitcoin, Hayes says, but the exchange itself bears little credit risk. If a customer on the losing side of a trade can’t meet margin calls, BitMEX will rapidly liquidate the investor’s position. Hayes says that this has happened only once so far and that BitMEX has placed 2,616 Bitcoins in a provision fund to cover liquidations.

Not all retail investors are equipped to grasp the complexities of BitMEX’s offerings or policies. “Trading on margin and leveraging are not a sensible idea for these markets, certainly not at the moment,” says Daniele Bianchi, an assistant professor of finance at Warwick Business School in Coventry, England. “There is too much volatility, and the growth prospects are far from certain.”

The BitMEX website isn’t a paragon of plain English. Its explanation of how the perpetual contract works is rife with terms such as “position marking” and something called the “8-hour time-weighted-average-price,” or TWAP. The mechanics of an “auto-deleveraging system” that liquidates losing positions is laid out in equations. Hayes, tweaking the nomenclature further, says he now prefers to call futures contracts “fixed-date contracts.” While more sophisticated investors may be comfortable with all of this, predicting the performance of cryptocurrencies, especially with the market so choppy, seems more a leap of faith than a science.

For Hayes, this is no time to be cautious, even if he keeps all of his wealth in U.S. dollars, the epitome of noncrypto. With speculation rampant and regulators circling, he and his generation of traders believe they’ve found the chance of a lifetime—an open field where they can deploy all their training and skills to create their own game. To that end, Hayes is recruiting former colleagues and new converts from UBS Group AG and other big banks to push the boundaries of crypto even further.

Greg Dwyer, another veteran of Deutsche Bank’s ETF market-making desk, is BitMEX’s head of business development. Nick Andrianov, a Ukrainian engineer who quit Deutsche Bank’s derivatives desk in 2012, is working on volatility indexes for virtual coins at BitMEX. And Hayes wants to crack open the fixed-income side of the market. “There’s no borrowing, no lending,” he says. “How do we get that started? How do we get companies to finance in crypto? How do we get interest rate swaps?”

Dreaming up such instruments sure beats hunkering down in an industry where the freewheeling days of yore have given way to layoffs, meager volatility, and surveillance programs that monitor traders’ every move, Hayes says: “When people ask me, ‘What is this crypto thing?’ I say, ‘Why are you still at the bank being miserable? Take some risk. Try it out.’ ”

Many are. Gavin Yeung and Neelabh Dixit started trading cryptocurrencies after they left Deutsche Bank’s Hong Kong office in late 2016 and early 2017, respectively. They were blown away by the volatility. So they created a basket of multiple digital coins that would smooth out the ups and downs. Their one-year-old startup, domiciled in the British Virgin Islands, Cryptomover, offers four such indexes.

Rizkalla, the trader who was one of the boys on the Hong Kong-Shenzhen bus in 2013, is betting on foreign exchange. Last October, the Canadian joined Paycase, a Toronto-based money transfer firm, to build a platform that will convert digital coins into Canadian dollars, U.S. dollars, and other currencies—and vice versa. “The thing I was most worried about in coming back to Canada was being bored, but now I’m trading in markets that make Asia look as tame as the S&P,” Rizkalla says.

Hayes’s ambitions may seem grandiose, if not crazy, given the carnage in crypto these days. With the total market value of all 1,495 cryptocurrencies plunging 37 percent in the first 26 days of 2018, to $523 billion, it looks like the euphoria of last year has swiftly given way to anxiety. When you cut to the heart of the Bitcoin phenomenon, there’s one fundamental question: What will it ultimately be used for, and how should that be valued?

Hayes concedes he doesn’t know. In time, he believes, the decentralized computing power underpinning Bitcoin and its kind will foment a new world of digital money and greater financial privacy. “In the short term,” he says, “the use case for crypto is purely guesswork.” But then Hayes is more a mercenary than a true believer. He’s the guy, after all, who keeps his own money in dollars.

For him, what matters is the action. As he said of his days as an intern before the world of banking fell in, it’s a blast. That’s why during the third week of January, as headlines screamed crypto bloodbath and foretold the end of Bitcoin, Hayes wasn’t white-knuckling it in his office. He was in Japan, skiing the fabled powder glades in the mountains of Hokkaido. Over one 24-hour period during his ski trip, BitMEX handled more than $3 billion in trades and took its bite from each and every one.

“As a trader,” he says by phone during a break from the slopes, “this is the best thing you could ever have. We make more money when the market goes down. We love this volatility. This is what we do.”

Robinson covers fintech in London. Vaghela covers market structure in London. With Benjamin Robertson and Frances Schwartzkopff