Galaxy Digital Inc. (GLXY) Earnings Call Transcript & Summary

Hello. Good afternoon, everybody. Thanks for joining us today at the Morgan Stanley Fintech Symposium and Financials Conference. Very excited somewhat to be speaking to Mike Novogratz of Galaxy Digital Holdings. I'm sure most, if not all of you, know him quite well and his background. But before we start talking to Mike about Galaxy, bitcoin, all things digital, et cetera, I do have a quick disclaimer to read. For important disclosures, please see morganstanley.com/researchdisclosures. So with that out of the way, I don't want to waste any time. And I do want to let people know who are watching on the webcast that you can submit a question through the portal. As those come through, we'll do our best to pose those to Mike.

But Mike, as we're getting started, maybe like I found your move to become a merchant bank a few years ago quite interesting. Can you tell us about your evolution, the evolution of Galaxy? How did you decide to become a merchant bank. What do the range of services look like over the long run? As I was telling you beforehand, I think that the story around Galaxy and its potential is at least as interesting as that around cryptocurrencies and digital.

Sure. So listen, I first started investing in crypto when I was still at Fortress. And I originally did it as a speculative idea. Bitcoin in 2013 post the financial crisis, post the European financial crisis, in the midst of quantitative easing seemed like a cool idea, right? It was a hard asset, right? It was this new technology. We worried about inflation in 2013. It's kind of comical that the world was really worried about inflation. And it was just so much that I remember Paul Singer taking a full-page ad in The Wall Street Journal with 40 other prominent economists and hedge fund managers claiming that Ben Bernanke should be put in jail because he was going to destroy our economy. I thought Paul was a little harsh. But this idea that we could have hyperinflation or we can debase currencies was out there. There was a libertarian group that really cared a lot about bitcoin. There were cyberpunks, guys that had kind of lived off the grid and said, screw the system. And there was a general breakdown in trust. And I won't pick on Morgan Stanley, but certainly with JPMorgan and the other big banks, Bear Stearns, right? Like why should we trust the central authority? It didn't seem trustworthy. It didn't seem fair. They bailed out the rich guys yet again. And so we bought that as a speculative asset. When I left Fortress, I do what everybody in finance does is you look at your PA when you're not at a big institution. Like when I was at Goldman Sachs, I never paid attention to my PA. I paid attention to my hedge fund or my job. And I looked and I was like, god, I own all this bitcoin and all these other venture investments. And I visited a friend, Joe Lubin, who runs a company called ConsenSys. And it was at that point I really got that this was more than an investment, right? The blockchain revolution, the crypto revolution is a revolution. It was a group of people who at their core said, we need to rebuild the financial markets in a way that's more transparent, more egalitarian, more fair, more efficient. And that it wasn't just financial markets, it was all markets. It was the infrastructure for consumer products as well. And so that intrigued me and it intrigued me that it was run by young people, right? If you think about Gen Z and millennials, they look about their grandfathers, the baby boomers, like dudes, you left us a broken planet. It's polluted. It's got freaking dying fish in our rivers, plastic everywhere. Oh, by the way, more debt than we'll ever be able to pay back. Thanks a lot. There has been a generational theft of monumental proportion perpetrated by the baby boomers on these young people who said, screw it. This is our thing. And so I got into crypto as a family office guy because I could work with young people. I was learning venture investing. And there was a purpose to it. There was a bit of a middle finger to the system. There was, let's do a systems change. And I did it as an investor, and it's fun to be a family office. Everyone comes and says nice things about you and comforts you. And I thought long and hard about doing this professionally again. I had left Fortress. That was a 12-year stint. I did 12 years at Goldman Sachs. I'm like, do I have another 12 years? And I thought I would because I thought I had a purpose. Like that because I got in early, I've been this unofficial spokesman for the system. And so we started Fortress with the idea that we build 3 or 4 businesses around our portfolio. And that we'd use our own capital both in the macro sense and in the venture sense to understand what was happening. And you can fast forward now 3 years, we'll be 400 people at the end of the year when we close our deal with BitGo. We still use our own capital first to understand the space. We have over 100 venture investments on our balance sheet. That goes from digital worlds, NFT space, the metaverse, to custody solutions, to exchanges, to new protocols, to anything basically being built on the blockchain. The idea is, let's try to understand this ecosystem. And then through our customer businesses, one in asset management where we have a partnership with Morgan Stanley, sales and trading, a classic sales and trading business, a derivative business, a mining business, an investment banking business. Let's go and take those lessons and try to win over and help educate customers to go the same journey we went on. And so now, like I said, we'll be 400 people when we close this deal. We have a $2 billion-plus balance sheet. We have a really vibrant credit business, a vibrant derivative business. We will inherit a really vibrant custody business, a growing asset management business, a growing investment banking business and a really cool mining business. And so I couldn't be more bullish on the space. In lots of ways, our stock, and I set it up this way, first in Canada, and we trade publicly in Canada, which is you learn how great the American capital markets are versus anything. Like the day we merged with BitGo, which was the largest merger in crypto history, right? It's $1.2 billion merger or acquisition more so than a merger. Merger sounds nice to the guys you're acquiring. The volume we traded was 1/10 the volume of a company called Marathon, which is half our market cap, no complexity as a mining company. And so we are planning on moving to the Nasdaq in the second half of the year. But we wanted to give investors kind of a one-stop shop to say, hey, you'll get the growth of the businesses, you'll get the growth of the balance sheet. We're the only public company where you can get exposure to venture investments, which have been some of the best-performing parts of the balance sheet. And it's a really simple bet, in my mind, if you believe, and where we can maybe pivot the conversation, if you believe that this asset class, this new asset class, Bitcoin, Ethereum, crypto, blockchain, NFTs is going to go from $1.5 trillion where it is today to much higher, we're a spectacular bet. I just told my interns, we have 15 new summer interns. I said, if it's not, if in 3 years it's a $2 trillion asset class, I'm going to look like a fool. Our investors aren't going to be happy and our employees won't be happy. And so at our core, it's a macro bet that something special is happening. I fundamentally believe it. I think Apple's got a $2-plus trillion market cap. And if I took all the Apple employees, their entire team put them on one side of the football field and took all the people that are working on all the crypto projects on the other side and we said, fight, it would be applesauce. The amount of human capital pouring into this space is dumbfounding in all the different protocols and all the different ventures. And so long answer, but bullish one.

So let's get into some of the nitty-gritty there, Mike, is that you've talked about in the past building business. And you mentioned here, building business levered to helping institutions to adopt crypto and blockchain. You're doing that through your venture investments, but also your market-making and that kind of thing. What does that progression look like? And how does that process of adoption end up happening? Like I'm just wondering, you make the case for new technologies and the work that's being done, but what does that landscape ultimately end up in your mind?

If you want to think about my favorite TED talk is one on what starts a movement. And it has a guy who walks out on a hill and he's dancing like this, his arms are going crazy. He looks like a complete and total maniac. And everyone on the hill is looking at him. And then a second guy goes out there and now they look like 2 nut-jobs. By the time the third guy goes out there, all of a sudden, the whole hill joins. Now the whole hill is dancing. And it's like, it's not the first guy that creates the movement, it's the third. In every one of our investment buckets, hedge funds, insurance companies, the wealth channel, pensions and endowments, the big institutional buckets of money were past the third person, right? So in hedge funds, Paul Tudor Jones wrote a letter about 14 months ago about why bitcoin is a hard asset. It's one of his bucket of hard assets. Well, the moment he did that, any other hedge fund manager who wanted to put money in could do it and not look like an idiot, right? Paul gave them cover. Then Druckenmiller came out and said, hey, I think bitcoins are great. I was wrong. I think it's a good asset, right? Ray Dalio came out, not wildly, but was more optimistic than he had been, right? He wasn't buy bitcoin now, but he was like, yes, it kind of makes sense to me. And all of a sudden, every hedge fund manager was starting to get engaged. There's not a macro fund manager who doesn't have some crypto position, right?

In some form or fashion, yes.

The same thing is happening. New York Life and MassMutual did at insurance. They bought bitcoin as a long-duration asset saying, we don't trust the Treasury yields here. And we think over 20 years, depreciation of the dollar, slow depreciation maybe, maybe fast, bitcoin long-duration asset. Now they haven't put huge amounts of money in the insurance side yet. But I know one thing, when people start, they don't usually just say, oh, that's enough, right? They get the taste and they start. And so my guess is, I know 5 insurance companies now, only 2 that went public that have bought something in their, and that's hard to do, they're buying that for their general account, right? That needs regulator approval. And so we're seeing it in the wealth space. Morgan Stanley was the first group to start selling it through their wealth channels, right? All the money in the world really sits between 50 and 80-year olds who call their FAs and say, what should I do? And I will tell you that Goldman, JP and all the other competitors are right behind. And so I'm optimistic of adoption because I'm seeing it in every bucket. And then on the younger people space, we're going to have the Novi wallet launch by Facebook. So that can be their platform for stablecoins. But it's also going to give people access to buy bitcoin. And you see what Square is doing and PayPal. Every single payment player is going to have access for bitcoin. And so the technology of bitcoin is no longer what makes it valuable, right? Originally, it was really cool technology. I didn't understand how cool it was. I was forced to learn more about it than I ever thought I would because like became an unofficial spokesman. I kept getting invited to speak at places, and I was petrified that I was going to look like an idiot. And I took the computer science and boiled it to one simple sentence that Satoshi's white paper allowed for the first digital signature that you couldn't counterfeit. So that was the genius of it. And once you understood that, you're like, wow, so we can have scarce digital stuff, scarce digital money, now gold and bitcoin, 21 million that will ever be mined. That's it. The rest is social construct. Bitcoin has its $900 billion or $850 billion market cap because I think it's valuable and you think it's valuable and 150 million people around the world think it's valuable. It's not the code. It's not the technology. We can take that same code and fork it and call it novo code, and it wouldn't be worth nearly that much. It's this brand. And how do you build the brand? You get people into the tent. I have spent 9 years bringing people into the tent. We just signed up 4,000 Morgan Stanley salesmen, hardworking FAs who had to take a course in bitcoin so they can sell to their customers to bring people into the tent. That's happening all over the place. And so the adoption is happening. And that's just bitcoin. Bitcoin is unique because as digital gold, it doesn't have to do much, right? The bigger revolution in lots of ways is happening on the other platforms, Ethereum, Solana, Terra, all these Binance smart contracts, all these faster blockchains. Some are decentralized, some aren't that are building 3 things on them. They're building stablecoins, right? That's the dollar or the euro wrapped in a token. They're building decentralized finance. We call it DeFi. That's driverless banks, driverless insurance companies, driverless exchanges. And now they're building NFTs. That's taking creativity, taking IP and tokenizing it. And so there are 3 giant tailwinds. We're really early in all of those. We're like not even the national anthem, forget the first pitch in NFTs. Same thing in DeFi, a little bit further along in stablecoins. But when you add that plus bitcoin, that's our collective universe so far. And it's unbelievably dynamic.

So I'm going to, there's a lot of different threads to pull on there. But let's start with bitcoin and the big one. And then I do want to go to DeFi and some of these others and the role for Galaxy there. But what do you think, Mike, is the ultimate state of bitcoin? And do you have concerns or what happens if and as it starts to undermine national monetary and political sovereignty?

Well, so that is a great question, and I would separate it into 2 halves. So I started as an emerging market investor. And I spent a lot of my life as an investor. And what was always interesting to me, if you were an emerging market, your fiscal policy and your yield curve were highly correlated. S*** fiscal policy, steep yield curve, weak currency; strong fiscal policy, flat yield curve, strong currency. But if you were a developed market, there was no correlation. It's like you pass through some mystical force field. And you could be Japan or the U.S. or Europe, run giant deficits, yield curve doesn't have any reaction to it. And so out there in the yonder somewhere, you shift from developing to emerging, on developed to emerging. You hit what they call the Minsky moment where confidence breaks down out there somewhere. We don't know where, but it's out there. The G20 investors that are participating in bitcoin are buying it because they think the crazy possibility of the U.S. or Europe or Japan starting to look more like an emerging market is growing, right? We grew up with the idea of embedded central banking. You and I did and everyone on this call, unless they're much, much older than me. We now have a central banker running Treasury. Think of the metaphor of that. She stepped out of one job and into the other. Like how was that independent, right? Her best buddy is running the central bank. It's like me and my brother running trades, makes no sense. And so that's from a developed market perspective. But in the developing market, we have 40%, 50% depreciations of currencies all the time. It's almost a human right to be able to store your wealth somewhere. And bitcoin provides. So that's Brazil, Argentina, Nigeria, Tanzania, Myanmar. One of our summer interns is from Myanmar. I haven't looked at their currency risk, but I can't imagine it's done well. And so there are 2 ways to think. And you just saw El Salvador, who is pegged to the dollar said, hey, we're going to make bitcoin legal tender. Everyone cheered. I wasn't so sure it's worth cheering about because it's going to p*** the regulators off. The regulators in the developed world, they don't mind bitcoin as digital gold. They don't want anyone to mess with the sovereignty of their currencies.

For sure.

The honest answer is, the most likely thing that happens in the U.S. and in the U.K., in all the developed countries is what happened already in the U.K. A pound sterling used to buy you a pound of sterling. It doesn't anymore. It's hundreds of pounds of sterling now to buy you a pound of sterling, right? You had this 99% depreciation of your currency slowly over time. That is the most likely thing that will happen in the West. We will have a slow debasement of fiat currencies. But people want hard assets because of that. If we have a faster one, right, where the s*** hits the fan, and we start looking like Weimar or Venezuela, then I think the regulatory issue is a big one because then people are going to say, how do I stop this? And so in some ways, as a bitcoin guy, you want the U.S. to do well. I cheer for the U.S. to do well because if it really screws it up, you're going to see a much tougher regulatory. They're going to confiscate, just like they tried to confiscate gold at one point. Those are really tiny tails. The main tail is, we've got a really tough situation. We're going to do the best we can with it. One of the ways you're going to get out of this is inflate the debt away, deflate your currency. And so owning bitcoin as a hedge makes all the sense. And that's why Paul Jones reiterated it today and Druckenmiller. And now I've got 2 of the biggest pension funds in the world coming. Like it's not that there was magic. They're looking at the dollar and saying, it doesn't add up in the long run. It's got to at least be a slow depreciation.

So we could spend like there's a -- and I think that your articulation of the thesis obviously makes sense, like people looking for ways to hedge against this debasement and even particularly like an accelerated debasement. There's a lot of places that we could go on that, like whether we would talk about like energy efficiency, et cetera. But I want to leave that to the side because I want to talk on some of these other areas where Galaxy is involved, like DeFi, NFTs, et cetera. And we only have about 8, 9 minutes left, Mike. So on DeFi, like on the one hand, like I like the way that you put it. It's like it's the banks on autopilot or insurance on autopilot or whatever financial product.

Let me give you like a specific example. DeFi mostly has been used within the crypto community as a gambling tool.

Yes, improve leverage, whatever.

There's a few examples where you've jumped out of that sandbox and moved into the real economy. One is a Korean payment system named CHAI that runs on the Terra blockchain. 7% of all payments in Korea now are happening on this blockchain-based system using a stablecoin that's algorithmically set and it runs on this blockchain, which is not even that decentralized. And the profits of it kind of remit to this coin called Luna. And so it's an interesting ecosystem. The more practical ones to think about are called Uniswap or SushiSwap where they're exchanges. They're peer-to-peer exchanges that the commission gets set by a community vote, right? There's no one to really regulate other than who uses it. And so there's only one thing holding back mass adoption, and that's can I KYC the person on the other side? If you're a retail user, FINRA is not going to come smashing your door down for having traded $500 on Uniswap. If you're Galaxy, we don't use it yet. We invest in them because we're dealing with a smart contract. And so we could make the argument to the regulators, hey, I'm not dealing with anyone. I'm dealing with a smart contract. We don't feel comfortable that, that argument is going to hold. There are more than a handful of initiatives to, in essence, give the other person a blue check. If I know I'm dealing with someone who's been KYC-ed by a reputable party, I don't need to know who they are. I just need to know that they're. The moment that gets done, then there's no one left to regulate. What are you going to do, regulate code? No. Peer-to-peer? So I have this sense that we all might be surprised way to the upside in how fast DeFi takes off. I have had conversations with the #2 guys at your 2 biggest competitors. And they get it all of a sudden, right? In bitcoin, they missed an opportunity to asset manage, to trade, to sell to their customers digital gold. That's not core to their business. DeFi goes right at the heart of what banks and insurance companies and exchanges do in trading derivatives, trading interest rates, trading currencies. And so I think you're going to see a big regulatory and lobbying front from the banks to say, oh, that's terrible stuff, right, because it really is a threat to their system. I think the guys who are running these banks are finally sensing that. But I was literally on 2 hours ago with one of your competitors, and they're doing a teach-in for the top 50 employees at their bank all day on this exact topic like how do we approach it? That's the gravity that the banks are now taking this with. The top 50 people at one of your biggest competitors are sitting down and doing a full day on this exact topic to say, do we try to fight it? Do we join it? And so I think it's hard to be an investor in financials without at least having some small sandbox amount in to understand what the heck is happening. Because it's one of those changes that could happen much faster than people think. The volume alone on Uniswap in the first quarter, I think, was $180 billion, staggering volumes that are going through these things.

So when you look at something like that, one of the issues that we've seen in other semblances of this, and granted they weren't as automated has been when there was a change in the interest rate environment or perceived levels of inflation, et cetera, there had to be decisions made about how do you manage through that, right? Like how does that algorithm work? And I think one of the things that you said is that previously is like the participants could vote on how they want to respond or manage in different scenarios. On the flip side of it, when you ask people and I ask advocates of DeFi, for example, how many of the stocks that you own do you actually vote the Board, right, and how involved are you really in those? Because they recognize that they aren't involved. So how does the management of this ultimately evolve? Do you think it can be fully automated or is there a Steering Board or how does that work?

It's an interesting question. So before I answer, I will answer it. I want to point out one thing, that 4 weeks ago, we had a 50% fall in crypto. 70% in some things, 50% in others, what you would call a catastrophe. And it happened fast. There were $20 billion and people that got stopped out of positions, 2.5 million accounts got zeroed out. The system didn't break. We didn't need the Fed to bail people out. We didn't need the Plunge Protection Team to show up and say, what's going on? Like what was special about that in my mind and promising, even I lost money, was that we are building a very robust system, right? At Galaxy, we're not all on chain, right? We give people credit risk. And so for me, I'm like, just like you guys would be checking and luckily, knock on wood, we didn't lose, have any credit losses. But on chain, it all happens automatically. So it's pretty fascinating that this early on the system was that robust. Why I think, and I told this to your competitor today in prep for this big meeting they're having, there will be a role for stores of financial knowledge is because the dentist, the doctor, the plumber or the artist, they don't specialize in markets. They look to their advisers, if they're FAs or if they're institutional advisers. They look to them for proxies on votes. They look to them for ideas on how to make money and how to protect their money for. And so I think there will continue to be a major role for people with knowledge. How that fits into the new system is to be determined, right? What I think the bigger threat to the places is in the transactional pieces because you are a 20th century bank operating in the 21st century, right? The technology build, the regulatory infrastructure, it's 150 years old at Goldman Sachs. I don't know how old Morgan Stanley is. It's probably just as old if you add all the pieces together. And so it's a huge disadvantage to things that got built 2 years ago that don't have any of that legacy baggage to carry around, both in technology and in regulation. And so I think as we look 5, 10 years in the future, the big institutions are going to have to figure out where their value -- can they create a version 2 with a much better user interface because the UX/UI in all of crypto kind of sucks still, right? It's not great. Or do they use their knowledge to plug in and be a part of that universe. But I'm pretty certain that the way we operate exchanges today will be very different in 5 or 10 years. And the same thing with derivative markets.

Yes. No. It makes a lot of sense. So just to wrap up here, Mike, in our last minute, you talked about DeFi taking off faster than people think, a slow debasement maybe of the major U.S. dollar currency. You kind of want that to be gradual because if it's too fast then that creates too many other issues. So what would be the third thing that you would tell people to watch out for that you're excited about or what have you?

I don't think anybody understands how big the NFT space is going to be. And I say that because right now if you buy an NFT, you can show your friend on the phone or maybe you can go on to your computer and see it or maybe you have a TV set at home like the Samsung Frame, it's called, that you can display art on. In 2 years' time, they're going to be monsterly wildly cool home displays. But more importantly, that stuff is going to exist in a metaverse that we use more and more often, right? We're going to have this conference not on Zoom, but on something that feels more like a big room. And I might hang my people, who I just met, I love the guy, on my wall or my Bojangles boxes. I might be wearing NFT jewelry that you can only see through your AR glasses. But it's unique jewelry done by, it's a 1 of 1 or 1 of 10. And I'm wearing my cool NFT bling. We're going to go to night clubs where we walk in and all put on these glasses and everyone's going to be dressed in '70s. Your health records are going to be NFTs. We'll put 100% certainty your health records will be NFTs one day. Your fingerprints will be NFTs. And so like the TAM of it is almost impossible to grasp, right? You can take IP and data, put it in a tokenized form, it can live on a blockchain. You can decide who sees it and who doesn't see it. I mean, little simple things, like your daughter who's 21 goes to the bar and says, I want to get in. Right now she shows her driver's license with her address on it to some guy she's never met who might be a creep. I'm hoping he's not a creep, but he might be a creep. Like there's a thing called zero-knowledge proofs. Then all of a sudden in a few years, you'll just say, all you need to know is that I'm old enough. You don't need my private data. You just need to know I'm old enough. Or I want to underwrite the mortgage for my cousin's apartment and Morgan Stanley says, well, send us your balance sheet. And goes like, you don't need my whole balance sheet. You need to know that I'm wealthy enough to underwrite that. And so in ways that we can see, in ways that we can't see, this revolution is spreading out all over the place. That's why I'm so optimistic. We're not a finance company. We're not a tech company. We're an ecosystem company. I bought BitGo because they have 60 blockchain engineers that can build on the blockchain, not just because they had custody. And so the companies that succeed in this new space are going to be these hybrids. But part of this is literally learning to build on a blockchain. Asset management could all be on chain at one point. And so I think we're at the point where you have to have something invested. Again, not just for the offense, but for the defense. And I used to think that 4 years ago, but no one listened to me. And now I say, now I see it because the scale is big enough and the change is happening fast enough. And so I like all those buckets. You're not going to have a banking account in 5 years, you're going to have a wallet. And maybe it's not 5 years, maybe it's 7, but it's not 10.

Mike, that's a great place to wrap up. Appreciate you taking your time today and sharing your insights as well as background and view, it's fantastic. So thank you very much. Thank you to everybody for joining us, and I'm sure there's a lot more to come.

Thanks, guys.