Tech
Former high school classmates are among the world’s largest cryptocurrency holders
Kyle Davies and Su Zhu founded Three Arrows Capital at their apartment kitchen table in 2012. They are now among the world’s largest cryptocurrency holders, with portfolios worth billions of dollars.
At least for now.
Their portfolios have been shaken in recent days, as environmental concerns about mining, regulatory scrutiny, warnings from Chinese authorities about digital currency payments and a flurry of erratic tweets from Tesla Inc.’s Elon Musk sent prices soaring. For Davies, an early investor in the sector and an evangelist for the underlying technology, the recent volatility is just an anomaly, enough perhaps to scare novice investors, but not for someone who has lived through far more volatile times.
“Bitcoin is down 30% from its highs, it’s actually not down that much,” the 34-year-old said in an interview from Singapore. “I don’t see anyone who’s really that scared.”
Former traders at Credit Suisse Group AG, Davies and Zhu are among the early Wall Streeters who have embraced cryptocurrencies, along with Dan Morehead of Pantera Capital and Mike Novogratz of Galaxy Digital. Now everyone from retail day traders to bankers is jumping in: CNBC reported this month that Aziz McMahon, head of emerging markets sales at Goldman Sachs Group Inc. in London, left the bank after making a fortune trading cryptocurrencies on his own.
While the fortunes of many early devotees rose and fell with the currency’s price swings, cryptocurrency wealth is quickly turning into real dollars for some, both through initial public offerings and traditional revenue-generating companies. Brian Armstrong, co-founder of crypto wallet Coinbase Global Inc., has a net worth of $8.7 billion following his company’s IPO, according to the Bloomberg Billionaires Index, while Binance’s Changpeng Zhao has built the world’s largest cryptocurrency exchange.
Grayscale Palette
Davies and Zhu, also 34, declined to talk about their fortune and took to social media to advise cryptocurrency billionaires to do the same.
However, a filing in January revealed the extent of the firm’s influence, when Three Arrows said it owned a 5.6% stake in Grayscale Bitcoin Trust, a $22 billion fund invested exclusively in the cryptocurrency created by Barry Silbert.
Davies declined to say whether their position had changed or to specify how much of the company’s equity they owned. Most of their other direct investments in cryptocurrencies and related companies are not required to be publicly disclosed.
Grayscale’s stake made Three Arrows the largest shareholder and would have been worth $2.1 billion in April. The trust’s shares have since fallen more than 40% following Musk’s announcement this month that Tesla would stop accepting the digital currency for purchases of its electric cars due to “rapidly increasing use of fossil fuels for Bitcoin mining” and China’s crackdown.
While Musk’s tweet highlighted the environment surrounding Bitcoin, Davies said he doesn’t believe those concerns apply to the cryptocurrency industry as a whole.
“There are a lot of cryptocurrencies that are proof-of-stake, that use very little or no electricity,” Davies said. “That’s the direction a lot of cryptocurrency is going.”
A proof-of-stake setup for a digital currency allows users with significant equity positions to verify transactions. This is comparable to proof-of-work transactions, such as those used in Bitcoin mining, where users must complete complex mathematical problems to access a coin, consuming much larger amounts of electricity.
Derivatives Trader
Davies and Zhu attended high school together, then studied at Columbia University in New York before joining Credit Suisse as derivatives traders in Tokyo. After three years at the Swiss bank, they left and launched Three Arrows Capital to start trading traditional currencies in emerging markets.
“It was a very inefficient market and that’s where we started,” Davies said.
Within three years, they went from working out of their San Francisco apartment to employing about 35 people and trading between 5% and 10% of all local emerging market currency volumes, he said.
They diversified into options, stocks and cryptocurrencies after “bigger and better firms came along that were better than us” at trading emerging FX markets, Davies said. By 2018, the firm was focused exclusively on cryptocurrencies.
Their Singapore-based firm now runs a fund, DeFiance Capital, that invests in decentralized finance, betting that these firms will “eat up traditional finance over the next decade,” according to the group’s website. Investments include InsurAce, which provides insurance services, and CDEX, a cryptocurrency exchange.
‘Out of Measure Voices’
“We’ve been long cryptocurrencies for a while,” Davies said. “We haven’t always been long Ethereum, in fact, we’ve been short for periods of time. What’s the best way to beat Bitcoin right now? Well, it’s just to own Ethereum. The ultimate goal of my book is to beat Bitcoin.”
Davies said that Ethereum is currently the largest cryptocurrency held by the company.
Despite the turbulence created by Musk’s tweets, Davies said he was becoming less concerned about the billionaire’s influence on the cryptocurrency market as the days went by.
“The problem with oversized voices is that they usually don’t last very long if they’re used too much,” Davies said. “If he tweeted every single day, by the end of the year he wouldn’t have any impact on prices.”