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

Thanks, everybody. Thanks for joining our afternoon session. We're pleased to have with us today, Mike Novogratz, Founder and CEO of Digital Galaxy.

Galaxy Digital.

Galaxy Digital. Prior to founding Galaxy, just 4 years ago, in 2018, Mike was a partner and President of Fortress Investment Group. He joined Fortress after 11 years at Goldman Sachs, where Mike was a partner and had several lead positions, including President of Goldman Sachs Latin America and Head of FICC Risk in Asia. Mike also served on the New York Fed's Investment Advisory Committee on financial markets from 2012 to 2015. And for those of you who are not as familiar with Galaxy Digital, Galaxy is a technology-driven financial services and investment management firm focused on providing a full suite of financial solutions, expanding the digital assets ecosystem to institutional and direct clients. And Galaxy is publicly traded on the TSX.

Indeed.

What did I forget?

You got it all.

Okay. Very good. So Mike, you came to Galaxy from a macro trading standpoint, both as Partner and President of Fortress and Partner at Goldman. How did those experiences help shape your goals for Galaxy?

Well, crypto at its core really is a macro trend, right? It came -- it was both really out of the breakdown of trust after the financial crisis. So Bitcoin, which was like the first killer app for crypto, really was created because people didn't trust banks, didn't trust governments. Satoshi, the founder of Bitcoin, he sensed populism was going to come because it always comes. And so he created this currency, a digital gold that was anti-inflationary. And it's kind of a miracle that 13 years later, it was a $1 trillion asset, it's less than $1 trillion today, but then it built this giant brand owned by 150 million people. And so when I started, macro guy, I saw people very worried about inflation. It's kind of ironic. After QE 1 and QE 2, we had some of the greatest investors in the world petrified that we're going to have hyperinflation, right? So you had this -- I mean Paul Singer from Elliott, who is one of the great investors. He took a full-page ad in the Wall Street Journal saying that Ben Bernanke should go to jail because this QE2 is going to ruin the world. And that was one of the reasons I got into crypto. I was like, there's all these people that believe inflation is coming, and this is going to be a great play. You also had people that lived off the grid and libertarians, people that just didn't trust government. And so it had this group of people that birthed it. Now the irony is it's 10 years, 12 years later and we're getting the inflation worry. It took not just QE1 and QE2 and QE3 and QE forever, but it took COVID until people started really believing in MMT to create the last giant leg of the bubble, and that's where crypto really took off.

Okay. Can you help us understand how you're navigating through this at this stage? I mean you've got a little bit of volatility here in the last few months.

Yes, down 30% since Thursday. Yes, listen, crypto doesn't live in its own universe, right? It lives in the same universe with all the other assets you look at, live in. And it went up in large part because there was free money forever. And it's coming down because Chairman Powell starting to act and look a little bit more like Chairman Volcker. And as long as the market believes the Fed is behind the curve and are going to catch up, right, I think you're going to see asset prices under pressure. The S&P will go down to 3,500, or 3,300 and crypto has been under pressure. What's accelerated crypto's pressure recently is what I would almost call like a long-term capital management, most of you guys aren't old enough for long-term capital management. But there are a few big companies that were very levered and interconnected. And so you're seeing an unwind of that. There was a company called Celsius that shut the window to its depositors today, which isn't good. That created this last surge of downdraft. I think it's really careful not to throw the baby out of the bathwater, right? The technology behind Bitcoin, the idea behind Bitcoin is not going away. The idea of Web 3 of transferring value across the Internet is not going away, unique digital objects. Like Satoshi gave us this idea that we could have a private property on the Internet. Before Satoshi, there was no private property on the Internet. So if you think about, there's no capitalism without private property. And so we had this Internet without capitalism in lots of ways. And so now you're seeing it with NFTs, you're going to see the gaming space explode in the crypto space, media, entertainment, that's going to be kind of the next leg of growth, I think. And so our plan is to weather the storm. We raised capital last year, both by selling crypto assets and by doing a big convert. It's to make sure costs make sense relative to our business. We're still growing. I think we'll have more people at the end of the year than we had at the beginning of the year. But it's to be realistic that a lot of confidence got kicked out of the market. It's going to take a while for Humpty Dumpty to get put back together again. It's going to take a while to kind of rebuild narrative, and it's going to be more focused on utility. Like in the gray bubble, which will probably get its own name, right, the QE -- the COVID bubble. We had this idea of identity investing that showed up. If you're a game stopper or an AMC guy or [indiscernible] in the things, and a lot of crypto got caught up in that. This idea from Robin Hood and lots of others that everybody should be an investor. Well, a lot of people don't have the training to be investors, don't understand risk management. And so I think you saw a lot of froth and that's mostly taken out of the market now.

So help us understand how your management business, is it any different today than it was, say, a year ago when you go through these periods of higher vol, how are you thinking about margins or counterparty limits, that kind of thing?

Yes, we have been conservative. My -- one of the presidents of our company came from hybrid or credit hedge fund and so I think he's the only guy in crypto that came from a credit background. And so we've suffered almost no credit losses in our history. We don't deal with retail, and so we're institutional only. And so everyone gets KYC, AMLed. And we lend with more collateral than we're lending out. And so all of our loans are over-collateralized. The same thing with counterparties. We watch our counterparties pretty closely. We have a big derivative business, a good lending business. Those are probably our 2 best businesses in the trading space. And so I anticipate volumes going down, and I anticipate compensation coming down. We're going to adjust. But I don't expect the market to go away. I mean, we're seeing a lot of the pension funds hadn't gotten in yet. They've done their homework and they're on the sideline and they're watching now. I think it's going to take them a little bit longer to get in, but they're not seeing this says, oh god, I'm glad I missed too, the mania. They're saying, hey, here's an opportunity to enter this new technology space.

And when you say that the next leg to provide growth is crypto as a utility, maybe you could talk about that a little bit.

Well, so if you want to think about crypto simply, right? You have Bitcoin as digital gold, let's just hold that aside. The rest of the blockchain space, if it's Ethereum or Cardano or Polygon or Solana are all trying to build this giant global decentralized supercomputer that authenticates processes and stores data, right, a shared database to then build on top of. That's happening. What it should be valued at, right? You almost have to invest in crypto as a momentum investor. There's not enough valuation metrics yet. But it's not just blind momentum, it's momentum around things where you see usage going up, where you see developers coming in, where you see talent building on. And so I think that space will continue to grow. And then things that are built on top of it, if it's the NFT space or decentralized finance, you're going to see them valued more on how they're used. Where the last cycle, it was community investing. I mean it's still -- it's amazing people say, I'm a Tesla guy. So what does that even mean other than you might drive a Tesla, right? So like we have this idea of community investing, which became very powerful. In crypto, it's tribal as heck. I mean I literally get death threats when I badmouth another ecosystem. Like the people from Cardano, which I call vaporware, ghost chain, literally just troll me every day on Twitter because you're badmouthing their thing. And so there's almost an irrationality in how people invested, not just in crypto, around the planet. And I think that's going to get washed out.

Okay...

Not completely, these communities are resilient, but I think it's going to be a lot less important.

Okay. And I guess the other perspective is crypto as digital gold, crypto as currency.

Yes. So I don't think crypto is going to replace the U.S. dollar and I hope it [ doesn't, ] right? Like if Bitcoin goes to $500,000, it's because the stewards of our economy have done really poor, right? Look at Turkey, where you had Erdogan, who was a crummy dictator, he is a crummy dictator, but he also was a -- wanted to be the finance minister and the central banker at the same time. And now they've got 90% inflation and the wealth of that country is being washed away, certainly the middle class, its working class. And so we're hoping we have better stewardship. We will have a digital dollar, some version of a stable coin, USDC is one, there are lots of different versions of it. That, I think, is going to become more important. And it's not so important inter-U.S., right? Like Apple Pay works pretty good. Our digital payment system works pretty well in the U.S. But outside of the U.S., it doesn't. So if you look at remittances, already 15% of total global remittances are done on crypto rails. That's going to go one way. And I think it's widely important from a national security perspective, China has a digital renminbi. When you think about the Mid East, South America, all of Latin America, Africa, they want that to be the reserve currency. And so I think you're going to see us from a policy perspective or from a national security perspective, really have to move forward with the digital dollar. And so payments is going to be part of crypto. The last piece is kind of more metaphysical, like how we decide what value is, is going to change. And you saw it already when the dollar -- when they were putting so much money, right? I mean people were trading Richard Mille watches at crazy prices and baseball cards. And -- what -- as we move into the metaverse, right, as we go from a world of atoms to world of bits, you're going to be able to transact more and more, make markets on more and more things. And so part of the future is this hyper capitalism, being able to make markets on everything. So if you look at a decentralized exchange like Uniswap. The real cool part of Uniswap isn't that it has no employees, right? It's just code and it's decentralized and its atomically settled. But if it can trade any 2 pairs of anything. And so I do think, not in the next couple of years, but in the future, you're going to see an explosion of markets. And all of this sudden then because you'll be able to transfer value on anything, this idea of what we decide is value its going to shift.

Okay. I don't know that much about Uniswap, but is it an AI platform?

Uniswap is the biggest decentralized exchange. So think of the NASDAQ with no people. It was doing about 5% of the volume on the New York Stock Exchange every day. So not insignificant. About $2 billion of trading a day. You can trade any 2 digital payers on it. But all of these decentralized protocols, why they're interesting is they're transparent. You see everything that happens, what commissions get paid, who trades where. They're composable, you can build on top of the platform. They're atomically settled, so there's no settlement risk. And so when I think about them competing in the long run or having decentralized platforms, my instinct is decentralized finance will win. And it's been stopped partly mostly because of KYC and AML issues, right, people say I want to make sure I know who I'm trading with. That's going to get solved technologically in the next couple of years. You're going to have like a blue check system where I don't need to know I'm trading with you, I just need to know that you're not [indiscernible]. That's happening. There's a ton of money being put in that space. And so I've got a lot of faith that DeFi is going to kind of rise again. Right now, everyone's throwing the baby out with the bathwater and crypto. But that technology is not going away.

Okay. You mentioned earlier about how you've been obviously speaking with investors in crypto, pension investors, staying on the sidelines, but looking to get in. What is the -- how do you get any skeptics to come on your side? Where are they? What are they missing? And maybe said it as a different way, what is it that you think they're waiting to see to get involved?

Well, it's funny. We have that cycle in lots of ways. I went to Paul Tudor Jones, bought Bitcoin and he wrote about it in his newsletter. Within months, almost every macro hedge fund manager had some Bitcoin, right? He had kind of made it okay to invest in the space. Stan Druckenmiller was on TV yesterday talking about wanting to buy Bitcoin if we have a bullish inflation that comes out of the Fed flinching. And so Bitcoin is now a macro weapon. We're seeing -- Texas Teachers publicly said, hey, we're going to put $1 billion into crypto. And so one by one of these kind of investment in verticals got comfortable. If you look at -- I can give you names of 30 unbelievable investors that have kind of bought in. And so now I think it's just waiting for the macro to come back. In the broader blockchain space, I think everyone buys into how blockchains can be really useful and how decentralized systems can, I think we need to see more use cases. So we've got the Ethereum and the layer 1 mania going last year, which really was NFTs because it was, in some ways, the first real-world use case where kind of real companies, not just crypto companies were making money and using crypto projects. So if you think about like the NBA, the NBA made $125 million extra dollars last year because they sold video highlights to sports fans. We have a joint venture with Fanatics around NFTs, baseball, WWE, some other -- NASCAR. In the future, your 12-year-old kid is not just going to buy a baseball card, he's going to want a digital one, and it's going to live in his metaverse bedroom. And you're going to see digital collectibles, not as investments or not just as investments but as consumption. The Head of Visa Blockchain told us they're piling in because they thought in 10 years or less, the average Visa cardholder who now swipes his card 0.9 times a day, will swipe his card 10 times a day because they'll be buying digital goods. And you can store a lot more digital goods and you can fancy shoes in your closet. And so that's happening.

Okay. And then just the other question there is on Qt and how do you expect Qt is going to impact the crypto asset class?

Well, I think it's going to have the same impact for a while that it will on most asset classes, right? We had a great run. And it was really accelerated from COVID. When I said S&P at 3,200 or 3,300, that just gets you back to the bull run of '09 till now, that trend line. And so it all depends. What's really, I think, challenging right now. So I've been an investor for 30 years. Nobody in this room that I can see at least has any experience with inflation, right? The last real inflation we had was in the '70s. And so our internal algorithms on what to expect for inflation don't exist. So we go to the models, right, okay, we go to the models say, did we hit peak inflation yet or not. Economy is going to slow that immensely down and inflation should roll over, it should. But the models are out of date, right? We're literally talking 1970s, 1981 was the last time, right? And so I think there's just a lot of uncertainty around what inflation does and what courage the Fed will have. The only way you kill inflation at this level is to put the economy in a deep recession. Not a soft landing, not we're going to just touch down. And so that's hard to do. You got politicians yelling at you. You've got -- and so the other piece of this is all our risk models. I went back when the stock market looked like it bottomed, whatever, a month ago, right around this area, 3830. It was a Thursday, big volume, huge volume day. On Friday -- on that Thursday, it was a 52-week low. On that Friday, 90% of stocks were green. 11 times in the last 20 years when that happened, it was a bottom. All 11 times, that was cutting rates. And you can go through tons of stories like that when stock market wealth falls more than 50% of GDP. It's almost always within 4 months of the bottom. But all those occasions, the Fed was cutting, not raising and not starting Qt. And so we're in uncharted territory, not just for crypto, but for investing. And it's both how markets adjust. I mean look at what's going to happen in Japan tonight. They've been trying to hold the Japanese bond market up for years. And the market is testing them right now, it's 1.5 points lower than it was 16 hours ago. You can't hold the currency in the bond market forever. So we went through a long period of time where we were in this unbelievably pleasant equilibrium/disequilibrium. And that might be breaking now. And so I think you have to have less confidence or more humility in what might be the outcomes.

Okay. So let's kick it up a notch, just talking about where Galaxy fits into the broader financial landscape. Right now today, banks are not able to do what you do because of regulation, right? They're not allowed to really face directly cash crypto.

Yes.

So can you speak a little bit about to the opportunities you have as a result of that? And then what if regulations change, and allow banks in?

So the good news is it gives us a bit of a head start, right? If you look at the money Morgan Stanley or Goldman Sachs made last year, banks have been so profitable, missing out on crypto is not really that big of a problem, right, in the short run, right? The whole crypto industry, it felt great if you were in it, but it's a small bump on the elephants rear when you look at the magnitude of how big these financial institutions are. And so I don't think [ David Sullivan ] has missed much yet. And they don't think so either. And so I think you're not going to see them come plunging into the market for a while, mostly because of regulatory stuff. When banks come in, it will probably be around security tokens, i.e., how -- when we start securitizing real estate or fixed income securities, tokenizing them, and that is happening. So we see some banks starting to look, and it will be the same infrastructure, the same type custody. Banks are staying out of custody because the SEC is messing with the accounting and they want us to put custody assets on your balance sheet now. Seems kind of crazy. And so I think you're not going to see the big banks plunge in. You might see the second-tier blanks plunge in. Listen, our basic business was to use our own money to understand the system. We made over 150 investments in the space. We learned lessons from that. And then we've tried to convey those lessons to our customers. We have the investment banking business. It does advisory, mergers, capital raising. We have an asset management business where we manage other people's money, both passively and actively. We have a sales and trading business for better -- our disintermediation business where we do derivatives and trading and a mining business. And so we are -- and waiting to close our deal with BitGo where we'll be the second largest custodian or one of the top 3 custodians in a big technology provider. And so the idea is, can we be a service provider and a fount of information to institutions who are trying to get in the space. That's been working for us. Again, this year, is in some ways a setback for the whole industry. In some ways, it gives us a chance to really build and dig in. I think you'll see a lot of people go out of business. I probably shouldn't have, but the last time I was on stage said, I think 2/3 of hedge funds will not survive, crypto hedge funds. And I said that because we went from 400 crypto hedge funds to 1,600 crypto hedge funds in 16 months and a lot are subscale and a lot of hedge funds that we're looking at are now down 50%, 60%. I think when you start doing the math, how hard it is to come back from 50% to 60%. The same, quite frankly, is true with trade by hedge funds. Every time we've had huge sell-offs in markets, market crashes, they've been bailed out by a Fed that's injected tons of liquidity. And so you've had all these Vs comebacks. Like if the [ VA ] come in, you're going to see a tremendous amount of hedge funds shut down. And so for us, it's growing through the next period of time. Bitcoin will lead the markets back higher before equities. It will be because once the Fed flinches, it's a perfect investment for it. And equities will still have, oh c***, our P is going way down. I'm sorry, almost our E is going way down, right? Because the economy is going to sink. And so earnings are going to go much lower than people think. And so what happened in the '70s, gold led the market up, not the stock market. I think you'll see the same thing with Bitcoin this time.

So I think there's some actions that you've taken with incumbents maybe to be -- when I'm saying incumbent, I'm talking about the traditional banks. There's something we've read a couple of weeks ago, partnership or...

Well, we have a partnership with you guys to sell just simple product, the coin Ethereum, funds. What you saw is CEOs of all the big investment banks getting calls from their high-net-worth customers saying, I want to buy Bitcoin, why won't you sell me Bitcoin? You'll sell me hurts claims for God's sake, but you won't sell me Bitcoin. And so there was enough pressure that the asset management -- wealth management groups decided, hey, we -- even if we don't love it, we're going to provide conduits. And that's been one of our strategies is to be a service provider to -- in Canada, we're partnered with the CI Group. We have ETFs in both the coin and Ethereum. We've got a partnership with Morgan Stanley, one with Goldman Sachs. We've got an ETF partnership with Invesco. If Mr. [indiscernible] ever gets off the stick and approves ETFs. And so one of our thoughts was we'll be the intellectual capital, and we'll use the distribution of these giant arms that have trusted distribution.

Okay. And there's more opportunity there?

I think so. We're about to announce one in Brazil. And so what's interesting is crypto is truly the first global markets, right? Like you have a U.S. bond market, you have a Japanese bond market. In crypto, you have compound, which is a global interest rate market. Bitcoin is like I said, if you think about Bitcoin being owned 150 million people, it's the eighth largest country on Earth. It's the most distributed asset outside of the dollar and the euro, of all time. And so Crypto is a lot more important in lots of ways in emerging markets or developing markets than it is in the U.S. And so a lot of the business growth is happening overseas.

And what if in the U.S., legislation requires stable coin issuers to be banks. Is that a positive or a negative?

I think what's most important with stable coins is that there is a separation of -- so the dollar is kind of cool because you can put it in your pocket and you can give it to a guy, no one knows you did it, right? So we have this privacy that we trust. Banks don't give up our information to the Fed unless they're subpoenaed. In crypto, every transaction is trackable. And so what you're seeing in China is they know exactly who spends what, when. And so each of these -- and Europe is -- the ECB is pushing for something that looks a lot more like China, which to me is so unAmerican that we can't let it happen. I do think stable coins will -- the deposits of stable coins should be at a Fed-regulated bank. I don't think you need -- you should need to be a U.S. bank to issue a stable coin. And we'll see how the legislation plays out on that.

I want to spend the rest of time here just to make sure that we understand what's going on with the business. You mentioned trading, investment banking, asset management. Maybe you could give us a sense of how things are looking and how you're managing through in each of those areas.

Yes. So we -- if you want to think about our business, we have a big balance sheet. And so you can call it our principal business, which is both venture investments and tokens, proprietary trading, if you want to think about it. That business had an amazing year last year, as the markets went up. It's certainly losing some money this year. So I think when you put the 2 of them together, with Bitcoin having done a full round trip and then some, we look pretty darn smart. And then we have the operating businesses. And as of our last official report, all our operating businesses were profitable on the year. I will get pencils thrown at me if I update that from Elsa and give you guys an NPI. But we're very focused on making sure the operating businesses stay profitable. And my strategy is to kind of -- like I said, we raised a bunch of capital as to kind of grow through this down period -- marginally grow, in terms of headcount. And hopefully, when the Fed loosens up a little bit and crypto comes back, we're really ready to take advantage of all the opportunities.

And just on the investment banking side, I know that investment banking generally is a little soft right now just as pipelines are not getting executed. Could you just give us a sense on your side?

So there wasn't -- crypto investment banking wasn't a thing 2 years ago. Like we made a bet, got Michael Ash, and he built a team and they developed domain expertise in the space and that become kind of go-to bankers. Not getting the giant deal like Coinbase, of course, they went to a Goldman Sachs or -- but there's a whole space of people in crypto that needed crypto knowledge. And so those guys are working 24/7 right now. There's going to be a tremendous amount of consolidation that happens. It's interesting, a lot of our companies were originally looking to raise capital. Now they're like, hey, can you sell me to someone? And so the gig is shifting some. But our bankers are unbelievably busy right now and engaged. They got off to a good start this year. I expect it to be a very good business for us.

And then just lastly, on your own capital and how you see putting that to work over time, what are the gating factors for you to redeploy versus retain?

Yes. Our bar is high right now as we're looking at all kinds of opportunities. And I don't think we've seen the bottom of the stock market yet. I think crypto is closer to the bottom than the stock market is only because of this weekend's fiasco, where we had this 30% drop in Ethereum and -- so if you were going to get to levels, I think Ethereum should hold around $1,000, and it's $1,200 right now. And Bitcoin around $20,000 or $21,000 and it's $23,000. And so you're much closer to the bottom in crypto, I think, than you are where I think stocks could have another 15%, 20%. We don't have 12-year bull markets and end with a 4-month bear. It's not the way it works. And bear markets are hard to trade. They're going to be giant squeezes up and down. But until I see the Fed flinch, until I really think, okay, the economy is so bad. The Fed is going to have to stop hiking and even think about cutting. I don't think it's time to really deploy lots of capital because you don't know, is that 3 months, 6 months, 18 months, this is not going to be a vague for the hedge funds that are down 50% in the tech space or the growth equity space or for the crypto funds. And so for us, it's hold on to our capital preciously, and -- I lived through 2018 -- in 2017, we had the first crypto mania, and then we had a crash. And people don't believe me what I tell them, but the overall crypto market cap went down like 97%. And what you don't understand until you do it is hey, a market that's down 97% is down 70% and then another 80%. And so you've got to be very careful of getting too excited to buy the falling knife too early because all of a sudden, you might want to take one more leg down. And so we're going to be pretty cautious in terms of deploying the big capital we have going out and buying someone early. Because I think there's a lot of work to do just to kind of -- like I tell my employees all the time, I want you building relationships, building technology, building systems, building trust. If we can do that through this downturn, I think we'll be in great shape.

Okay. Great. Mike, thanks so much for joining us this afternoon.

Thank you.