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

Welcome back, everyone. It's a great pleasure to welcome Mike Novogratz, CEO of Galaxy Digital for a fireside chat. Mike is a super influential voice in the crypto industry, especially given his deep pre-crypto experience in banking and asset management and many other things, as I understand. With Galaxy, Mike has built a sort of all-in-one multifaceted crypto strategy. We're really looking forward to hearing more about today, Mike. So thanks so much for being here. I appreciate it.

Thank you.

Having said all that, before we dive into some Galaxy specific questions, I wanted to ask you some industry stuff. This is a big question. How far are we from realizing the kind of disruptive, transformative potential of blockchain technology. In your mind, are we sort of seeing it happen as we speak? Or is it still sort of early innings enough as to where the best is yet to come.

Yes, it's a great question. And I would break it up into a couple of buckets. So there is Bitcoin, right, which really serves one great purpose, right? It's digital gold. And Bitcoin is ready for prime time, like it's a finished product. And we are seeing adoption continue to accelerate. Adoption from -- going first from individuals and then to small institutions, family offices, hedge funds and now you're seeing pension funds, sovereign wealth funds, endowments. And so it's now known as a macro asset, right? Its primary use case is a hedge versus really bad fiscal stewardship. And so you see places like Erdogan's Turkey where the currency went to hell in a hand basket or what's happened in Russia, a huge uptick in Bitcoin. You see people in the U.S. buying it because they're worried about our stewardship, right? We've moved to an era of populism, both on the left and the right. Populist governments usually print too much money. And so that story, that community of the debasement of currency really is picking up speed. And that's really a finished product. When you go to Web 3, which is most likely being built on Ethereum, but also a lot of other Layer 1 protocols. It's not ready for prime time. We couldn't snap our fingers and take over the banking system, right? I mean, JPMorgan moves $4 trillion a day through their bank, crypto is not ready yet. It is growing at an unbelievable pace. The adoption curve is faster than it was during the Internet. And what is so promising is you see use cases that are starting to really scale. What got things heated up last year and continues to, what surprised everybody, it was NFTs. NFTs became the killer app of the blockchain of Web 3. It did it for a few reasons. One is no one was kind of fighting it, right? In payments, it's a war, right? And the regulators are very involved. In decentralized finance, the banks have a lot to say and regulators. In IP enormous fighting. It was accretive income to places like the NBA, the Major League baseball, right, to artists, to musicians. And that idea really has started to spin. Now listen, to be honest, a lot of the NFT trading and volume is still gambling, right? It's identity gambling as I'm going to buy my Bored Ape or my CryptoPunks. And it's going to say something about me, it's giving me access to a community. But we shouldn't underestimate the power of that. The company, Yuga Labs that owns Bored Ape, just raised money at a $4 billion valuation, having done an acquisition of the IP from CryptoPunks. People like wait a minute, there is how much? $450 million at a $4 billion valuation. So these are big numbers for real companies making real revenue, right? It's about $100 million of revenue and 90% profit margins on that company, and so [ Check The Box ], pretty cool company that didn't exist 18 months ago. And so you're seeing an innovation cycle pick up that just has everybody excited. And so what was exciting about NFT is that every real company -- real economy company said, hey, I need to understand the blockchain. I need to be involved here. And so if you're in the crypto knowledge business, what Galaxy is in, there's like limit up for our time to try to help people understand to get people access to markets, to how can Web 3 change -- how will Web 3 change their companies or their investment paradigm. Long answer, sorry about that.

No, we like long answers here. We like long answer here. You mentioned the banking industry and -- what about the banking industry in terms of adapting to blockchain? Is this something where in the future you see DeFi, for example, as a zero-sum game? Or do you see utility being distributed among -- in the existing kind of financial services industry?

No, listen, I think there will always be a financial services industry because while we talk about the democratization of finance, I personally don't think, if you're a dentist in Poughkeepsie, if you want to spend all your free time understanding markets you can, but I don't think you might not want to. You might want to hire someone who is your financial expert to manage your wealth. And so I always think there'll be a big wealth management business, and there should be for a long period of time. I do think banks will use parts of DeFi. I think the first part they'll use is, hey, I can raise deposits at pretty low level. I would love to get some of this yield being generated on chain, in some of these yield products that are happening. And so that might be the first place. And we're working ourselves to be able to, in a regulatory compliant way, deliver that on chain yield to institutional clients, right? No one has really done that in a soup to nuts way at this point, partly because the regulators have been really unclear. What's promising is we're starting to get signs from D.C. that they at least get it. It's really gone popular to be negative about crypto as a politician. And so you're seeing a shift, other than from Elizabeth Warren, almost all the other politicians and all the young ones are saying, stop, stop, stop, like let's -- this is a technology we want in America, technology we want to build here and participate with. And so I'm hoping we get some regulatory clarity. But right now, we don't have it. And so that's slowing the DeFi stuff down a little bit. Banks haven't participated in some ways because they've been having the ride of their lives in their traditional markets. So you look at bank earnings last year, and crypto is still small. And even now with us as a $2 trillion industry, it's still very small relative to the profits of Barclays or Goldman or Morgan Stanley. And so I think you're going to start seeing moves, you saw Cowen come into the market yesterday. We did a joint venture with Goldman on their first options trade. They're going to provide their clients and we're going to back-to-back liquidity in the derivative market and so that's exciting. And so I think you're going to see them walk in slowly, but I don't see a stampede from the banks.

And you mentioned regulation. How long do you think that process takes for us to basically evolve a more kind of sane and reasonable framework for crypto? Is it going to be fits and starts and regulations for enforcement? And -- or is it you think...

Mr. Gensler at the SEC has certainly setting all the signs that he's regulation by enforcement, which is really frustrating. And could that change? Maybe, right? Like who knows how long he's in that position. But I think right now, it's regulated by enforcement. The politicians aren't going to pass negative crypto legislation, which is great. And there's a growing number of Democrats that are starting to say, hey, we can't lose this industry to the Republics. It should be bipartisan. It drives me crazy as a guy who is mostly center-left that the progressives have been so anti-crypto. That's changing. I was with a young Congressman Jake Auchincloss, yesterday. He knew more about crypto than any politician I've met and he's a center-left guy from Massachusetts. And so there's this growing number of young politicians that say, wait a minute, we understand this. And listen, crypto is interesting, right? Part of it is the ideas of libertarianism. But part of it is really progressive, right? It cuts out the middleman. And so it's a hybrid product. And so I'm optimistic, but not in the short run that we get clarity. And so what I'm happy about is I don't think we're going to get anything really negative. It's going to be kind of the status quo.

Another thing I wanted to ask you about was where crypto sort of fits in terms of other asset classes and the correlations between those asset classes. I think there were many folks who were thinking that a more inflationary environment, higher rates would translate into more of sort of call it Bitcoins, digital gold sort of not necessarily correlated with tech equities. Maybe that hasn't necessarily turned out to be the case. How do you see crypto fitting in? Is it -- do you see it eventually as some type of inflation hedge? Or is it really more of a tech investment.

Again, I think Bitcoin will end up being something that trades more like gold, and that it will be used as a place where more and more people store wealth. And the correlation with tech this year and equity has made some sense because everything went up because we had this sense they were going to print money forever. And then as Powell got more hawkish and [ threatening ] get more hawkish, you saw all those markets say, well, wait a minute, maybe we wouldn't have inflation forever even though we have it now, right? And the Chairman really is acting like he's going to be [ Paul Walker ], right, a huge change of face ever since you got reappointed. And so we'll see do they cut 50 at next meeting. I think [indiscernible] market's certainly believing he's being a Paul Walker. What's interesting is equities and crypto decoupled from rates. I don't know how long that lasts. It doesn't intuitively make a ton of sense to me. But I think it's -- people are selling their bonds, where they're going to put their money? I do believe over time, and we're starting to see the correlation. The correlation has gone from like a beta of 3 to a beta of 2. So the beta of crypto versus the NASDAQ is coming lower. And I think you're going to continue to see that. Crypto is very well supported down below. Like the OGs in Bitcoin aren't selling their Bitcoin, right? And you're adding new members to society. And so what happens is in periods of real duress, which we saw, a war in Russia -- a war in Ukraine, Fed moving rates, people selling portfolios, Chinese stocks down 70%, very few people want to put on new risk, right? So you have people selling old positions to get closer to home but you don't have the new risk taker until you get some sense of calm. The moment stocks bottomed, all this money starts coming into crypto again. And so I do think over the year, you'll see on a vol adjusted basis, Bitcoin way outperform stocks this year. But in a short run, it still trades like a risk asset.

That makes a ton of sense. Well, let's pivot over to talking about Galaxy. Why don't you give us an overview of the business? I know you guys are into a lot of interesting stuff. Just give us a brief overview of what the business is comprised of.

Yes. So we started Galaxy to be a bridge in lots of ways between the crypto world and the institutional world with the thought of using our own capital to understand that space to be domain experts and then to bring that into the asset management business, the banking business, the intermediation, what I'll call the sales and trading business, the credit derivative businesses. And we continue to execute on that division. We're growing really fast. I think we're 350 people or plus or minus a few from that. That's up from 80 a few years ago. And so it's been rapid growth. In our trading business, we provide liquidity in over 100 tokens. We have roughly 700 counterparties. The business is that I love there are our credit business, lending money to counterparties, our derivative business providing hedging and option opportunities for people. That's miners, that's hedge funds, that's crypto hedge funds, that's at times private equity funds. We have an electronic trading -- electronic market making business, an arbitrage business and we're building a prime business. And so when I look forward, that complex really should be a big, big revenue -- steady revenue generator. Asset Management, we're adding product, right? We've got great partnership relations with big institutions to bring in capital plus our own sales force. But the key now is adding the right product. So we're about to launch a mutual fund business. There hasn't really been a real mutual fund in crypto. People gave money to hedge funds and paid two and twenty to be long crypto. That seemed a little silly, quite frankly, because most of the alpha was just being long. And so we do think the market is going to mature into a mutual fund complex. We are going to add alpha product. We're just in the market now raising, I think, we've just done our first close on a $700 million fund for interactive. We call it interactive. Call it a Metaverse fund. NFTs, gaming. The gaming space has such a tailwind, it's incredible. It's probably got a 20-year macro tailwind. And so it's almost recession-proof. Like more and more people are being born, young people like video games. So I asked one guy that's in our business. I said, how much time a day do you spend outside of work playing video games. And I was thinking he was going to give me an hour or two, 5 hours. That's outside of work. I was like, that's what him and his wife do for fun. I was like that's -- to me that was insane. To him, that's just normal, right? And so I think you're just going to see more and more people living in this digital world. And look, because of it, these digital native currencies, like -- I mean, I coined this phrase Ethereum is the currency of culture, right? People price NFTs in Ethereum, like that world is going to continue to grow. And so I love that business. Our investment banking business, our advisory business, really has taken off this year. That is going to be a sleeping gem for us. It took a while to build domain expertise to be able to go to the players in this space and have value to add. And now we have a really good team led by Michael Ash, and we're participating in deal after deal. And so I think that will be a good business. And we still have this direct investment business. That's both in mining, right? We have a big mining operation that will start adding a lot to our bottom line. That mining spins off banking deals, it spins off derivative deals, it spins off lending deals. And so by leading with our capital, we're feeding all our businesses but also invent the early-stage venture. Lots of the profit of the firm over the last few years, and we have our earnings coming out soon, have been driven by getting in early to understand the space, helping companies actually build their company. I think of a company like Fire Blocks where we were one of the first investors and really helped connect them to the community and now it's -- they raised capital at $8 billion. And so we'll stay in that business. The hope is, over time, our recurring revenue franchise businesses have a big enough earnings stream that it mutes some of the volatility of being long in this portfolio of assets that, lucky for us or maybe smartly on our part, has mostly gone up. But our balance sheet earnings has overshadowed our franchise businesses. What I would tell you, though, in this period of up and down crypto markets, those businesses continue to grow, we continue to invest in them. And I see nothing. I mean, I guess our biggest challenge now is everyone's kind of got the story and the price for talent and the competition for our people, creating a culture that people want to stay at, incentivizing them the right way, it's just going to get harder and harder because everyone wants to build a crypto business now.

Yes. One thing that you said about your mining business kind of feeding into a lot of your other businesses. I thought that was really fascinating. Can you comment more about the sort of synergies between all of these disparate or not so disparate business lines that you're in? Give us some examples of how that mining business generates other business in other parts and other components sort of help each other along.

Sure. So Amanda Fabiano, who runs our mining, she came from Fidelity, which -- the nice part of coming from Fidelity when you got into crypto early, everybody in the [indiscernible] wanted to come see you, right? Because how do we get the giant Fidelity into crypto. And Abby Johnson has been kind of forward-thinking on crypto. And so Amanda had a great role of decks people in the space. She loves Bitcoin mining. And so as we -- she functions both as an investor, but also as an investment banker, right? He's the representative to these groups. Miners need 2 things. They need hedging unless they wanted to stay long Bitcoin. It's a bit like the old gold companies, right? Hey, I'm a gold public company, I should stay long gold because that's why people invest or I should mine the gold and take some of it off and do the arbitrage of what I cost to mine and what do I get it from. But they all need credit. And so it's been a big part of our lending business. And we're good securitized lenders. That business is getting tougher in that lots of people -- the cost of capital in crypto is coming down. And there's more and more people entering the space. And so like in any of our business, I told all our employees this year is about building, building, building. You no longer have career risk that we picked the wrong sector. We have a career risk that we better execute, right? It's now a competitive sector. And it was just -- the risk used to be, are we all going to look weird, having made our careers in this thing called crypto. That risk is off the table. Now it's, can we build a better company than the next guy. We see it in our -- those synergies in our venture business or a business that we have, like special situations where we'll go to protocol founders and say, hey, we'll run a validator node for you. So validator node is like a Bitcoin mine. It's how you secure that ecosystem, right? Each crypto currency or crypto asset has its own constitution, its own ecosystem that's stood up by validators. So we'll run a validator that will bring our brand into the space. We might -- if we can get the right regulatory framework in that token market make, we will take those potential treasury assets, right? These protocols have treasury assets, hey, we can help asset manage them -- asset management them. And so if you think about who should be some of our biggest accounts, right? When you think of like a Barclays you've got your account list, the protocols in the space will end up this year and in 5 years being some of our most important relationships. I think of Terra (LUNA) with Do Kwon where we had a big investment and helped him literally just through our marketing side, through our PR. Got him his first article in the Wall Street Journal and Bloomberg and in these communities, these token communities, getting energy into them is how they get kick started. And so here's now a $30-plus billion protocol. We have a great relationship with the founder because we helped him get started. We made a whole lot of money being longest tokens. There's lots of other businesses that get spun off of that main blockchain, right? And so we get to participate along the way. And so in some ways, that connectivity is a constant flywheel.

No, it's really fascinating. I mean your platform, if you'll for give a kind of the Zen analogy, it's almost like so broad and deep that it's sort of like water and where the opportunity presents itself, you guys can kind of flow in and capture the opportunity. I guess the question becomes, and you've mentioned a lot of very interesting kind of high-growth areas in the industry. What is next for you guys? You have such a diverse kind of portfolio. Where the areas that you think are the most interesting to kind of push deeper into?

Well, I think part of 2022 for us and I think for the whole industry is to really build out the plumbing at scale to connect. Like it sounds easy to, hey, we'll just cover a lot of hedge funds and we'll do their business. But then you're like, okay, we got to have a whole team to get ISDA agreement signed with each of these funds. And we have a pretty good balance sheet, but it's not Barclays balance sheet. And so how do you set up financing relationships with funds to allow them to take your credit risk. And so there's a lot of plumbing that gets built -- financial markets plumbing that gets built that we're working really hard on. When you hire that many people, integrating them all under the firm is important. I do think the big growth opportunity is, and this is where there's the regulatory focus, is connecting of on-chain activities with institutional accounts. And we are focused on doing that. We're not there yet in a scalable way. We will get there. There's -- that's where the regulatory risk comes in. That's where it would be much easier if Gensler or the regulatory apparatus would say, hey, these are the rules guys. And so we've been a relatively conservative company certainly to some of our peers, partly from where we started thinking, our super power is going to be the person who can understand how to operate in an institutional world. And so that's where we're spending a lot of effort in trying to get that right.

I see. Let me ask you another industry question. How do you see the sort of landscape evolving in terms of Layer 1 protocols. Is it the type of thing now where you will just see a continuing stream of new founders creating new Layer 1s over time where there's a future state where there's just this multiplicity of these kind of base layer protocols? Or do you see a situation where there's kind of a shakeout at the end of the day with the network effects of a select few, potentially Ethereum, for example, but others also kind of squeeze the others out of the mix.

It's a great question. I started thinking about this in 2016 when I invested in some other Layer 1s besides Ethereum. And one of the founders of Ethereum is a good friend of mine, and he got all mad at me. And I was like, I'm not smart enough to understand how this whole system is going to work. I do think Ethereum probably is going to be around for good, and it's going to be most likely the biggest base layer of trust blockchain. That doesn't mean I think all the value will accrete there. It's too complicate of a formula. Layer 2 blockchains like Polygon or StarkWare that are using very sophisticated methods to validate and provide confidence around data in a much smaller way, right? If me and you are doing a small financial transaction peer-to-peer, do we really need every computer in the world as part of the network to validate that transaction, probably not, right? And so these scaling solutions on Layer 2s might end up creating more value than Layer 1s. No one really knows, to be honest, to answer, and you can -- everyone can have an opinion. My -- the way we bet with our own capital and what we advise clients to do is to have a diversified portfolio of the projects that are run by teams of world-class guys that we see communities building around, that we see developers developing on, there's lots of ways you can track that. And that we see investors excited about, but most importantly, growth in the ecosystem on top of those things. And listen, there's smoke and mirrors to some degree, right? You get a big -- people are paying money to get other people to build their protocols on top of the protocol, so they show the volume and the protocol goes up, right? We're so early in this process that anybody who thinks they have a crystal ball is either far smarter than I am or is fooling themselves. It's really complicated. And I spent a lot of time with a lot of smart people that are in the space. And I would say it's a very -- it's the most important question in lots of ways. I don't think you need to answer the final answer to participate and make a whole lot of money because I don't think we'll see the final answer for 5, 6, 7 years or longer. One of the things that's hot right now is how do you bridge between chains. So all of these bridging protocols you want to think about, multichain protocols. That's going to be the 2022 sweep stakes and so you're going to see a lot of money made in that space in 2022. Will those things still be worth a lot in 2024? We'll see.

You often hear the analogy about it's the Internet circa 1994, and you might end up with Amazon or you might end up with Pets.com. It's hard to place the right bet.

Well, what's so different about venturing crypto or crypto itself is that by the way this whole thing is designed, there's liquidity in projects that happened way earlier than in any other kind of venture cycle we've ever had. So right, you couldn't -- if you were an Uber investor, you're kind of blocked in for the first 6, 7 years, like just watching. There was no -- you got your Uber token after 18 months and you decide what to do with it, right? And it created some frenzy of activity up and down in this sense of wealth and not wealth and volatility. And so by the nature of the beast because these tokens are only part of a community, there is going to be more volatility, more false starts than we would see -- not more successes or failures but more things that we think are going to be successes that turn out not to be just because you're getting liquidity much earlier. Does that make sense?

That makes a ton of sense, that makes a ton of sense. Unfortunately, we're about out of time. So I greatly appreciate your comments, Mike. It was really an insightful conversation. Thanks so much for donating a little bit of your data. Appreciate it.

Thank you.