Original text: thiccy

Translation: Yuliya, PANews

Kevin Zhou is known in the cryptocurrency field 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, while the hedge fund he founded, Galois Capital, has grown at a compound rate of 35% over five years, reaching an asset size of $250 million. This fund, which operates a market-neutral strategy, has only experienced losses in four months, and no month's drawdown has exceeded -1% (excluding the FTX bankruptcy incident). In this exclusive interview, Kevin Zhou shares his legendary journey from being born in Shanghai to immigrating from a financially struggling family, becoming addicted to gaming, and then becoming a cryptocurrency trader, along with his profound insights and personal involvement in major market events such as the Luna collapse and the Ethereum merge.

Early Experiences

Q: How did you get involved with cryptocurrency? Were there any signs in your childhood that indicated you would engage so deeply in this field?

I grew up in a very difficult family situation 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, having been raised by my grandparents before that. My father was pursuing a PhD in mathematics at the University of Hawaii, and my mother was studying for a master's in electrical engineering. Our family was financially struggling, often barely able to make ends meet. From a young age, I was taught to cherish every penny and not waste anything. I was a "latchkey kid," often home alone, cooking for myself, essentially self-sufficient.

My father later became a mathematics professor, and he taught me math from a young age. I had a talent for mathematics; at 11, during the summer between fifth and sixth grades, my father took me to audit a calculus course at the community college where he taught, studying alongside students much older than me. Many people don’t know that I was actually a math prodigy as a child. I participated in the talent search test at Johns Hopkins University, ranking first in Hawaii and around the top 120 in the nation. However, I later became addicted to video games, and my math skills did not develop further.

In middle and high school, I was not the best student; my grades were average, and I didn’t pursue academics too seriously. I was a bit rebellious, enjoying trading Pokémon and Magic: The Gathering cards on the playground, which might have been an early sign of my future as a trader. I remember when Diablo II was released, I particularly enjoyed trading runes in the in-game market. I found the economic system in the game more interesting than just leveling up or climbing the leaderboard. I have always loved games, having played countless titles, from StarCraft, Warcraft III, DOTA, to Super Smash Bros. and Street Fighter IV, covering strategy games, fighting games, card games, and board games.

Q: What was your major in college?

I majored in mathematics and economics in college, graduating in 2009. At that time, the economy had just experienced a collapse, and I didn’t want to take on adult responsibilities right away, so I continued to pursue a master's in economics. After that, I went to Wall Street, working as a backend quantitative analyst at a rating agency similar to Standard & Poor's, which was not a glamorous job. Our team programmed in both MATLAB and C++; some people wrote models in one language, and my job was to replicate the same models in the other language, ensuring accuracy 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 pursue trading while in college?

No, during college, I was smoking weed almost every day, and I have a fuzzy memory of about two and a half years. However, during that time, I read a lot of Wikipedia and philosophy books, which led to more reflection on the world. I had no idea what I wanted to do in the future. Later, my father transitioned from academia to quantitative finance, and I realized that the finance industry made more money, so I decided to abandon academia and enter finance. My love for video games and my emphasis on money led me to choose trading. Ultimately, I enjoy the pure gameplay of games. My experiences of being poor as a child made me hate poverty because living without money is really hard.

Entering Cryptocurrency

Q: How did you get into the cryptocurrency field?

I got involved with cryptocurrency in 2011, and after returning to school from a trading internship in 2013, I decided to dive into the field and joined Buttercoin, an exchange incubated by Y Combinator. The platform attempted to profit through market-making in 2013, but due to the limited market size at the time (for example, OTC trades were only about $100,000, and the peak Bitcoin price in 2013 was only $1,000), the profit margins were high but overall revenue was insufficient, leading to its failure. In the early stages, I deepened my understanding of cryptocurrency by reading the Bitcoin white paper and related libertarian literature, such as Hayek's "The Road to Serfdom," and I believed this technology was worth trying.

Q: Did you invest all your money into Bitcoin?

Yes, I started investing when Bitcoin was around $11 and have held it firmly ever since. At that time, I didn’t have much money, just what I saved from my internship, but aside from daily expenses, I put all my money into it. At that time, liquidity was very difficult to obtain, trading volumes were small, and spreads were large, with the industry filled with dubious characters and immature operations. Over time, the industry gradually attracted more technical talent, but the early cypherpunk spirit had been diluted.

Q: What did you do after Buttercoin failed?

After Buttercoin shut down, I joined Kraken and established an OTC desk, where I worked for two years. At that time, Kraken ranked fifth to seventh in the market, primarily dominating the European market, but the business was tough. Just a month after I joined, Kraken laid off more than half of its staff. During the bear market, the company implemented several cost-cutting measures and managed to stay afloat through a round of dilution financing, ultimately successfully weathering the storm. In the spring of 2016, Kraken launched Ethereum, splitting the market with Poloniex and Gate, as there were only three platforms supporting Ethereum at the time, which provided the company with a solid revenue base. Subsequently, the market gradually expanded, and the bull market began in early 2017, leading to significant growth in the company's business.

Q: What memorable experiences did you have at the Kraken OTC desk?

Sometimes trading counterparts would not settle, and you had to cancel the trade (DK), which almost always worked against you. I remember a time when the market was very volatile, and I needed to close out an overnight risk position, thinking it wouldn’t be a problem, but it turned out to be a disaster. I recall giving my position to Bobby Cho, the founder of Cumberland, and paying him a hefty sum on the spread. I woke up that morning and traded directly, my mind not clear, and lost tens of thousands. Since then, I made a rule to never trade immediately after waking up.

There was also the incident with the Ethereum Classic (ETC) fork; after the Ethereum fork, all holders received ETC, but the price only skyrocketed days later when Poloniex launched ETC. Before that, Bobby Cho had proposed to buy all of Kraken's ETC at one cent each. However, after discussing with Kraken founder Jesse, I felt it was unwise; what if ETC had value? If we sold it and later had to buy it back at a high price, it would be a disaster since our funds were already tight, so we ultimately chose to keep the ETC. It turned out to be the right decision, as clients had the right to own those ETC.

Founding Galois Capital

Q: After leaving Kraken, how did you establish Galois Capital?

After leaving Kraken in 2017, I founded the market-neutral hedge fund Galois Capital 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 timing was right, and fundraising went relatively smoothly. During this period, I spent about nine months completing the fund setup and system building (if experienced, it could be done in one or two months), and ultimately decided to turn down some funds because I was uncertain whether I could effectively deploy more than $5 million in capital.

When I left, Kraken was in good shape, with a healthy balance sheet and positive cash flow, and my personal equity situation was also satisfactory.

Q: Why did you choose the name "Galois"?

Both my co-founder and I have a mathematics background. I initially wanted to name it "Julia Capital" to honor the mathematician Gaston Julia, who studied fractals, but my partner thought that name sounded too feminine. So we chose "Galois," but that was a big mistake because it’s a French name that almost no one can pronounce correctly. Perhaps we should have chosen "Mandelbrot," but that name is also too convoluted. I met my co-founder at a financial engineering school; he was responsible for technology, while I handled business operations, investor relations, and accounting.

Q: What was Galois Capital's initial strategy?

The strategy has changed significantly over time. Initially, we only did OTC because that was our area of expertise. When I left Kraken, Jesse and I reached an agreement on how to split the business: any well-known crypto company or anyone I knew before Kraken was a fair competition target; however, I would leave the lesser-known clients I met through Kraken to them. Jesse was very generous, supporting me not only in terms of limited partners (LPs) but also providing operational assistance, for which I have always been grateful.

Q: What did you do initially to make money?

In the early days, we primarily made money through OTC, then we did some basis trading (arbitrage between futures and spot), and later during the DeFi boom, we became one of the largest yield farmers for Yearn Finance, participating in YFI token mining under the pseudonym "yfi_whale," accounting for less than a quarter of the total supply.

YFI was initially discovered during a time when everyone was focused on Compound mining. The team noticed a protocol called Curve that focused on stablecoin exchanges, and the "yTokens" caught our attention. Although it initially seemed suspicious due to a website certificate error, after in-depth research, we found that yTokens provided a robo-advisory style of yield management, automatically rebalancing assets between yield platforms like Compound and Aave to optimize returns. The team seized the opportunity quickly when YFI launched its mining program due to our prior research on the protocol.

We initially built the system using Python, but due to performance issues, we migrated to C++, although this process was time-consuming and complex, it laid the foundation for subsequent market-making trading. Additionally, the team maintained a market-neutral strategy, using only a small amount of capital for discretionary long and short trading. Over five years of operation, the team only experienced four months of losses, with a maximum drawdown of 1%.

Q: Did the opportunities for delta-neutral strategies really increase from 2017 to 2020?

The return opportunities for delta-neutral strategies have not significantly increased. During this period, the market experienced several months of low return phases, forcing traders to constantly seek new strategies. As market competition intensified, alpha returns gradually diminished. In the OTC trading space, institutions like Cumberland and Circle gained an advantage by compressing spreads, and the subsequent entry of Alameda and Jump further heightened competitive intensity, squeezing out other participants. In terms of basis trading, although there were periods of considerable profitability from 2018 to 2020, this opportunity gradually disappeared as more people got involved. Similarly, the yield farming sector became less attractive due to a flood of capital. In the current market environment, traders need to establish a monopoly in a certain area or turn to less efficient markets to find opportunities. Flexibility is considered an effective strategy to cope with market changes.

The key to success lies in maintaining a contrarian mindset towards the market, identifying opportunities where you are right and others are wrong, and uncovering potential profits through modeling, backtesting, and deep thinking. For example, with Tribe and Fei, in April 2021, Fei decoupled from its stablecoin peg to $0.85 and imposed high penalties on redemptions due to its protocol design. We profited by buying Fei at $0.85 and hedging the underlying asset risk with ETH. Even if Fei went to zero, we could still profit through our hedging strategy. Although this was not the most profitable trade, I believe it was a very contrarian and clever move.

Ethereum Merge and Luna Incident

Q: Can you explain the whole situation regarding the Ethereum merge?

I previously expressed my views on Ethereum's transition from PoW to PoS, which led to misunderstandings that I was "promoting" ETH PoW. In reality, I was analyzing the event from a trading perspective. At that time, Ethereum was transitioning from proof of work (PoW) to proof of stake (PoS), and discussions about the residual chain ETH PoW heated up. I suggested trading by buying tokens and shorting perpetual contracts, believing that the tokens might split into two, while the perpetual contracts were more likely to track the dominant chain (i.e., ETH PoS). Additionally, I predicted that the futures basis would diverge, Lido discounts would increase, and the put-call ratio might shift in a specific direction. The results showed that some predictions were accurate, such as the changes in futures basis and Lido discounts aligning with expectations.

However, I also admit that I overestimated the long-term value of ETH PoW, thinking it would stabilize at 2% of the ETH PoS network value, while it actually was only 0.5%. Furthermore, I had proposed a $5 million consulting suggestion to ETH PoW founders Chandler Guo and Vitalik, which angered many at the time. My intention was to mock the hypocrisy of certain matters, such as large budgets being spent in areas that might have no real impact. I believe that if such high costs could create actual value in some kind of arms race, then it might be worth it.

Q: How did you trade Luna?

Speaking of trading Luna, I actually feel a bit regretful because we could have made more money.

In simple terms, Luna had an algorithmic stablecoin system where many people deposited money on the Anchor platform to earn a high yield of 20%. However, this high yield was unsustainable because it was subsidized by Terraform Labs or the Luna Foundation.

I encountered Luna early on when it had just raised funds. I thought to myself that this thing was definitely not going to work. Two years later, I looked back and was shocked to see it had become one of the top 20 cryptocurrencies. After careful study, I found that its fundamental structural issues still existed.

In January 2022, I began publicly discussing the problems with Luna, but we were still waiting for the best time to short it. The key turning point came in May when we noticed that UST began to decouple by about 30 basis points. At that moment, I thought, "This is a good opportunity for a one-way bet. If it re-pegs, we only lose a little; if it continues to decouple, we can make a lot of money."

Interestingly, before we started shorting, we had been earning that 20% yield on Anchor until the moment of decoupling, at which point we withdrew all our funds, liquidated UST, and then began to short.

Although we ultimately made $15 million, I feel we could have made $100 million. Part of the reason is that we were hesitant to go all in, and we had agreed with investors not to exceed 10% of the fund in long and short positions. Even within my team, there were differing opinions about shorting Luna. Some people engaged in short-term long trades while Luna dropped from 80 to 40 to 20.

Another half of our profits came from facilitating liquidations on the Anchor platform, which inadvertently helped the protocol operate. Ironically, later on, there were rumors that we were the masterminds behind a coordinated attack on Luna, while in reality, we spent half the time helping the protocol with normal liquidations.

In the final stages of Luna's collapse, things became very chaotic. Sometimes Luna's price dropped so low that exchanges had to adjust the minimum price unit. I remember at times you could buy in, and a minute later the price would jump from 0.01 to 0.1, a tenfold increase. The craziest part was that at that time, Luna's supply doubled every nine seconds, leading to complete hyperinflation.

Looking back, I should have been bolder and directly told investors, "This is a once-in-a-lifetime shorting opportunity, we must seize it!" and then go all in. However, a $15 million profit is still good, especially considering the size of our fund at the time.

Market Changes and Future Outlook

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

It has become increasingly difficult, with only occasional brief respites during bear markets. In the early days, there were many part-time "retail players," but now if you want to be professional, you must be fully committed, and even individual traders are finding it harder to survive. Although automation is increasing, in cutting-edge areas, it has not yet been completely covered by MEV bots or high-frequency algorithms; true "smart people" can still find opportunities, just like Michael Burry, who reads through materials that others are too lazy to look at. The key is to "think one step further," capturing secondary or tertiary effects rather than just focusing on the primary effects that everyone is competing for.

Q: You are both a staunch Bitcoin believer and an extremely cautious trader regarding altcoins. How do you balance this dual stance?

Saying it’s "aggressive" only holds if I misjudge the direction. In fact, Galois Fund also holds Bitcoin shares, and users can subscribe with BTC, which we then use for margin trading based on BTC, achieving "BTCβ + market-neutral α." But personally, I truly believe in Bitcoin. Altcoins come and go, with incredibly short lifecycles; projects that can survive two or three cycles are rare. Only Bitcoin has its uniqueness.

Q: So your long-term belief in Bitcoin has not wavered due to cyclical fluctuations?

Actually, I was too optimistic. I originally thought Bitcoin would reach a million dollars by now, but reality is a bit slower. Of course, there’s nothing to complain about; the journey has still been very exciting. The bear market is actually good because people start to rethink those questions that were long "taken for granted," such as "What is money?" and "The PoW vs. PoS debate." These questions are ignored in bull markets, but when the market is down and the pie shrinks, everyone starts to fight for shares, reigniting these core discussions.

Q: Have you ever been attracted by the "practicality" of Ethereum and smart contracts?

Not really. My thinking has gone very deep; unless there is a significant technological change like quantum computing breaking elliptic curves or SHA256, it’s hard to change my mind. However, the "final state" of Bitcoin—how to maintain network security after block rewards end—is a major risk that I believe must be addressed. I tend to think that a fork version with "tail emissions" will eventually emerge, and then funds will gradually migrate.

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

Exactly. The number of forks and the timing of forks will be proportional to the degree of "approaching the final state." The closer we get to the "finish line," the more forks there will be, and it’s unlikely to miss the opportunity.

Q: Looking back at your career in the crypto industry, how do you view your experience?

I haven’t completely exited; I might come back one day when I get bored. But overall, this journey has been pretty cool, with regrets and achievements, and it feels fair. In terms of pure returns, I think I’m probably in the "40th to 60th percentile." I believe that in this world, most of the time, people will earn "what they are supposed to earn," roughly within an order of magnitude. Although this range still has a 100-fold difference, it’s still relatively fair.

Q: How has the crypto industry changed your personal character?

It has made me more paranoid, dealing with various "marginal figures" every day. But at the same time, it has also given me more hope; I used to feel despair about the fiat currency system and central banking, but now I see Bitcoin as a lighthouse in the dark, and it has helped me grow a lot. When I entered this industry, I was still an innocent young person, but now that innocence is gone.

Q: What would you say to your younger self?

Start a business earlier. Back then, I always felt I wasn’t ready, but in reality, no one is ever truly "ready." Also, buy more Bitcoin; I should have even borrowed money to buy it—though this is not investment advice. The risk-reward ratio of Bitcoin is already worth leveraging, and I hardly used leverage back then.

Q: Have you converted all your fiat currency into Bitcoin?

Almost all of it, but I still feel it’s not enough. As the movie "Margin Call" says, there are three ways to make money: be the first, be the smartest, or cheat. And "being the first" is much easier than "being the smartest." In today’s market, everyone is competing on IQ density, battling top players like Jump, Jane Street, GCR, and Jordi, which is very tough. In the past, you could make money just by having a bit of brains.

Q: Finally, is there anything you want to say to the world?

Have confidence. Without enough confidence, you will hesitate and miss opportunities. Of course, you also need to maintain skepticism and be ready to overturn your conclusions at any time. These two need to coexist. But overall, confidence is a necessary condition—"shoot first, ask questions later," that’s the key.

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