New York: Kyle Davies and Su Zhu started Three Arrows Capital at the kitchen table of their apartment in 2012. Now they're among the world's biggest crypto holders with a portfolio worth billions of dollars. At least for the moment.
Their portfolio was rocked in recent days as environmental concerns over mining, regulatory scrutiny, warnings by Chinese authorities about digital currency payments and a flurry of erratic tweets by Tesla Inc's Elon Musk whipsawed prices. For Davies, an early investor in the space and an evangelist for the underlying technology, the recent volatility is just a blip, enough perhaps to scare off newbie investors, but not for someone who has experienced far more volatile periods.
"Bitcoin's down 30% off the highs, it's really not down very much," the 34-year-old said in an interview from Singapore. "I don't see anyone really being that spooked."
Former traders for Credit Suisse Group AG, Davies and Zhu, the two are among the Wall Street pioneers who've embraced crypto, along with Dan Morehead of Pantera Capital and Mike Novogratz of Galaxy Digital. Now everyone from retail day traders to bankers are jumping in: CNBC reported this month that Aziz McMahon, head of emerging market sales for Goldman Sachs Group Inc. in London quit the bank after making a fortune trading cryptocurrencies for himself.
While many of the early devotees' fortunes rose and fell on the currency's price swings, crypto wealth is quickly turning into real dollars for some, whether through initial public offerings or companies that bring in traditional revenue. Brian Armstrong, co-founder of crypto-wallet Coinbase Global Inc., has a net worth of $8.7 billion after his firm's IPO, according to the Bloomberg Billionaires Index, while Binance's Changpeng Zhao created the world's largest crypto exchange.
Davies and Zhu, also 34, have resisted talking about their fortune and recommended on social media that crypto billionaires do the same.
However, a filing in January revealed the extent of the firm's influence, when Three Arrows reported it owned a 5.6% stake in the Grayscale Bitcoin Trust, a $22 billion fund invested solely in the cryptocurrency set up by Barry Silbert.
Davies declined to say whether their position had changed or specify how much of the firm's capital belonged to them. Most of their other direct investments in cryptocurrencies and related companies don't need to be publicly disclosed.
The Grayscale stake made Three Arrows the largest shareholder and would have been worth as much as $2.1 billion in April. The trust's shares have since tumbled more than 40% following Musk's announcement this month that Tesla would suspend accepting the digital currency for purchases of its electric cars because of "rapidly increasing use of fossil fuels for Bitcoin mining" and regulatory clampdowns from China.
Despite the environmental spotlight Musk's tweet placed on Bitcoin, Davies said he doesn't believe that those concerns apply across cryptocurrency trading as a whole.
"There are many cryptocurrencies that are proof-of-stake, which use very little if any electricity," Davies said. "That is the direction that a lot of crypto is headed in."
A proof-of-stake setup for a digital currency allows users with significant equity positions to verify transactions. That compares with proof-of-work transactions, such as those used in Bitcoin mining, where users have to complete complex math problems to access a coin, consuming much greater volumes of electricity.
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 quit and launched Three Arrows Capital to begin trading traditional currencies in emerging markets.
"It was a very inefficient market, and that's where we got our start," Davies said.
Within three years, they went from working in their San Francisco apartment to hiring about 35 people and trading 5% to 10% of all local emerging market currency volumes, he said.
They diversified into options, equities and crypto after "bigger and better firms came in and were better than us" in FX emerging-markets trading, Davies said. By 2018, the firm concentrated exclusively on crypto.
Their Singapore-based company now runs a fund, DeFiance Capital, that invests in decentralized finance, betting that these businesses will "eat traditional finance over the next decade," according to the group's website.
"We have been long crypto for a while," Davies said. "We've not always been long Ethereum, in fact we've been short for periods of time, too. 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 outperform Bitcoin."
Davies said that Ethereum is currently the firm's largest cryptocurrency holding.
Despite the turbulence created by Musk's tweets, Davies said he gets less worried about the billionaire's influence on the crypto market with each passing day.
"The thing about outsized voices is they usually don't last very long if they're used too much," Davies said. "If he were to tweet every single day, by the end of the year he would have no price impact."