There are many great business ideas out there, but how do you find the right one for you? It’s hard enough to get up the courage to start a business, but that’s only the beginning. Now you need to decide what business to start, and it’s not as simple as doing what seems obvious. For example, a friend of mine learned how to design websites while he was in college.
When he decided to start a business, he figured, “I know how to design websites, I guess I’ll start a website design business.” Others have started certain types of businesses because of a hobby, because they heard it was a good way to make money or because someone else dragged them into it.
Sometimes these decisions work out, but often they don’t, and that’s a shame — because if you start a business, it’s likely to consume several years of your life. Asking the following questions can help you make sure you’re starting the right business for you:
Why do you want to start a business? It seems like a simple question, but if you ask different entrepreneurs you’ll get different answers, at least you will if you dig deep enough. Most entrepreneurs will say they want to make the world a better place or make money, but many entrepreneurs use their businesses as a laboratory to experiment and learn, others are driven by a psychological need, and yet others are trying to please someone else. What’s motivating you?
In his book, The Founder’s Dilemmas, Noam T. Wasserman, dean of the Yeshiva University Sy Syms School of Business and former professor of clinical entrepreneurship at the University of Southern California, divided founding entrepreneurs into two types based on their objectives. One type of founder wants money, while the other wants control. It’s a useful exercise to figure out which type you are and how that aligns with your other motivations.
Will it make a profit?
Too many entrepreneurs ask, “Will it make money?” and perhaps they mean “profit” when they say “money,” but it’s good to be specific. Almost any business will make money, but a business can’t survive, thrive or grow unless it has profits. Will your business idea turn a profit? How much? How fast? If you can’t answer those questions, are you sure this is the right business for you?
One hundred years ago, almost every man in the United States owned at least one dress hat, if not several. Men wore them whenever they stepped outside, to work and on dates. Then all the hats disappeared, and today you’d be hard-pressed to walk down a city street and see a single man wearing anything but a ball cap if they’re wearing a hat at all. Imagine all the hat manufacturers and hat sellers who went out of business when hats faded from common fashion, not to mention the suppliers of raw materials to make hats.
On the other hand, when the internet began to grow in the late ’90s, many entrepreneurs recognized the fundamental shift this new technology would bring to society and jumped on the bandwagon. Today, companies that are wholly dependent on the internet like Alphabet, Meta and Amazon are among the largest businesses in the world.
How can you know if demand is growing? Thankfully, the internet provides today’s founders with tools to answer this question in ways our entrepreneurial ancestors couldn’t have imagined. “Using search query data, we can detect breakout trends in different markets to identify rising consumer needs so we can meet them with a solution,” says Mulenga Agley, CEO of Growthcurve, whose company helps entrepreneurs identify and validate new business ideas before assisting them to scale.
Agley says they use Glimpse to gather and analyze data from Google Trends, Google’s own search trend tracking service, to help clients “discover trends before they’re trending.” Agley continues, “With the rapid advancements in machine learning, this technology will become ever more reliable and is one of the best ways to find new business ideas out there.”
Do I have what it takes?
You may have the grit and determination to be an entrepreneur, but do you have the right experience, skills and drive for the specific business you’re thinking of starting?
“After my first exit, I looked back at the experience running my first company Bikewagon to see what made me tick, and how I added value,” says Dale Majors, who is an investor in multiple companies and runs Venture Anyway, a mastermind group for entrepreneurs. “That experience helped me in my next business to know what problems I wanted to solve, the ones I felt best suited for.”
Some lessons only come with time, but one shortcut is to identify a business you want to run, then talk to others who are running that type of business, and ask them what it takes. The answers you get may steer you toward a different opportunity, or they may solidify your plan. Either way, you’re in a much better position.
When a venture capitalist is pitched on an idea, one of the first questions they’ll ask is, “Who’s on your team, and have they done this before?” A VC’s job is to maximize returns and minimize risk, and a team that has been there and done that stands a good chance of being able to do it again.
Whether you plan to raise funding or not, it’s good to ask yourself, “Who’s on my team, and are they the right team to bring my vision to reality?” One red flag to watch out for is team members who have never started or run a business before, let alone the kind of business you plan to start. Another danger sign is when a co-founder wants to get paid the kind of salary they would get in an established business.
Yet another is the co-founder who doesn’t have immediately useful skills that are critical to the business. There are too many red flags to list them all here, but if you consider just a few of them, you’re better off than the entrepreneur who doesn’t give it a second thought and brings on co-founders because they’re friends or because they seem “smart.”
Launching a new business is hard work, but it can also be rewarding. To increase your chances, don’t shy away from asking yourself hard questions. The hardest questions to answer may be the keys to your success.
Illustration by Gracelynn Wan for Forbes; Photos by Rodolfo Glcksberg/EyeEmby/Getty Images; Imran Kadir/Getty Images
For many hedge funds, Elon Musk’s $44 billion “forced” purchase of Twitter represented an easy money trade.“You didn’t have to be a genius to realize that he was going to finish that deal,” said Carl Icahn at the Forbes Iconoclast Summit on November 3, adding that he would have considered waging a proxy fight if the deal fell through.
Icahn told the audience at New York’s Historical Society that he made a profit of around $250 million by investing in Twitter this summer. But he was far from the only one to benefit. Regulatory filings show that billionaire-led hedge funds including Citadel Advisors, Millennium Management, D.E. Shaw and Third Point built large positions in Twitter in the second and third quarters, as well as other firms like Pentwater Capital and Farallon Capital.
Musk signed a merger agreement to buy Twitter for $54.20 per share in April, but the stock was trading as low as $32.65 by July when he tried to terminate the deal. That created an arbitrage opportunity for as much as a 66% return for investors who doubted Musk had much of a chance in the Delaware Court of Chancery to back out.
Icahn’s third-quarter 13-F filing with the SEC shows that he owned 12.5 million Twitter shares as of September 30. He said at the Forbes summit he bought in the mid-$30s–if he bought at an average price of $35 per share and made a $19.20 profit on each one when the deal closed at the original price of $54.20 per share on October 28, he would have netted a $240 million profit.
The only fund that made a bigger bet than Icahn was Naples, Florida-based Pentwater Capital Management, founded by Matthew Halbower in 2007. It bought 18.1 million shares during the second quarter and added another 5.3 million shares as of the end of the third quarter.
If it bought those 24 million shares at Twitter stock’s median closing price of $40.16 in the first quarter and $41.05 in the second quarter and held them through the completion of the acquisition in October, it would have made $324 million in profit, though its 13-F filing shows it hedged some of those gains by buying put options as well. Pentwater didn’t respond to a request for comment.
In all, Forbes found 13 hedge funds that spent upwards of $100 million adding to their Twitter stakes between the end of the first quarter and the end of the third quarter this year. We reached out to each fund to ask for average purchase prices, and estimated that they bought at Twitter’s median closing price in each quarter if more precise information wasn’t available. These funds cumulatively purchased more than 10% of the company in the six months leading up to September 30 and likely made well over $1 billion in profits on the deal.
These numbers don’t include any additional shares the firms may have purchased in October, when the margins were slimmer while Musk finalized the acquisition, and don’t include possible trading that took place within each quarter. 13-F filings show a simple snapshot of each firm’s long stock holdings on the last day of each quarter and don’t provide enough information to pin down exact gains and losses, but often represent the most thorough picture of what funds are buying and selling.
The biggest winners included Hong Kong-based Segantii Capital Management, founded by British investor Simon Sadler, and Farallon Capital, the San Francisco-based firm founded by Thomas Steyer in 1986 and now run by Andrew Spokes.
David Einhorn’s Greenlight Capital initiated a position of 4.3 million shares in the third quarter, his 13-F filing shows, and he wrote in a letter to investors viewed by Forbes that the average purchase price was $37.24 per share. He expected that the Delaware Court of Chancery would be wary of inviting future buyer’s remorse suits if it let Musk walk away.
“The case law on this is quite clear. If it were anyone other than Musk, we would handicap the odds of the buyer wiggling out of the deal to be much less than 5%,” Einhorn wrote in the letter prior to the completion of the deal. “At this price there is $17 per share of upside if TWTR prevails in court and we believe about $17 per share of downside, if the deal breaks. So, we are getting 50-50 odds on something that should happen 95%+ of the time.”
Musk saw the writing on the wall and reversed course in October, agreeing to pay the full price as these investors expected. His first weeks as Twitter’s owner have been marked by confusion and complaints after he opened verification to anyone willing to pay $8 per month, causing a wave of “verified” parody accounts, and laid off 3,700 employees, almost half of its staff. He has warned Twitter’s staff that “bankruptcy is not out of the question,” but if his $44 billion equity investment goes up in smoke, the hedge funds he paid that cash to will be laughing all the way to the bank.
I’m a reporter on Forbes’ money team covering investing trends and Wall Street’s difference-makers. I’ve reported on the world’s billionaires for Forbes’ wealth team
Leading crypto exchange Coinbase reported a Q2 net loss of just under $1.1 billion this afternoon, or $4.98 a share, as sales fell more than had been expected and the company’s company’s stock tumbled 6%.
The beleaguered exchange has been hit hard in recent months by a confluence of declining cryptocurrency market conditions, regulatory pushback and investor uncertainty that has dragged its stock price down over 55% since late March.
Coinbase recorded the majority of its $802.6 million in revenue last quarter–over 80%–from transaction fees on sales and exchanges of cryptocurrency. That’s down 61% from the corresponding 2021 quarter and 35% less than Q1.
Analysts had predicted revenue of $868.4 million for the quarter and an adjusted per share loss only about half as severe as reported. In Q2 2021, the company earned $1.6 billion.
The below-consensus revenue may have been reflected rising use of the exchange by customers who aren’t there currency trading, according to Michael Miller, an equity analyst at Morningstar. “Coinbase’s problem wasn’t so much that customers abandoned it — transacting users were essentially flat sequentially — but that there was a shift toward non-traders, such as those involved in staking.”
Despite the flood of red ink, Coinbase has an ace in the hole: its $6.2 billion of cash in the bank, barely changed from Q1. That figure includes $362 million of stablecoin USDC.
“Coinbase is really caught out with its cost structure, and now that crypto prices have come way down, they’re in a position where they do need to cut costs pretty dramatically,” says Miller. “While they are caught out on the costs side, though, they did go into this crypto downturn with a very strong balance sheet.”
The exchange cut costs aggressively last quarter, laying off 1,100 employees, 18% of its workforce, in mid-June and reducing its marketing outlays from a high point last fall (in which it spent $14 million on a single 60-second Super Bowl ad). Operating expenses, adjusted to remove cryptocurrency impairments, fell to $1.48 billion in Q2 from more than $1.5 billion in each of the two previous quarters but were still higher than $1.3 billion a year earlier.
“Expenses haven’t come down much—they were more or less flat sequentially. Coinbase did reduce cost guidance for the rest of 2022, though,” says Miller. “It does sound like they’re comfortable with this level of losses—they were within the guardrails they set. Unless revenues decline further, I wouldn’t expect to see any further layoffs.”
Coinbase’s web engagement fell dramatically, according to data from Simliarweb: visits to coinbase.com fell 45% in June, even while U.S. sites of competitors like FTX showed them more than doubling. Moreover, Coinbase’s weekly web display ads have dropped by over 35% since early June.
“By looking at web traffic and app traffic, you just see a trend towards somewhat of a decline in engagement for cryptocurrency in general,” says David Carr, senior insights manager at Similarweb. “But for Coinbase, the decrease in the percentage of customers using the app on a regular basis and the decrease in the amount of time they spend on the app are signs of lesser enthusiasm.”
Ben Weiss, CEO of crypto financial services and Bitcoin ATM provider CoinFlip, says the market may be overly pessimistic. “I feel that the market is conflating the performance of crypto assets with the companies in the crypto ecosystem, and therefore the reduction in Coinbase stock price is possibly an overcorrection,” says Weiss. “Coinbase is a household name in the crypto space and is extremely competitive among crypto exchanges. While companies must continue to innovate to stay relevant, Coinbase is still extremely well positioned among exchanges to continue to capitalize in the crypto space.”
Coinbase operates as a remote-first company and has no physical headquarters As part of its SEC filing to go public, the company reported 43 million verified users, 7,000 institutions, and 115,000 ecosystem partners in over 100 countries. It also reported net revenue of $1.14 billion in 2020, up from $483 million the previous year. The company also reported a net income of $322 million after posting a loss in 2019.
Out of the $782 billion worth of assets on the crypto market, some $90 billion worth is held on the Coinbase platform. As of 2018, the company offered buy/sell trading functionality in 32 countries,while the cryptocurrency wallet was available in 190 countries worldwide. In a May 2022 Form 10-Q filing, Coinbase stated that “because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors“.
The “Coinbase Effect” refers to the rise in price of cryptocurrencies listed for sale on a dominant crypto exchange such as Coinbase in the days after the news becomes public. According to Barron’s, the effect of getting a cryptocurrency listed on the exchange plays a big role in what cryptocurrencies gain widespread acceptance.
On February 16, 2018, Coinbase admitted that some customers were overcharged in error for credit and debit purchases of cryptocurrencies. The problem was initiated when banks and card issuers changed the merchant category code (MCC) for cryptocurrency purchases earlier that month. This meant that cryptocurrency payments would now be processed as “cash advances”, meaning that banks and credit card issuers could begin charging customers cash advance fees for cryptocurrency purchases.
Customers who purchased cryptocurrency on their exchange between January 22 and February 11, 2018, could have been affected. At first, Visa blamed Coinbase, telling the Financial Times on February 16 that it had “not made any systems changes that would result in the duplicate transactions cardholders are reporting.” However, the latest statement from Visa and Worldpay on the Coinbase blog clarifies: “This issue was not caused by Coinbase.
In March 2018, Quartz reported that the number of monthly customer complaints against Coinbase jumped more than 100% in January of that year, to 889, citing official Consumer Financial Protection Bureau data, with more than 400 of those categorized as “money was not available when promised”.The article also noted that the company was subsequently increasing its customer service staff to reduce wait times. In December 2021, CNBC reported that Coinbase froze the cryptocurrency GYEN due to a sudden price spike, resulting in many traders losing money.
On July 22, 2022, a former Coinbase product manager, Ishan Wahi, along with Nikhil Wahi (Ishan’s brother) and Sameer Ramani (a friend), was charged in the first-ever insider trading case in cryptocurrency by prosecutors for the Southern District of New York and the Securities and Exchange Commission.According to the complaint filed in SEC v. Wahi, Ishan Wahi allegedly shared information that certain tokens were about to be listed by Coinbase with Nikhil Wahi and Ramani, who then allegedly acted upon that information to make trades for an alleged illicit profit in excess of $1.5 million.
According to federal prosecutors, Ishan Wahi purchased a one-way ticket to India upon being summoned by Coinbase to the company’s Seattle office for a meeting. Wahi was subsequently intercepted by law enforcement from boarding a May 16 flight to India. Coinbase’s chief security officer, Philip Martin, noted that the company provided prosecutors with information from an internal investigation.
In the USA, both the S&P 500 and the Nasdaq are in bear market territory. A bear market is often taken to mean a 20% fall. That’s either from a recent peak, or over a set period of time.But generally, investors tend to think of any sustained upwards run as a bull market. And any significant downwards spell is a bear market. Typically, the average bull market has lasted around five years. The average bear, meanwhile, continues for a little more than a year.
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Might long-term investors be better of if that was the other way round, with more falls than rises? Wouldn’t we have more opportunities to buy cheap shares? To answer that, I can’t think of anything better than looking at how the billionaire boss of Berkshire Hathaway, Warren Buffett, deals with stock market falls.
In the few weeks after the Covid-19 pandemic struck, the S&P 500 fell 30%. The recovery was surprisingly fast, with the index regaining its ground by August. The FTSE 100 took quite a bit longer, mind. What happened the next year, in 2021? The S&P 500 gained 28.7%, while Buffett’s Berkshire Hathaway slightly bettered it with 29.6%. Buying shares while they were depressed by the pandemic was clearly a good plan.
Major bear market
But that’s nothing compared to the carnage resulting from the the financial crash, which kicked off in 2007. Between a high point in October that year, and the beginning of March 2009, the S&P 500 crashed by a whopping 56%.
Berkshire Hathaway suffered too, albeit with a softer fall of 32%. Now what do we see if we wind forward a decade? From the depths of the banking crash in 2009, the S&P 500 had gained 280% by the same point in 2019. Buffett’s shareholders did a bit better on 290%, and they’d started from a significantly lower initial fall.
Just like the Covid market slump, the financial crash provided investors with a great time to buy. And those who were panicking and selling while shares were down? Well, we can see what they missed.
Fear and greed
Buffett is famed for buying heavily when he sees great companies unfairly marked down. In his 1986 letter to Berkshire Hathaway shareholders, he explained how he avoids trying to time the market bottoms. Instead, he said: “Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.“
That approach to bear markets has served Buffett, and his shareholders, well.From Buffett taking control of Berkshire Hathaway in 1965 up to the end of 2021, the S&P 500 managed a total return (including dividends) of more than 30,000%. Berkshire, meanwhile, soared by a total of 3.6 million percent!
We’re not all going to be as good as Buffett. But even investors who make regular purchases in an index tracker will benefit from bear markets over the long term. The simple truth is that when markets are down, we can buy more shares for the same money.
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If you have reviewed these basics and you still have money at the end of the month, here’s a quick look at further investment options to consider.
1. Increase your deferral to your 401(k) or other workplace retirement plan.
The maximum amount you can contribute each year through elective salary deferrals is $19,500.1 And if you’re 50 or older, you can also make a “catch up” contribution of up to $6,500.2
“Bumping up your deferral, even by 1 or 2%, may not seem like much. But with the power of compounding earnings, it can make a big difference over 20 or 30 years,” says Heather Winston, CFP®, assistant director of financial advice and planning for Principal®. Also, weigh the difference between saving in a tax-deferred account vs. a taxable one.
Winston says if your account has taken a dip, increasing your contributions may help you reach your retirement goal sooner. If the markets have dropped, the money you defer to your retirement plan may go further by allowing you to buy more shares.
To get started: If you have a retirement account from your employer with services by Principal, you can log in to increase your contribution. First time logging in? Here’s how you create an account.
2. Add to your traditional or Roth Individual Retirement Account (IRA).
Good news: You have until July 15, 2020, to make a 2019 contribution to an IRA, thanks to recent legislation. (And you can always make a 2020 contribution now, too.)
The maximum annual contribution to a traditional IRA is $6,000. If you’re 50 or older, the IRA catch-up contribution limit is $1,000. (Read the basics of IRAs.)
Depending how much money you make and if you’re not covered by a retirement plan at work, you may be able to deduct all or a portion of your traditional IRA contributions from your taxes (details are on the IRS website). The more you save today, the more you’ll likely have years down the road.
With a Roth IRA, you can contribute up to $6,000 per year using after-tax money. If you’re 50 or older, you can add an extra $1,000 per year. To contribute the full amount to a Roth IRA, you need to make less than:
$124,000 if you’re single or file as head of household.
$196,000 if you’re married filing jointly.
You can withdraw your annual Roth IRA contributions without taxes or penalties at any time. If you have earnings, you can withdraw them tax-free in retirement.3
To get started: Review our IRA solutions to see what may be best for you.
If you’ve never invested in stocks and mutual funds outside of your workplace retirement plan or IRAs, you could start by opening a brokerage account. (Not sure if you’re ready? Read “Four signs you’re ready to start investing.”)
You’ll need to know your risk tolerance. A risk profile (PDF) places you on a scale somewhere between conservative (more averse to risk) and aggressive (more tolerant of risk). Your profile can help you select investments and build a portfolio at a level of risk you’re comfortable with, while continuing to work toward your goals.
This year is a good test of investors’ tolerance for risk. If you find yourself worrying about whether your portfolio is gaining or losing day-to-day, or certainly if you’re losing sleep, you may need to adjust your risk profile. When your risk tolerance matches your investment portfolio, volatile times can be less concerning for you.
If you invest, consider diversifying—spreading your money across multiple types of investments—to help reduce the risk of losing money.
Large companies and technology stocks will likely continue to perform well.
Look at small companies and sectors like energy, materials, consumer discretionary (non-essential goods and services), and financials to improve.
Stocks in emerging countries may perform better than those in developed countries outside the United States.
For bonds, go for higher yields on high quality corporate and municipal bonds at short-intermediate maturities.
4. Set aside money in a 529 savings plan for a child or grandchild.
A 529 savings plan allows you to invest your money to be used for qualified education expenses such as college, apprenticeship programs, and K-12. This includes tuition, room and board, mandatory fees, and textbooks. You designate how and where it’s spent.
Before opening an account, get a full understanding of the plan, including its tax benefits, fees, expenses, and investment options. You can open a 529 plan offered by any state, so shop around for the one that best suits your needs.
To get started: If you’re interested in learning about our 529 plan, visit scholarsedge529.com.
5. Contribute more to a Health Savings Account (HSA).
If you’re enrolled in a High Deductible Health Plan (HDHP), you can add a total of $3,550 a year for single coverage or a max of $7,100 for family coverage in 2020. If you’re over age 55 but under 65, you can also make “catch-up” contributions to your HSA, to the tune of $1,000 more per year.
An HSA offers a triple advantage on federal income taxes: Money put in isn’t taxed, it grows tax-free, and you’re not taxed when you take money out for medical expenses. Plus you decide how the funds are invested, and how you’ll use the money for health care expenses.
To get started: Talk to your employer’s human resources department about how to contribute more to an HSA associated with your HDHP.
The co-founders of an influential multi-billion-dollar crypto hedge fund have suddenly gone MIA right at the moment that people want their money. Days of swirling rumors have been followed by harder evidence that Three Arrows Capital, or 3AC, is ghosting its business partners as it attempts to avoid insolvency after the firm overleveraged itself ahead of the recent “crypto winter,” which has plagued the industry and led to a steep decline in crypto prices.
Now, firms are scrambling to distance themselves from 3AC to assure customers that their funds won’t go down with the ship run by Zhu Su and Kyle Davies, two childhood friends who suddenly found themselves wielding billions in the Wild West of emerging crypto markets. “Losing a bet is one thing, but at least be honorable and not drag others into your bets who have nothing to do with it. Certainly don’t ghost on everyone since potentially, they could’ve helped you,” the head of trading at a firm that does business with 3AC said on Twitter.
The largely self-funded hedge fund has become a prominent investor in almost all arenas of the cryptocurrency industry, as well as a prolific borrower, making its inability to meet margin calls over the last week—money a firm has to pony up to cover losses—a subject of concern throughout the sector.
Rumors of issues at 3AC started to percolate over the last week, as crypto prices plunged and evidence emerged that the firm was frantically unloading tokens. “They’re not responding to anyone,” an unnamed source at a crypto trading firm told The Financial Times. As the frustration grew louder, 3AC’s normally prolific co-founders went silent, until Su sent out a cryptic and ominous tweet on Tuesday. “We are in the process of communicating with relevant parties and fully committed to working this out,” he wrote, without any additional context. He has not tweeted since, nor has Davies.
The head of trading at the Hong Kong-based firm 8 Blocks Capital, Danny Yuan, released a statement on Wednesday saying that 3AC had stopped responding after 8 Blocks requested a large withdrawal on Monday, June 13. After 3AC didn’t respond, a member of Yuan’s firm noticed that “~1m was missing from our accounts with them.” Additional attempts at contact went nowhere, and 8 Blocks Capital went elsewhere for information.
“What we learned is that they were leveraged long everywhere and were getting margin-called. Instead of answering the margin calls, they ghosted everyone. The platforms had no choice but to liquidate their positions, causing the markets to further dump,” Yuan said. In other words, 3AC had bet on crypto prices going up with borrowed funds (or “leverage” to use financial speak) meaning that any gains are higher but losses hurt much more. Yuan then called on platforms holding funds associated with 3AC to freeze them.
Zhu and Davies made their first public comments in an interview with the Wall Street Journal published on Friday morning, where they said that they were exploring asset sales and “rescue by another firm,” the outlet reported, and hoped to secure an arrangement with their creditors to give the firm some runway.
The apparent crisis afflicting 3AC is already sending ripples through the industry. On Thursday, the yield generation platform Finblox said that the company would pause reward distributions and limit withdrawals for all customers as it evaluated the effect of 3AC’s financial stress on its platform. 3AC is an investor in Finblox, the company said.
The crypto lender BlockFi would not confirm if BlockFi had liquidated 3AC’s position, saying in a statement to Motherboard that it is against company policy to “comment on specific counterparties.” But BlockFi added that it “exercised our best business judgment recently with a large client that failed to meet its obligations on an overcollateralized margin loan.” (Unnamed sources told TheFinancial Times that BlockFi had indeed liquidated 3AC’s position.)
The stench of 3AC is so strong that even those who are not attached to the company have felt it necessary to distance themselves. Tether, the stablecoin currency, for one, issued a statement calling rumors that it had lending exposure to 3AC “categorically false.”
The question is whether 3AC is a canary in the coal mine for crypto hedge funds, or just an overzealous fund that took too many risks. Mike Novogratz, the founder of Galaxy Digital Holdings, for one, has said he expects two-thirds of crypto hedge funds to soon fail.
Since its founding in 2012, 3AC has become one of the largest crypto hedge funds in the world, and its demise could cause trouble throughout the sector. Zhu and Davies, friends since high school who attended Columbia and joined Credit Suisse as derivatives traders together, started the fund while they lived in an apartment together, and have since become rumored to be “among the world’s biggest crypto holders,” according to Bloomberg.
3AC mostly (and maybe only) managed the co-founders’ own money, which Zhu claimed allowed 3AC “the ability to make very good decisions on market timing.” It also allowed for unusually large, risky bets, and for a while, the firm achieved astonishing results. The analytics firm Nansen estimated 3AC held $10 billion in blockchain assets as of March, and the company has investmentsall over the crypto ecosystem. As of December, that included a stake in the world’s biggest Bitcoin fund, the Grayscale Bitcoin Trust, that reportedly exceeded 5 percent.
To increase the size of its bets, 3AC borrowed money from a number of firms, dramatically increasing its potential windfall. But when the crypto market started to crash, 3AC got hit hard. The hedge fund had invested in places like the play-to-earn game Axie Infinity and the Solana blockchain, whose token values have crashed in recent months. It also invested in Celsius, a crypto bank that has suspended withdrawals indefinitely amid rumors of insolvency. 3AC’s worst bet may have been Luna, a cryptocurrency that plummeted to near-zero in a dramatic implosion.
Now, 3AC appears to be scrambling to find money wherever it can, such as by selling massive amounts of tokens. One NFT fund the company had backed even moved all of its 70 pieces of digital art on SuperRare, which it had spent more than $20 million collecting, to a single address, indicating asset consolidation.
Ahead of the crash, Zhu and Davies professed an almost religious devotion to the potential of cryptocurrency. The libertarian Su had repeatedly pushed his “supercycle” thesis publicly, claiming crypto prices would continuously rise as it gained prominence relative to government currencies. “I also think we are entering an era where the potential of Bitcoin to become one of the key reserve currencies of people and nations is becoming clearer than ever,” Zhu told Bloombeg in April. “It will not be a smooth ride, but it will be a highly meaningful one for those who take the journey.”
On May 27, Zhu admitted that his grand supercycle theory was “regrettably wrong,” adding that “crypto will still thrive and change the world every day,” comments that Davies echoed in the Wall Street Journal. “We have always been believers in crypto and we still are,” he said.
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