Original: thiccy
Compiled by: Yuliya, PANews
Kevin Zhou is well-known in the cryptocurrency space for his unique trading perspective and market insights. Since entering the Bitcoin market in 2011, his personal account has grown at a compound rate of about 100% per year, and the Galois Capital hedge fund he founded has grown at a compound rate of 35% in five years, with assets of $250 million. The fund, which runs a market neutral strategy, has only had four months of losses, and no month has had a drawdown of more than -1% (excluding the FTX bankruptcy). In this exclusive interview, Kevin Zhou shares his legendary experience from being born in Shanghai to a poor immigrant family to being addicted to games and then to being a cryptocurrency trader, as well as his deep insights and personal participation in major market events such as the Luna crash and Ethereum merger.
Early life
Q: How did you first get involved in cryptocurrency? What were the signs during your childhood that you would become so deeply involved in this space?
My family was in a very difficult situation when I was a child because we were an immigrant family. I was born in Shanghai, China, and immigrated to the United States with my parents when I was three years old. I was raised by my grandparents before that. My father was studying for a doctorate in mathematics at the University of Hawaii, and my mother was studying for a master's degree in electrical engineering. Our family was financially tight and often had difficulty maintaining basic living. From a young age, I was taught to cherish every penny and not waste it. I was a "key child" and was often alone at home, cooking for myself, and basically self-reliant.
My father, who later became a math professor, taught me math when I was young. I was very talented in math, and when I was 11, during the summer between fifth and sixth grade, my father took me to the community college where he taught to audit calculus courses, studying with students who were much older than me. Many people don't know that I was actually a math prodigy when I was young. I took the Johns Hopkins University Talent Search test and ranked first in Hawaii and around the top 120 in the United States. But then I became addicted to video games and my math skills did not develop further.
In middle school and high school, I wasn’t the best student, with average grades and little academic pursuits. I was a bit of a rebel and loved to resell Pokémon and Magic: The Gathering cards on the playground, which may have been an early sign that I was going to be a trader. I remember when Diablo II first came out, I loved trading runes on the in-game market. I found the economic system in the game more interesting than simply leveling up or climbing the leaderboard. I have always loved games and have played countless games, from StarCraft, Warcraft III, and DOTA to Super Smash Bros. and Street Fighter IV, strategy games, fighting games, card games, board games, and almost everything else.
Q: What major did you study in college?
I majored in mathematics and economics in college and graduated in 2009. The economy had just collapsed, and I didn't want to take on adult responsibilities right away, so I continued to study for a master's degree in economics. After that, I went to Wall Street and worked as a back-end quantitative analyst at a rating agency similar to Standard & Poor's. It was not a glamorous job. Our team programmed in two languages, MATLAB and C++. Someone wrote a model in one language, and my task was to replicate the same model in another language and ensure that the model was accurate to two decimal places. This was just quality assurance work, and my code was never put into production.
Q: Did you know you wanted to be a trader when you were in college?
No, I smoked pot almost every day in college, and my memory of two and a half years is completely blurry. However, during that time, I read a lot of Wikipedia and philosophy books, and I reflected more on the world. I had no idea what I wanted to do in the future. Later, my father moved from academia to quantitative finance, and I realized that the financial industry could make more money, so I decided to give up academia and go into finance. My love for video games and the importance of money led me to choose the field of trading. Ultimately, I like the pure gameplay of the game. My experience of being poor as a child made me hate poverty because it is really difficult to live without money.
Enter Cryptocurrency
Q: How did you get into the cryptocurrency space?
I was exposed to cryptocurrency in 2011. After returning to school from a trading internship in 2013, I decided to join the field and joined Buttercoin, an exchange incubated by YC. The platform tried to make money through market making in 2013, but due to the limited market size at the time (for example, the single OTC transaction volume was only about $100,000, and the peak price of Bitcoin in 2013 was only $1,000), the profit margin was high but the overall income was insufficient, and it ultimately failed. In the early stages, by reading the Bitcoin white paper and related works on liberalism, such as Hayek's The Road to Serfdom, I gradually deepened my understanding of cryptocurrency and believed that this technology was worth trying.
Q: Have you invested all your money in Bitcoin?
Yes, I started investing in Bitcoin when it was around $11 and have held on to it ever since. I didn’t have much money at the time, all I had saved from my internship, but I put everything I had in it, except for daily expenses. It was very difficult to get liquidity, the transaction size was small and the spread was large, and the industry was full of suspicious people and immature operations. Over time, the industry has gradually attracted more technical talents, but the early cypherpunk spirit has been diluted.
Q: What did you do after Buttercoin failed?
After Buttercoin shut down, I joined Kraken and built the OTC desk, where I worked for two years. At the time, Kraken was ranked fifth to seventh in the market, mainly dominating the European market, but business was difficult. Just one month after joining the company, Kraken laid off more than half of its employees. During the bear market, the company took a number of cost-cutting measures and was able to maintain operations through a round of dilutive financing, and finally successfully survived the difficulties. In the spring of 2016, Kraken launched Ethereum, dividing the market with Poloniex and Gate. At that time, only three platforms supported Ethereum, which provided the company with a sufficient revenue base. Subsequently, the market gradually expanded, and the bull market started in early 2017, and the company's business ushered in significant growth.
Q: What are some of your memorable experiences at the Kraken OTC counter?
Sometimes the counterparty doesn't settle and you have to cancel the trade (DK), which is almost always against you. One time the market was moving very fast and I needed to close out my risky position overnight. I thought it was not a big problem, but it turned out to be very bad. I remember I spit out the position to Bobby Cho, the founder of Cumberland, and paid him a lot of money on the spread. I woke up that morning and traded directly, and I was not sober, and I lost tens of thousands of dollars. Since then, I have made a rule not to trade immediately after waking up.
There was also the Ethereum Classic (ETC) fork. When Ethereum forked, all holders received ETC, but the price did not skyrocket until Poloniex listed ETC a few days later. Before that, Bobby Cho had proposed to buy all ETC from Kraken for one cent. But after discussing with Kraken founder Jesse, I felt that it was not prudent. What if ETC was valuable? If we sold it, we would have to buy it back at a high price later. Our funds were already tight, and it would be a disaster. In the end, we chose to keep ETC. It turned out to be the right decision because customers have the right to own these ETC.
Creation of Galois Capital
Q: How did you start Galois Capital after leaving Kraken?
After leaving Kraken in 2017, I founded Galois Capital, a hedge fund with a market-neutral strategy, and successfully raised about $5.5 million. Although I was not familiar with the process of setting up a hedge fund at the time, the fundraising was relatively smooth because the timing was right. During this period, it took me about nine months to complete the fund establishment and system construction (if you have experience, you can get it done in one or two months), and finally decided to reject some of the funds because I was not sure whether I could effectively deploy more than $5 million in capital.
I left Kraken in good shape, with a healthy balance sheet, positive cash flow, and a satisfactory personal equity position.
Q: Why did you choose the name "Galois"?
My co-founder and I both come from math backgrounds. I originally wanted to name the company “Julia Capital” in honor of Gaston Julia, a mathematician who studied fractals, but my partner thought that sounded too feminine. So we chose “Galois,” which was a big mistake because it’s a French name that almost no one can pronounce correctly. Maybe we should have chosen “Mandelbrot,” but that’s too hard to pronounce. My co-founder and I met in financial engineering school. He’s in charge of technology, and I’m in charge of business operations, investor relations, and accounting.
Q: What was Galois Capital’s initial strategy?
Strategies change a lot over time. Initially we only did OTC because that was an area we were familiar with. When I left Kraken, Jesse and I reached an agreement on how to split the business: any well-known crypto company or people I knew before Kraken were fair game; but the non-well-known customers I met through Kraken, I would keep with Kraken. Jesse was very generous and supported me not only in the limited partner (LP) aspect, but also helped with operations, which I am always grateful for.
Q: What did you do to make money when you first started?
In the early days, we mainly made money through OTC, and later we did some basis trading (profit arbitrage between futures and spot). Later, with the DeFi boom, we became one of Yearn Finance’s largest profit farmers. We used the pseudonym "yfi_whale" to participate in the mining of YFI tokens, accounting for less than a quarter of the total supply.
YFI was first discovered during a period when everyone was focused on Compound mining. The team noticed that a protocol called Curve focused on stablecoin exchange, and the "yTokens" in it attracted attention. Although it initially seemed suspicious due to the website certificate error, after further research, it was found that yTokens provided a robot advisor-style yield management that could automatically rebalance assets between yield platforms such as Compound and Aave to optimize returns. Due to the team's previous research on the protocol, they quickly seized the opportunity when YFI launched its mining plan.
We initially built the system in Python, but migrated to C++ due to performance issues. Although this process was time-consuming and complicated, it laid the foundation for subsequent market-making transactions. In addition, the team maintained a market-neutral strategy and only used a small amount of funds for discretionary long and short transactions. In five years of operation, the team only experienced four months of losses, with a maximum drawdown of 1%.
Q: Have opportunities for delta-neutral strategies really increased from 2017 to 2020?
The return opportunities of delta neutral strategies have not increased significantly. During this period, the market experienced several low-return phases lasting several months, and traders had to constantly look for new strategies. As market competition intensified, alpha returns gradually declined. In the OTC field, institutions such as Cumberland and Circle took advantage by compressing spreads, and the subsequent entry of Alameda and Jump further increased the intensity of competition and squeezed the space for other participants. In terms of basis trading, although it was once profitable from 2018 to 2020, the opportunity gradually disappeared as more people participated. Similarly, the field of yield mining has become less attractive due to the influx of a large amount of funds. In the current market environment, traders need to establish a monopoly in a certain field or turn to less efficient markets to find opportunities. Flexibility is considered an effective strategy for coping with market changes.
The key to success is to think contrarian to the market, find opportunities where you are right and others are wrong, and explore potential gains through modeling, backtesting, and deep thinking. Take Tribe and Fei as an example. In April 2021, Fei was decoupled from the stablecoin to $0.85, and a high penalty was imposed on redemption due to the protocol design. We profited by buying Fei at $0.85 and using ETH to hedge the risk of the underlying asset. Even if Fei goes to zero, we can still make a profit through the hedging strategy. Although this is not the most profitable trade, I think it is a very contrarian and smart operation.
Ethereum merger and Luna event
Q: Can you explain the whole Ethereum merger thing?
I once expressed my views on the merger of Ethereum from PoW to PoS, which caused misunderstandings from the outside world that I was "promoting" ETH POW. In fact, I was just analyzing the event from a trading perspective. At that time, Ethereum was switching from Proof of Work (POW) to Proof of Stake (POS), and the market discussion on the residual chain ETH POW continued to heat up. I suggested trading by buying tokens and shorting perpetual contracts, thinking that the tokens might split into two, and the perpetual contracts were more likely to track the dominant chain (ie ETH PoS). In addition, I also predicted that the futures basis would diverge, the lido discount would increase, and the put-call ratio might change in a specific direction. The results showed that some of the predictions were accurate, such as the changes in the futures basis and lido discount were in line with expectations.
However, I also admit that I overestimated the long-term value of ETH POW, believing that it would stabilize at 2% of the value of the ETH POS network, while it is actually only 0.5%. In addition, I once made $5 million consulting suggestions to ETH POW founders Chandler Guo and Vitalik, and these remarks aroused the anger of many people at the time. But my original intention was to make fun of the hypocrisy of certain things, such as huge budgets being spent on areas that may have no actual impact. I think if this high fee can create actual value in some kind of arms race, then it may be worth it.
Q: How did you trade Luna?
Speaking of the Luna deal, I actually feel a little regretful because we could have made more money.
In short, Luna has an algorithmic stablecoin system, and many people deposit their money on the Anchor platform to earn a high return of 20%. However, this high return is actually unsustainable because it is subsidized by Terraform Labs or the Luna Foundation.
I came across Luna very early on, when it had just raised funds. I thought it would not work. Two years later, it became a top 20 cryptocurrency. I was shocked, and after careful study, I found that its basic structural problems still existed.
In January 2022, I started discussing Luna’s problems publicly, but we were still waiting for the best time to short. The key turning point was in May, when we found that UST began to de-anchor by about 30 basis points. At this time, I thought: "This is a good opportunity to bet in one direction. If it re-anchors, we will only lose a little; if it continues to de-anchor, we can make a lot of money."
Interestingly, before we started shorting, we had been making that 20% profit on Anchor until the moment the unpegging occurred, at which time we withdrew all funds, liquidated UST, and then started shorting.
Although we ended up making $15 million, I think we could have made $100 million. Part of the reason was that we didn’t dare to go all out, and part of the reason was that we agreed with investors not to do more than 10% of the fund. Even within my team, there were different opinions on shorting Luna. Some people took some short-term long trades when Luna fell from 80 to 40 and then to 20.
The other half of our money came from facilitating liquidations on the Anchor platform, which inadvertently helped the protocol run. Ironically, we were later rumored to be behind the coordinated attack on Luna, when in fact we were helping the protocol run normal liquidations half the time.
At the end of the Luna crash, things got really crazy. Sometimes the price of Luna was so low that the exchange had to adjust the minimum price unit. I remember sometimes you could buy it, and a minute later the price went from 0.01 to 0.1, which was 10 times higher. The craziest thing was that at the time, the supply of Luna was doubling every nine seconds. It was completely hyperinflationary.
Looking back, I should have been more courageous and told investors directly: "This is a once-in-a-lifetime short opportunity, we must seize it!" and then go all in. But $15 million was not bad, especially considering the size of our fund at the time.
Market changes and future prospects
Q: Do you think trading has become more difficult in recent years?
It is getting harder and harder, with only a brief respite in the bear market. In the early days, there were many part-time "retail players", but now if you want to be professional, you have to be full-time, and even individual traders are finding it harder and harder to survive. Although the degree of automation is increasing, in the frontier areas that have not been fully covered by MEV robots or high-frequency algorithms, the real "smart people" can still find opportunities, just like Michael Burry, who reads page by page the materials that others are too lazy to read. The key is to be able to "think one step further" and seize the secondary or tertiary effects, rather than focusing on the primary effects that everyone is grabbing.
Q: You are a firm believer in Bitcoin, but also an extremely cautious trader of altcoins. How do you balance this dual stance?
Calling it "radical" is only true if I'm looking in the wrong direction. In fact, the Galois Fund also has Bitcoin shares, and users can subscribe with BTC. We then conduct margin trading based on BTC to achieve "BTCβ+market neutral α". But for me personally, I really believe in Bitcoin. The life cycle of altcoins is surprisingly short, and there are very few projects that can survive two or three cycles. Only Bitcoin has its uniqueness.
Q: So the long-term belief in Bitcoin has not been shaken by cyclical fluctuations?
Actually, I was too optimistic. I thought Bitcoin would have reached $1 million by now, but the reality is a little slower. Of course, there is nothing to complain about, and the journey is still very exciting. The bear market is actually good because people will start to think about those long-standing "default" questions again, such as "What is currency?" "PoW vs. PoS" and so on. No one cares about these issues in the bull market, but when the market is sluggish and the pie becomes smaller, everyone starts to fight for a share, and these core discussions will be restarted.
Q: Have you never been attracted by the “practicality” of Ethereum and smart contracts?
I haven't been too shaken. I've already thought deeply about it, and unless there is a major technological change like quantum computing breaking the elliptic curve or SHA256, it will be difficult for me to change my mind. But the "final state" of Bitcoin - how the network security will be maintained when the block reward ends - is a big risk that I think must be faced. I tend to think that there will be a forked version with "tail issuance" in the end, and then the funds will be gradually migrated.
Q: So there will be more and more forks in the future, and eventually the market will decide which chain is more valuable?
That’s right. The number of forks and the timing of forks will be proportional to the degree of “closeness to the final state”. The closer to the “end”, the more forks there are, and the less likely you are to miss the opportunity.
Q: Looking back on your career in the crypto industry, how do you view your experience?
I haven't quit completely yet. I might come back when I get bored one day. But overall, this journey is pretty cool. There are regrets, achievements, and it's fair. In terms of pure income, I think it's probably between the "40th and 60th percentiles." I believe that most of the time in this world, people will earn "the money they deserve," which is roughly within an order of magnitude. Although there is still a 100-fold difference in this range, it's still fair.
Q: How has the crypto industry changed your personality?
It made me more paranoid, dealing with all kinds of "marginal characters" every day. But it also made me more hopeful. I used to feel hopeless about the legal currency system and the central bank system, but now I feel that Bitcoin is like a beacon in the darkness, and it has also made me grow a lot. When I entered this industry, I was still an innocent young man, but now, my innocence is gone.
Q: What would you say to your younger self?
Start a business early. I always felt that I was not ready at that time, but in fact, no one is really "ready". Another thing is: buy more Bitcoin, and even borrow money to buy it - of course this is not investment advice. The risk-return of Bitcoin is enough to make it worth leveraging, and I hardly used leverage back then.
Q: Have you converted all your fiat currencies into Bitcoin?
I changed almost everything, but it still felt not enough. Just like the movie "Margin Call", there are three ways to make money: be the first, be the smartest, and cheat. And "being the first" is much easier than "being the smartest". In the current market, everyone is competing for IQ density, and it is too difficult to fight with top players such as Jump, Jane Street, GCR, and Jordi. In the past, you could make money as long as you had a little brain.
Q: Finally, what do you want to say to the world?
Be confident. Without enough confidence, you will hesitate and miss opportunities. Of course, you must also be skeptical and be ready to overturn your own conclusions at any time. The two need to coexist. But overall, confidence is a necessary condition - "shoot first, ask questions later", this is the key.
