Case Study: Using Bitcoin Derivatives in Global Trade

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One of the stated goals of BitMEX is to allow Bitcoin to be used in global trade by eliminating the price volatility. Two entrepreneurs in Kenya and Hong Kong are using Bitcoin and BitMEX futures contracts to import goods into East Africa from China.

China produces goods cheaper and in bigger quantities than anywhere else globally. Kenya is one of Africa’s richest countries and consumes many Chinese finished goods. For Kenyan SMEs (Small and Medium-sized Entrepreneurs), procuring goods to resell locally can be troublesome and quite expensive. This is mainly due to the fact it is hard for them to settle payment between the Kenyan Shilling (KES) and Renminbi (CNY). Multinational companies can cheaply settle cash flows between Kenya and China, and manufacturers might even give them credit, but for SMEs the inability to settle payment means they must buy products second hand from parallel traders at large premiums. This mostly comes down to banks supporting larger organisations over smaller ones.

Robin Omwega is the head of Kenyan IT services firm Wageni Tech and also a Bitcoin enthusiast. Joseph Wang is the founder of Bitquant, a quantitative research firm focusing on Bitcoin and other financial markets. He is also a former JP Morgan quantitative trader. They met via a global Bitcoin chat room and devised a way to help supply East Africa with more affordable goods from China. They found that Bitcoin can serve as the settlement mechanism for payments between them, and have began a trading partnership between Kenya and Hong Kong / China.

The biggest issue with using Bitcoin is the price volatility. In the time between when Robin sends Joseph payment for goods in Bitcoin and they arrive in Kenya, the price can fluctuate wildly and cause losses for Joseph. To eliminate the price risk, Joseph hedges Bitcoin payments by selling BitMEX futures contracts that lock in the USD value.

Robin and Joseph have started by importing USB drives. Robin places an order with Joseph for the drives. Joseph selects a Chinese manufacturer with whom he has formed a business relationship. Joseph pays the manufacturer in CNY and now needs payment from Robin. Robin sends Bitcoin equaling the value of the purchase to Joseph, and the coins are locked in escrow using Bitrated. While they are in escrow, Joseph can’t sell the Bitcoin for CNY and needs to hedge. Joseph goes onto BitMEX and sells futures contracts locking in the USD value of the Bitcoin. Since he can trade on leverage, Joseph only needs to deposit as little as 30% of the value he wants to hedge. The USDCNY exchange rate is quite stable and Joseph isn’t worried about the price fluctuations. Once Joseph receives the goods in Hong Kong, he inspects them and ships them to Robin in Kenya. Robin receives the USB drives and releases the Bitcoin from escrow to Joseph. Joseph then buys back the futures contracts on BitMEX, and exchanges the Bitcoin into CNY on a spot exchange.

Robin and Joseph have been able to use Bitcoin as a clearing mechanism and eliminated the price risk using BitMEX derivatives. Without the use of futures contracts, Joseph exposes his business to price volatility and either must pass this cost onto Robin or not do the deal at all.

BitMEX derivatives are unique in the Bitcoin landscape as they are the only futures that guarantee settlement without socialized losses or clawbacks. With this guarantee, traders around the globe can hedge without fear that fluctuating prices – or other traders’ liquidations – will cause them to lose money.