San Francisco, CALIFORNIA – On a particularly blustery Tuesday night in March, some 200 people crammed into a bar in San Francisco’s ritzy Four Seasons Hotel to discuss cryptocurrencies. On any given evening in the City by the Bay, there are at least half a dozen formal or informal cryptocurrency and blockchain meetups and get togethers, but this one is unusually crowded as 20 and 30-somethings, mainly Asian, scramble to get a glimpse of and hopefully an opportunity to speak with FBG Capital’s Vincent Zhou. Based in Beijing, FBG Capital’s fame and Zhou’s mystique stems from his record in turning a US$20 million investment in cryptocurrencies into US$200 million in a year. Today FBG Capital is one of the world’s biggest crypto-asset managers in Asia and can count among its investors, blue chip names such as Sequoia Capital. Not bad for a company that just over a year ago, didn’t even have a name.
But Zhou’s ascendance was not due to the quantitative analysis or better trading algorithms. To hear Zhou tell it, his personal success and the success of FBG Capital in cryptocurrencies leaned on the one commodity that successful Chinese businessmen have come to rely on for millennia – “guan xi,” or relationships. Growing up in Yancheng, a second-tier city of 7 million people in Jiangsu Province, a few house north of Shanghai, Zhou studied applied math at the University of Electronic Science & Technology, at best a fair to middling college in central China, but he readily admits that he was never there to fill his head with data, instead he was there to fill his network with contacts. Speaking to Forbes Asia, Zhou said,
“Friendship, I think, is the most important thing in college. I forgot all the things I studied.”
FBG Capital’s investment approach relies on three pillars, invest like a venture capitalist in initial coin offerings (ICOs), trade on news and events by moving in and out of digital tokens rapidly and exploit insider relationships and marketing hype to ensure profitability – decentralization and democratization be damned. But the strategy has worked in spades for FBG Capital. After graduating college, Zhou worked for a stint in Beijing as an IT consultant for IBM and then Oracle, but in 2014, he committed US$10,000 of his life savings to trade Bitcoin. A year later, he ditched the job at Oracle to trade Bitcoin full time and increased his stash tenfold to US$100,000 during a period when the bellwether cryptocurrency rocketed from US$270 to US$430. During this period, Zhou relied more on trading skills than the fabled “guan xi,” capitalizing on the inherent inefficiencies of the nascent cryptocurrency market. Unlike stock exchanges, because cryptocurrencies were at the time unregulated in most parts of the world, there were discrepancies in the price of Bitcoin between exchanges. Zhou soon exploited this arbitrage, pocketing the price difference in Bitcoin between different cryptocurrency exchanges.
Zhou soon joined a group of like-minded Chinese traders who pooled their money and by early 2017 had squirreled away US$20 million. That year, Bitcoin would soar past US$20,000 and the ICO market would bubble over to what former U.S. Federal Reserve chairman Alan Greenspan would describe of as “irrational exuberance.” In the rush to get in on the cryptocurrency “gold” rush, investors like Zhou poured into ICOs, sometimes on the back of little more than a white paper and a fistful of promises. Like a rising tide that lifts all ships, there was scarcely a project that didn’t “moon” or rise multiple times on listing on a cryptocurrency exchange. Gordon Chen, a trader who was in the thick of things at the time described FBG Capital’s unorthodox ICO investing approach – examine the founding team, monitor Telegram chat groups, speak to academics, scientists, engineers, investors and community leaders and then decide whether or not to invest. Chen himself said that when he was deciding whether or not to invest in an ICO, he would travel relentlessly to meet with the ICO project teams,
“I only slept three or four hours a night.”
FBG Capital’s investment process, while light on numbers and algorithms worked phenomenally. While other hedge funds in the traditional capital markets were struggling to clear 20 percent returns for their clients, FBG Capital was minting money, with investments in OmiseGO, a decentralized financial services ICO that aims to provide financial services to the unbanked soaring 33 times after FBG Capital bought its coins at US$0.27 each in mid-2017. The firm also invested in the tokens of Zilliqa, an ICO which is speeding up blockchain transactions and returned 567 percent for FBG Capital.
And while FBG Capital is an active trader in cryptocurrencies, Zhou claims that over half of the firm’s revenues come from trading activities, there are some who claim that not all of the firm’s tactics are completely aboveboard. For one, Zhou’s cozy relationships with three of the biggest cryptocurrency exchanges in the world, OKEx, Binance and Huobi, with each processing between US$500 million to US$1 billion worth of trades a day, has ensured that the ICOs that FBG Capital invests in have an easy path to being listed on a major cryptocurrency exchange. And when listing fees can be as much as US$1 million according to some sources, “guan xi” in listing an ICO token on a major exchange may play an outsize role in determining whether an ICO soars or languishes. But it’s not just Zhou’s relationships which make a difference. FBG Capital is a huge volume provider and claims to trade US$10 billion worth of cryptocurrencies monthly – which translates to huge fees for cryptocurrency exchanges and a good enough reason for exchange bosses to pander to FBG Capital. Zhou claims he doesn’t get any “special rights” to influence which ICOs get listed on any exchange, but according to another cryptocurrency hedge fund manager who spoke on condition of anonymity,
“If a big name like FBG Capital or one of the others doesn’t invest in it (the ICO), I won’t invest either.”
The manager added that certain firms have a reputation for bringing up the value of an ICO’s tokens and FBG Capital is one of them. According to Yubo Ruan, founder of Paolo Alto-based 8 Decimal Capital, a rival cryptocurrency hedge fund,
“They (FBG Capital) are flippers. Their reputation is pump and dump.”
Another cryptocurrency hedge fund manager who also spoke on condition of anonymity said that FBG Capital is synonymous with wash trades in the space – the process by which the fund trades with itself (by buying and selling to itself) to create “fake” volume in order to pump up the price of an ICO token and then dump it just as the hype behind the token reaches its nadir and retail investos start pouring in. And because cryptocurrency trading is unregulated, wash trades are not only difficult to prove (thanks to the anonymity provided by cryptocurrencies and the blockchain), they are also not illegal. Even if FBG Capital is indeed wash trading (something which would be illegal in stock exchanges), it is perfectly legal on cryptocurrency exchanges and may yet reflect another way that Zhou and his band of traders ply their craft. But while Zhou is unabashed about making money from cryptocurrencies and capitalizing on the unregulated nature of the space, FBG Capital partner Richard Liu takes a more philosophical view,
“We want to be an institution rather than just people making money.”
So far in 2018, with the price of Bitcoin having fallen by more than 50 percent since its 2017 highs, Liu claims that FBG Capital’s trading still remains profitable but concedes that its ICO investments are down about 30 percent in the current bear market. Which may explain why Zhou has been making successive trips to the United States to raise more money. Given FBG Capital’s track record, it has been an easy sell, with its new Cayman Islands registered Volatility Token Fund already raising US$100 million.