Crypto Heavyweights Coinbase, Polychain And Paradigm Invest $28 Million In Hong Kong Crypto Trading Firm

The founding team of Amber, a Hong Kong crypto trading firm. Before Amber, four of them were traders … [+] PHOTO CREDIT: AMBER

The crypto market is thriving in Asia—today it’s home to at least 80% of global crypto trading. Now top U.S. crypto investors, including Pantera Capital, Paradigm, Polychain, Coinbase and Dragonfly are lunging at an opportunity for a piece of that market. They’re sinking $28 million into Hong Kong-based crypto trading firm Amber at a $100 million valuation.

Amber started in 2015, when a group of five twenty-somethings in Hong Kong—four of which were Morgan Stanley traders—formed a company called Amber AI. They initially used artificial intelligence algorithms to trade Chinese stocks and other securities, but they pivoted to crypto in the summer of 2017, a time when there were huge arbitrage opportunities. For example, they could buy bitcoin on one exchange for $7,300 and immediately sell it on another for $7,700, pocketing a 5% gain. “I remember first trying it out, and we couldn’t believe it was true,” says Tiantian Kullander, 28, Amber’s CFO. “We had come from fixed income [bond trading] where you have to fight for every basis point.” (One basis point equals 0.01%.) Between October and December 2017, Amber made 100% to 200% gains per month, Kullander says, although its total assets were only in the single-digit millions of dollars.

The firm profited by trading both its own capital and crypto startups’ money. Many new crypto companies had raised tens of millions of dollars in initial coin offerings (ICOs), and they turned to Amber to earn a return on the digital assets they weren’t using to fund their businesses. In 2018, a year when bitcoin fell 70% to $3,800, Amber made $50 billion in trades and earned a 40% average return, Kullander says. In addition to arbitrage, they focused on market making—quickly buying and selling cryptocurrencies and taking a small “spread,” or profit, on each transaction.  Today In: Money

Over the past 18 months, Amber started pursuing a bigger vision beyond running a lucrative trading shop: becoming a technology company. Since crypto is a nascent industry, the complex tools required by traders who want to pursue sophisticated strategies haven’t been built. 

Amber has written software to support its own trading, and like New Jersey startup Tagomi, it’s trying to create a platform where it can serve large, professional investors with high-tech needs. One way they do this is by linking to dozens of exchanges so they can route customers’ trading orders to the markets offering the best prices. Amber is also starting to offer more financial services like lending, so investors can trade with borrowed money and potentially widen their gains, and options, or financial securities that give investors more leverage and the right to buy or sell an asset at a predetermined price. Last year, Amber dropped the “AI” from its name because it doesn’t use artificial intelligence in its core operations, even though it had originally planned to.

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In 2019, Amber made between $10 and $20 million in revenue, with net profit margins north of 50%, Kullander says. He aims to double revenue in 2020. 

For the 105-employee crypto startup, being in Hong Kong comes with two key benefits. First, sitting geographically closer to the largest exchanges in the world—including Singapore-based Binance, Beijing-based Huobi and Hong Kong derivatives exchange Bitmex—lets Amber more easily develop relationships with the trading venues and integrate their technologies.  

Second, Hong Kong has a friendlier regulatory environment than that of the U.S., where uncertainty about whether the SEC will deem some cryptocurrencies unregistered securities weighs heavily on entrepreneurs. In 2018, Hong Kong’s Securities and Futures Commission declared that cryptocurrencies weren’t securities, helping investors feel more comfortable buying digital tokens. Today Amber and its clients—80% of which are based in Asia—can trade more than 700 coins on up to 30 exchanges. On Coinbase, the most popular U.S. exchange, investors can trade fewer than 30digital assets. 

Kullander’s philosophy on regulation is more liberal than what you hear from U.S. entrepreneurs and investors. An executive at crypto startup Origin X Capital once alleged (in a leaked recording) that Amber engaged in wash trading, the practice of one party taking both sides of a trade—acting as the buyer and seller—to fake others into thinking that a given digital asset was popular and trading actively. Kullander says Amber has never done wash trading. At the same time, “I’m not in the camp of people who think wash trading is very evil,” he says. “In traditional finance, doing wash trading would be illegal. In crypto, it’s done to generate attention … it’s just peacocking.”

“We’re not anti-regulation, and we’re probably also not pro-regulation,” he says. “What’s most important: regulation comes second to public trust. If you do the right thing, I don’t think there’s anything to worry about.” So far, the strategy has worked not only for Amber, but for firms like Binance, which is famous for evading regulatory oversight. 

For now, the downside of being in Asia is, of course, the coronavirus. All of Amber’s Hong Kong-based employees have been working from home. “The biggest disruption is not being able to visit clients,” Kullander says. Although that has made communication less efficient, he doesn’t think it has affected the firm’s revenue. “That’s the beauty with crypto. You can access these markets 24/7,” he says. “If anything, we have seen business pick up, perhaps because everyone is just sitting around at home.”

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