Interview with the founder of Galois Capital: Because I was too afraid of poverty, I gave up mathematics and changed to trading

Original text: thiccy

Compiled by: Yuliya, PANews

Kevin Zhou is known in the cryptocurrency field for its unique trading perspective and market insight. Since entering the Bitcoin market in 2011, his personal account has grown at a CAGR of about 100% per year, and the Galois Capital hedge fund he founded has grown at a CAGR of 35% in five years, with an asset size of US$250 million. The fund, which runs a market neutral strategy, suffered losses for only four months, and no month's drawdown exceeded -1% (excluding the FTX bankruptcy incident). In this exclusive interview, Kevin Zhou shared his legendary experience from being born in Shanghai, from a child to immigrant from a poor family, to being addicted to games, to a cryptocurrency trader, as well as his profound insights and personal participation in major market events such as the Luna collapse and the Ethereum merger.

Early life experience

Q: How did you get involved with cryptocurrencies? What are the signs of childhood that you would be involved in this area so deeply?

When I was a kid, my family was very difficult because we were immigrant families. I was born in Shanghai, China and immigrated to the United States with my parents at the age of three. I was previously raised by my grandparents. My father was studying for a Ph.D. in mathematics at the University of Hawaii, and my mother was studying for a master's degree in electrical engineering. Our family was financially in financial difficulties and often had difficulty maintaining a basic life. Since I was a child, I was inculcated to cherish every penny and not waste it. I am a "key child". I often cook alone at home, basically relying on myself.

My father later became a professor of mathematics and he taught me mathematics since he was a child. I am very talented in mathematics. When I was 11 years old, during the summer vacation of fifth and sixth grades, my father took me to the community college where he taught to attend calculus courses and studied with students much older than me. Many people don’t know that when I was a child, I was actually a math prodigy. I have participated in the Johns Hopkins Talent Search Test, ranked first in Hawaii and ranked around the top 120 in the United States. But later I became addicted to electronic games, and my math ability did not develop further.

In middle school and high school, I was not the best student, with average grades and didn't pursue academics too much. I'm a little rebellious and love reselling Pokemon and Magic cards on the playground, which may be an early sign of my becoming a trader. I still remember when Diablo II first came out, I especially liked trading runes in the in-game market. I find the economic system in the game more interesting than simply upgrading or climbing the rankings. I have always loved games and have played countless models, from StarCraft, Warcraft III, DOTA to Nintendo Stars and Street Fighter IV, strategy games, fighting games, card games, board games, almost everything is included.

Q: What major did you study in college?

I majored in mathematics and economics in college and graduated in 2009. At that time, the economy had just experienced a collapse and I didn’t want to take on the responsibility of an adult immediately, so I continued to study for a master’s degree in economics. Then I went to Wall Street and worked as a backend quantitative analyst at a rating agency similar to S&P. My job was not glamorous. Our team uses MATLAB and C++ to program. Someone writes a model in one language. My task is to copy the same model in another language to ensure that the model is accurate to two decimal places. It's just quality assurance work, my code has never been put into production.

Q: Did you know you wanted to engage in transactions when you were in college?

No, I smoked marijuana almost every day in college, and I had two and a half years of memory completely blurred. However, during that time I read a lot of Wikipedia and philosophy books and had more reflection on the world. I had no idea what to do in the future at that time. Later, my father moved from academics to quantitative finance. I realized that the financial industry made more money, so I decided to give up academics and enter the financial field. My love for video games and my emphasis on money prompted me to choose the trading field. Ultimately, I like the pure way of playing the game. The experience of poverty when I was 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 came into contact with cryptocurrencies in 2011. After returning to school from a trading internship in 2013, I decided to join the field and joined the YC-incubated exchange Buttercoin. The platform tried to make profits through market making business in 2013, but due to the limited market size at that time (for example, the OTC transaction volume was only about 100,000 US dollars, and the price peak of Bitcoin in 2013 was only $1,000), resulting in high profit margins but insufficient overall revenue, which ultimately failed. In the early stages, the understanding of cryptocurrencies was gradually deepened by reading Bitcoin white papers and liberal related works, such as Hayek's "The Road to Slavery", and believed that this technology was worth trying.

Q: Have you put all your money into Bitcoin?

Yes, I started investing when the price of Bitcoin was around $11 and I firmly held it to this day. At that time, I didn’t have much money, I saved up all of my money from my internship, but except for daily expenses, I invested all my money. At that time, it was very difficult to obtain liquidity, the transaction scale was small and the price difference 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 crypto-punk spirit has been diluted.

Q: What did you do after Buttercoin failed?

After Buttercoin closed, I joined Kraken and set up an over-the-counter (OTC) counter, where I worked for two years. Kraken ranked fifth to seventh in the market at that time, mainly dominated the European market, but the business was difficult. Just one month after joining the company, Kraken laid off more than half of his employees. During the bear market, the company took several cost-cutting measures and maintained operations through a round of dilution financing, ultimately successfully tide over the difficulties. In the spring of 2016, Kraken launched Ethereum and shared the market with Poloniex and Gate. At that time, only three platforms supported Ethereum, which provided the company with an adequate 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 unforgettable experiences did you have at the Kraken OTC counter?

Sometimes when the counterparty does not settle, you have to cancel the transaction (DK), which is almost always bad for you. Once the market fluctuated very quickly and I needed to close my overnight risk positions. I thought it was not a big problem, but the situation became very bad. I remember spitting out my position to Cumberland’s founder Bobby Cho and paying him a lot of money on the spread. After waking up that morning, he traded directly, and was unconscious and lost tens of thousands of yuan. Since then, I have set rules to never trade immediately after waking up.

There is also the fork of Ethereum Classic (ETC). After Ethereum fork, all holders obtained ETC, but the price did not soar until a few days later when Poloniex launched ETC. Prior to this, Bobby Cho proposed to acquire Kraken's entire ETC for one cent. But after my discussion with Kraken founder Jesse, I felt that it was not cautious. What if ETC is valuable? If we sell it, we have to buy it back at a high price. We are already tight on funds, which will be a disaster. In the end, we choose to keep ETC. It turns out that this is the right decision because the client has the right to own these ETCs.

The founding of Galois Capital

Q: How did you found Galois Capital after leaving Kraken?

After leaving Kraken in 2017, I founded Galois Capital, a hedge fund for market neutral strategies, and successfully raised about $5.5 million. Although I was not familiar with the process of setting up a hedge fund at that time, the financing was relatively smooth due to the right timing. During this period, I spent about nine months completing the fund establishment and system construction work (if I have experience, I can handle it in one or two months), and finally decided to reject part of the funds because I was uncertain whether more than $5 million in capital could be effectively deployed.

When I left, Kraken was in good condition, his balance sheet was healthy, his cash flow was positive, and his personal equity status was satisfactory.

Q: Why choose the name "Galois"?

My co-founder and I are people with backgrounds in mathematics. I wanted to name it "Julia Capital" in honor of Gaston Julia, a mathematician who studies fractals, but my partner felt the name sounded too feminine. So we chose "Galois", but this is a big mistake because it is a French name and almost no one can pronounce it correctly. Maybe we should choose "Mandelbrot", but the name is too difficult to pronounce. I met the co-founder at the School of Financial Engineering, where he is responsible for technology, and I am responsible for business operations, investor relations and accounting.

Q: What was the early strategy of Galois Capital?

The strategy varies greatly over time. Initially we only did OTC because this is the area we are familiar with. When I left Kraken, Jesse and I reached an agreement on how to split the business: Any well-known crypto company or someone I met before Kraken is a fair competition; but I will leave it to Kraken if I met through Kraken. Jesse is generous and supports me not only in terms of limited partners (LP), but also in terms of operations, and I have always been grateful.

Q: What did you do at the beginning to make money?

In the early days, we mainly made money through OTC, and later we did some basis transactions (returnover arbitrage between futures and spot), and then the DeFi boom. We became one of the biggest earning farmers in Yearn Finance. We once 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 initially discovered during a period when everyone was focusing on Compound mining. The team noticed that a protocol called Curve focused on stablecoin exchanges, with "yTokens" attracting attention. Although it initially seemed suspicious due to website certificate errors, after in-depth research, it was found that yTokens provides a robot consultant-style income management that can automatically rebalance assets between revenue platforms such as Compound and Aave to optimize returns. Due to previous research on the protocol, the team quickly seized the opportunity when YFI launched its mining plan.

We initially built the system using Python, but moved to C++ due to performance issues, which, although time-consuming and complex, laid the foundation for subsequent market making transactions. In addition, the team maintains a market neutral strategy and only uses a small amount of funds for discretionary long and short trading. During the five years of operation, the team experienced only four months of losses, with a maximum drawdown of 1%.

Q: From 2017 to 2020, has the opportunity for delta neutral strategies really increased?

The chances of return of delta neutral strategies have not increased significantly. During this period, the market experienced several months of low returns, and traders had to constantly look for new strategies. As market competition intensifies, alpha returns gradually fade. In the field of over-the-counter trading, institutions such as Cumberland and Circle have the advantage by compressing the price spread. The subsequent addition 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 profitable at one point between 2018 and 2020, the opportunity gradually disappeared as more people participated. Similarly, the income mining sector has become less attractive due to the influx of funds. In the current market environment, traders need to establish a monopoly position in a certain field or turn to a more inefficient market to find opportunities. Flexible response is considered an effective strategy to deal with market changes.

The key to success is to keep a reverse thinking about the market, discover opportunities for yourself to be right and others to be wrong, and tap potential benefits through modeling, backtesting and deep thinking. Taking Tribe and Fei as an example, in April 2021, Fei was decoupled to $0.85 as a stablecoin, and imposed high penalties on redemption due to the design of the agreement. We profit from it by buying Fei for $0.85 and using ETH to hedge the underlying asset risks. Even if the dust returns to zero, we can make profits through hedging strategies. Although this is not the most profitable deal, I think it is a very reverse and clever operation.

Ethereum Merger and Luna Events

Q: Can you explain the whole story of the Ethereum merger?

I once expressed my views on the merger of Ethereum's transition from PoW to PoS, which caused misunderstandings from the outside world that I was "promoting" ETH POW. Actually, I just analyze events from a trading perspective. At that time, Ethereum shifted from Proof of Work (POW) to Proof of Stake (POS), and the market's discussion on residual chain ETH POW continued to heat up. I have suggested trading by buying tokens and shorting the perpetual contract, believing that the tokens may split into two, and the perpetual contract is more likely to track the dominant chain (i.e. ETH PoS). In addition, I also predict that futures basis will diverge, Lido discounts will increase, and bearish bullish ratios may change in a specific direction. The results show that some predictions are accurate, such as the futures basis and Lido discount changes in line with expectations.

However, I also admit that I have overestimated the long-term value of ETH POW, believing it is stable at 2% of the ETH POS network value, compared to only 0.5%. In addition, I had proposed $5 million in consultations with ETH POW founders Chandler Guo and Vitalik, and these remarks sparked anger among many people at the time. But I mean to make fun of the hypocrisy of certain things, such as huge budgets being spent in areas that may not have actual impact. I think if this high fee can create real value in some kind of arms race, it might be worth it.

Q: How did you trade Luna?

Speaking of Luna's deal, I'm actually a little regretful, because we could have made more money.

Simply put, Luna has an algorithmic stablecoin system, and many people store their money on the Anchor platform to earn 20% high returns. But this high yield is actually unsustainable because it is subsidized by Terraform Labs or the Luna Foundation.

I had come into contact with Luna very early, and it had just raised funds. I thought this thing was definitely not good at that time. As a result, looking at it two years later, it actually became the top 20 cryptocurrencies. I was shocked and after careful study, I found that its basic structural problems still exist.

In January 2022, I started discussing Luna’s issue publicly, but we are still waiting for the best time to short. The key turning point was in May, when we found that UST began to deank for about 30 basis points. At this moment I thought, "This is a good opportunity to bet one-way. If it re-anchors, we only lose a little; if we continue to dean, we can make a big profit."

Interestingly, before we started shorting, we kept making that 20% profit on Anchor until the moment the dean occurs, we pulled out all the funds, cleared the UST, and started shorting.

Although we ended up making $15 million, I think we could have made $100 million. Part of the reason is that we dare not do our best, and in addition, we agreed with investors not to be long and short sellers more than 10% of the fund. Even within my team, everyone has different opinions on shorting Luna. Some people also conducted some short-term long trading during Luna's drop from 80 to 40 and then to 20.

The other half of our money is to facilitate liquidation on the Anchor platform, which actually inadvertently helped the protocol run. Ironically, there were later rumors that we were behind the collaborative attack on Luna, and in fact we spent half of our time helping the protocol to perform normal liquidation.

In the final stage of the Luna crash, things got very crazy. Sometimes Luna's price is as low as the exchange needs to adjust the minimum price unit. I remember sometimes you can buy it, and the price will rise from 0.01 to 0.1 in one minute, up 10 times. The craziest thing is that Luna's supply doubled every nine seconds at the time, completely hyperinflation.

Looking back, I should have more courage and tell investors directly: "This is a once-in-a-lifetime shorting opportunity, we must seize it!" and then go all out. However, the return of $15 million was also good, especially considering the size of our fund at that time.

Market changes and future prospects

Q: Do you think trading has become more difficult in recent years?

It is getting harder and harder, only a few short breathing periods occasionally occur in a bear market. In the early days, there were many part-time "retail investors", but now if you want to be professional, you must invest full-time, and even individual traders are becoming increasingly difficult to survive. Although the degree of automation is increasing, in the cutting-edge field, it has not been completely covered by MEV robots or high-frequency algorithms. A true "smart person" can still find opportunities. Just like Michael Burry, he will read the information that others are too lazy to read. The key is to be able to "think more" and grasp the second or third level effects, rather than staring at the primary effect that everyone is fighting for.

Q: You are both a firm believer in Bitcoin and a trader who is extremely cautious about altcoins. How can you balance this dual position?

Saying it is "radical" only holds true if I see the wrong direction. In fact, 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. Altcoins come and go, and their life cycles are astonishingly short, and there are very few projects that can survive two or three cycles. Only Bitcoin has its uniqueness.

Q: So Bitcoin’s long-term belief has not been shaken by cycle fluctuations?

Actually, I'm too optimistic. I thought Bitcoin had reached one million dollars now, but the reality was a little slower. Of course, there is nothing to complain about, and the journey is still very exciting. It's actually very good during the bear market because people will start to think about the questions that have long been "default", such as "What is a currency?" "The battle between PoW and PoS". No one cares about these issues in the bull market, but when the market is in a downturn and the cake becomes smaller and everyone starts to grab share, these core discussions will be restarted.

Q: You have never been attracted by the "utility" of Ethereum and smart contracts?

Not too shaken. My thinking is already very deep, and it will be difficult to change me unless there are major technological changes like quantum computing breaking the elliptic curve or SHA256. However, Bitcoin’s “final state” - how to maintain network security after the block reward is over - is a big risk that I think must face. I tend to think that there will be a forked version of "tailed issuance" eventually, and then funds will be moved gradually.

Q: So there will be more and more forks in the future, and the market will eventually decide which chain is more valuable?

That's exactly that. The number of forks and the timing of forks will be proportional to the degree of "close to the final state". The closer you wait, the more forks, and it is unlikely that you will miss the opportunity.

Q: Looking back on your career in the crypto industry, how do you think of your experience?

I haven't completely quit yet, and I may be back one day when I'm bored. But overall, this journey is quite cool, regretful, accomplished, and fair. In terms of net income, I think it is about the "40 to 60 minutes". I believe that in this world, people will make "the money they should make" most of the time, roughly within an order of magnitude. Although this range is still 100 times different, it is fair.

Q: What changes has the crypto industry changed your personal personality?

It makes me more paranoid and deal with various "marginal characters" every day. But at the same time, it also makes me more hopeful. I was originally desperate about the fiat currency system and the central bank system, but now I feel that Bitcoin is like a beacon in the dark, which has also made me grow a lot. When I entered this industry, I was still an innocent young man, but now I am gone.

Q: What would you say to yourself when you were young?

Start a business early. At that time, I always felt that I wasn't ready yet, but in fact no one would really be "ready". Another thing is: buy more bitcoins, or even borrow money to buy - of course this is not investment advice. Bitcoin’s risk-reward is already worth leverage, and I hardly used leverage back then.

Q: You have already exchanged all fiat currencies for Bitcoin, right?

Almost all of them were changed, but I still felt that it was not enough. As the movie "Margin Call" says, there are three ways to make money: be the first, do the smartest, and cheat. And "being the first one" is much easier than "being 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, I could make money with just a little brain.

Q: Finally, what do you want to say about this world?

Be confident. If you don’t have enough confidence, you will hesitate and miss the opportunity. Of course, you must also remain suspicious and be ready to overturn your conclusions at any time. Both need to coexist. But overall, confidence is a necessary condition - "fire the shot first, ask questions later", which is the key.