The team behind EMX is creating a derivative exchange market that will bridge traditional and digital financial markets.  Led by two Carnegie Mellon founders with backgrounds in traditional financial markets, they are providing cryptocurrency holders with a single platform to trade crypto, traditional equity, commodity, and currency futures. EMX recently closed an equity round with Bain Capital, $105 Billion Assets under Management (“AUM”) and Jaan Tallinn (Co-Founder of Skype). They were seeded by Hashed, a major South Korean investment fund, in 2018. 

Market Analysis 

The past two months have been historic for Bitcoin futures setting multiple record highs for volume in June. On June 26, the Chicago Mercantile Exchange (“CME”) reported $1.6 billion in volume and $373 million in open interest for Bitcoin contracts. This is not a trend that is going unnoticed, in fact it is exactly what the smart money in the space expected to happen.

Silently and mostly through equity investment, the premier investors in the digital currency space, have been acquiring interests in derivative and institutional trading platforms. Dragonfly Capital Partners, a new Venture Capital (“VC”) fund led by Alexander Pack (Bain Capital Ventures) and Bo Feng (Ceyuan Ventures) raised $100M in October 2018 and has been near exclusively investing in these projects. Of the six investments listed on their current portfolio (crunchbase), five are focused on improving trading. Similarly, Bain Capital Ventures, Polychain Capital, and numerous other Silicon Valley VCs have been actively investing in these projects. 

The current major players in the space are CME, Bitmex, and Deribit. As of this writing, Bitmex has a trading volume of $6B USD and the CME has a trading volume for futures of 9,320 contracts (5 BTC/contract). Of this group, the CME is the least favorable for the everyday crypto trader. All Bitcoin contracts on the CME are cash settled meaning the actual use of Bitcoin or other digital coins is not required for a transaction. As a result, users of the platform must deposit FIAT to open positions. Depositing FIAT can be a lengthy process and hurt the trader since markets are constantly changing. Conversely, Bitmex and Deribit only accept BTC for transactions. 

The CME strongly favors institutional and/or high net worth traders over the average retail trader. Its matching engine processes orders in time-priority, so traders are advantaged by being as physically proximate as possible to the exchange. To benefit from this, traders have been known to setup servers as close as possible to the exchange, sometimes even in the same building. Additionally, trading firms allocate significant resources to removing any and all latency from their servers to ensure their orders are processed earliest. While these solutions are available to certain parties, the everyday trader does not have the financial means to relocate or compete and is severely disadvantaged while trading futures on the CME. 

Bitmex and Deribit are currently the preferred choice for retail traders when trading futures. However, like the CME, the largest downside to using these platforms is fairness. Bitmex has a reputation for processing trades slowly. A recent study by their competitor, Deribit, showed that on average it takes 1.11 seconds for an order to completed on Bitmex. For comparison, this same order on EMX will take between 50-100 milliseconds, over 20x as fast. This issue is further complicated because Bitmex has an internal trading desk which creates a conflict of interest. Though not confirmed, it is likely that their trading desk does not have the same latency concerns. Deribit does not have the same latency issues at Bitmex but like the CME, they do process orders on a first come first serve basis.  

The derivative and trading platform market in the crypto space is rapidly growing. The best investors in digital assets are fully supporting its growth and see a future where everyone is transacting on a trading platform with derivative capabilities. EMX is postioned perfectly to capture the market share missed by its competitors. Neither Bitmex or Deribit offers the option to trade in non crypto futures and while the CME does, it is not built for the everyday trader. Additionally, both Bitmex and Deribit ban US traders from using their platforms but EMX is already speaking with American regulators and working towards operating in the US. By allowing digital asset deposits, multiple futures trading, and ensuring fairness, EMX will be a new strong option for the everyday trader. 

Team Highlights: 

Co-Founder: Jim Bai – Carnegie Mellon graduate who was a VP at Citibank for 6 years. Before Co-Founding EMX, he went on to become a Quantitative Portfolio Manager at Graham Capital Managemen (founded in 1994, $13B AUM). 

Co-Founder: Craog Austin – Carnegie Mellon graduate with Jim, who began his career at Microfot as a Software Engineering for 5 years. He went on to become a VP at AQR Capital Management ($203B AUM) where he led the buildout of nearly all front-office systems. 

VP of Engineering: Evan Rothmayer – Microsoft (3 years), Amazon (5 years), Intuit (4 years)  

VP of Growth: Sohyung Kang – Viacom (9 years), HBO (4 years) 

How it Works

EMX will list both crypto futures and traditional equity, commodity, and currency futures. Some of the initial contracts to be listed will include: BTC-USD, ETH-USD, EMX-USD, EMX Large Cap Crypto Index, US Equity Index, and Oil. EMX currently only accepts BTC deposits but in the future, they plan to accept a large variety of digital assets including stable coins. 

Trading on the Platform

1. Register on EMX, Pass the KYC check, and deposit BTC

2.  Send an order to the exchange*

*Leverage will be used when creating an order on the EMX platform. By using leverage, the trader risks their collateral but has the capability to achieve much larger gains. Currently, a 15x rate will be applied for BTCUSD futures, see example below:

1. Alice deposits 1 BTC. BTC is currently valued at $10,000, so Alice has $10,000 available for trading

2. Alice purchases 1 BTCUSD contract for $10,000, requiring $2,250 for initial margin ($10,000 * 15%). She now has $7,750 available for trading.

3. BTCUSD increases to $12,000. Alice makes $2,000 in unrealized PNL on this increase ($12,000 * 20%). She still has her initial margin of $2,250 but she can now trade her initial remaining balance of $7,750 and her profit of $2,000. By purchasing the 1BTCUSD contract valued at $10,000 for just $2,250, Alice made over 100% gains on this trade. 

Once the order is submitted, it will enter the EMX auction-based matching model. This model relies on frequent batch auctions, the same which are currently used on the London Stock Exchange and NASDAQ. Contrary to a first-come-first serve trading system which benefits high-frequency traders, batch auctions achieve fairness by de-emphasizing speed. On the EMX platform, orders received from traders will be entered into batches occurring every 250 milliseconds. Using these batches will remove the ability for a high-frequency trader to trade most of an order book before everyone else can participate by breaking their trade orders up into different periods. In this system, orders will be matched at a price that maximizes executable volume known as the crossing price. Market orders are matched first, followed by limit orders. The figure below, from the EMX whitepaper, illustrates the matching process. 

Conclusion – 

The most successful Venture Capital Funds: Bain Capital, Polychain Capital, a16z, and Dragonfly all standout by creating market trends and not simply following them. Analysis of their recent investments and current market conditions strongly indicates that institutional and derivative trading platforms will be the next big thing in the blockchain space. To compete with traditional markets, the blockchain space needs trading platforms that allow traders to do more than just spot trade. Derivative trading is a fundamental part of traditional markets, but it is seriously lacking in the current crypto market. EMX combines traditional and crypto markets without compromising on fairness. It has all the tools needed to capture market share from its competitors. The team is also working toward securing a license to operate in the United States. If and when the wave of trading platforms hits, EMX could become the go-to platform for the everyday trader.  


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