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

Good morning, and welcome to Galaxy Digital's Fourth Quarter 2022 Earnings Call. Today's call is being recorded [Operator Instructions] At this time, I would like to turn the conference over to Elsa Ballard, Head of Investor Relations. You may begin.

Good morning, and welcome to Galaxy Digital's fourth quarter earnings call. Before we begin, please note that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors, including those identified in our filings with the Canadian securities regulatory authority on SEDAR and available on our website or in future filings we make with other securities regulators. Forward-looking statements speak only as of today and will not be updated. In addition, none of the information on this call constitutes a recommendation, solicitation or offered by Galaxy Digital or its affiliates to buy or sell any securities, including Galaxy Digital securities. With that, I'll turn it over to Mike Novogratz, Founder and CEO of Galaxy.

Good morning, everyone. Last time we did this was November 9. It was 2 days after the FTX debacle. And so, man, it seems like a year, so it hasn't been that long. I thought about my remarks today and at one point, I thought about it calling them the tale of two cities because it feels like overseas, crypto is really doing really wonderfully. And domestically, there seems to be a regulatory onslaught. But I changed my pitch to the good, the bad and the ugly. [indiscernible] moving for you youngsters. Listen, there is a ton to talk about today. I'm going to try to focus on high-level stuff. Why I'm excited right now. What I see going forward. Why am I excited about Galaxy's opportunities. How I'm framing the world. And then I'm going to have Chris Ferraro kind of really take you through our businesses and our strategic opportunities. And then Alex Ioffe, to really bring you through the numbers. Let's start with the good. I don't want to bury the lead. This is crypto's moment, right? Crypto was, in lots of ways, created for this point, right? Satoshi Nakamoto, way back in 2009, worried about the breakdown of the legacy financial system. He worried about populism infecting our politics and a constant printing of fiat currencies in a debasement of money and created Bitcoin. Bitcoin really is the first decentralized store of value or money, which then really gave birth to this whole industry of a decentralized revolution. And so there is nothing like a banking crisis in the United States where 1 day, Silicon Valley Bank is healthy and 3 days later, it's out of business, where Signature Bank is a key part of the infrastructure for lawyers in America, for crypto, for real estate in New York and a week later, it's out of business to remind you that our system is fragile. We have been on a debt orgy, literally gorging ourselves with cheap money for years really post-'08, certainly. And have built up a debt-to-GDP in this country that might be unsustainable. I always say I go to bed and I say Hail Mary hoping that the stewards of our country and our economy can land the plane, can actually maneuver our economy into something that's sustainable without a real disaster. But that challenge is real and the challenge gets worse and worse. And so things like this banking crisis are a great reminder. And it gives Bitcoin and Bitcoin's community unbelievable resilience, right? It gives the crypto community unbelievable resilience because it literally is like an adrenaline shot of -- this is why we got into this. And so I look right now and say, what's the good? Bitcoin's trading over $27,000, Ethereum over $1,700. On a risk-adjusted basis, that's volatility adjusted, sharp ratio adjusted. Bitcoin and Ethereum have been the two best performing assets in the world this year. They've been the two best performing assets in the world over the last 2 years. They've been the two best performing assets in the world over the last 3 years. So whatever Jamie Dinan wants to say, whatever the Biden Administration wants to say, they're just wrong. And the world knows that, right? Crypto started as a retail phenomena. It started as the little people's revolution, and it continues to be. We got in this business wanting to connect institutions to this market, to this new phenomenon, to these new technologies and continue to see a really interesting lane for Galaxy. We're as resilient, I think, as the crypto community. And so you can take shots at us, you can knock us down, but we're going to be here. We're going to be coming to work every day, and we're going to continue to try to build these bridges. And so like when I say good, it's good in price action, it's good in spirit, it's good in narrative. And it's good quite frankly, overseas, we see unbelievable adoption, right? If it's the Mid-East, if it's Hong Kong's new regulatory regime, we see lots of exciting things happening in Europe. And so lots of progress being made. What's the bad? In some ways, the regulatory regime in the United States is very tough. My own narrative on it is it was making lots of progress until FTX. And then the democrats felt foolish that they were so close to Sam Bankman-Fried from the SEC to the CFDC to the Biden Administration and have used this one example of horrific fraud and being snuckered by a guy in Bermuda shorts to just say the whole thing is bad. Katy Han wrote a great editorial in the Wall Street Journal yesterday, people should read it. She was really articulate about, you don't want to throw the baby out with the bathwater, but we see that consistently. And so if it's the government trying to pressure banks not to be in crypto, regulatory enforcement after regulatory enforcement, the SEC seems to be issuing wells letters weekly, and there's going to be a huge backlog of judicial proceedings. That's not good for innovation. It's not good for America's chance to lead this industry. It's pushing people offshore. And so we're fighting back. We've got a guy in D.C. today trying to educate. I've been on the phone plenty with both Republican and Democratic Congressmen and Senators trying to make the case that the Biden Administration's really attack on crypto was shortsighted. Again, what's good about this is despite all that, despite what you would think are insurmountable odds, crypto prices are higher, activity is moving up and we see a pretty promising future. Listen, we have three main focuses this year in each of our businesses, right? We've broken our businesses up in -- by next reporting cycle. We're going to resegment our earnings. So you can see them more clearly into the markets business, the asset management business and the infrastructure business. In markets, we are frantically trying to finish and launch our Galaxy Prime, our G1 offering. We think it's going to be best in class. Chris Ferraro is going to talk about that. In Asset Management, we're trying to -- and I think we'll be successful raising active as opposed to a path of Asset Management, active money to manage for other accounts, higher fees, plays into our strength of being able to navigate these markets. And on the infrastructure side, right at the end of the year, we spent a whole bunch of money buying Helios, a big data center, a mining operation in Texas. That is coming online as fast as we hoped it would. And so you're going to see our mining revenue and our hosting revenue pick right up. We think that will be a positive EBITDA business for us this year and are really excited about it. And so things feel good on the Galaxy level. So the good, the bad, the ugly. What's ugly? Well -- and I feel for you, our stock price has been ugly, right? I said last earnings call, I cared a lot about the stock price, and it's lower, not higher. And it's lower with Bitcoin, higher -- and it's lower with our company doing better. I looked as of Friday, best estimate for partners equity. Our book was roughly CAD 6.60 with the stock trading close to CAD 4. The way I look at things is we have an operating business that I think will make money or at least breakeven this year and if not, should come close. And again, I said by next reporting, we're going to break that out in a more clear way for people to see it. But -- and we've got a book that certainly feels like it's bottomed. Alex will take you through the markdowns in 2022 and our private portfolio losses, the FTX loss and everything else that hit our partners' equity. We've cut costs. We took the bonus pool way down last year. We continue to understand that we need to grow but, at the same time, be very prudent with how we spend our money. And so the way I look at it is if book has bottomed and is heading up and our operating businesses should at least breakeven or come close to it. Our stock is just at the wrong price. We had bought stock last year. The Canadian rules, the exchange rules limit how much you can buy per year. We can't start buying our own stock again until May 15. But hear me loud and clear, if our stock is still anywhere close to here, we will file with the Canadians to be able to use some of our capital to buy back stock. And so with that, I want to close and pass to Chris to kind of come into the detail of Galaxy itself. I would tell you, I'm proud of our team. This has been a trying 5 months. It was all a hands-on-deck event just 2 weeks ago -- weekends ago, and I think our team handled it wonderfully. We've got diverse bank and brokerage accounts. We were ahead of the game on lots of ways. And so I think we're coming out stronger than we were with our peers and lots of our competitors either out of this business or weakened. And so I'm optimistic and bullish. And with that, I'm going to pass it to Chris.

Thanks, Mike. I'll now cover some of the more detailed updates for the three strategic priorities that Mike mentioned earlier. First, we have Galaxy One. On the last earnings call, we highlighted that we began the build of Galaxy One, our unified technology first platform for institutional clients to engage with digital assets. Our first product release will be Prime, integrating custody, trading, lending and derivatives for institutional participants through unified tech and regulatory compliant platform. We've dedicated a significant team across all areas of the organization focused on the build-out, the majority of which are in our product and engineering teams. Some specifics on what differentiates our Galaxy One offering are: A licensed regulatory compliant, institutional-only platform with a focus on robust risk management and reporting; a multi-custodial model that will include a number of different qualified custodial integrations; a hybrid liquidity model that leverages our best-in-class principal liquidity powered by our in-house [indiscernible]; integration with our existing financing and derivative offerings in order to provide cross and portfolio margining, access to our in-house research and a dedicated customer success group to provide white glove client coverage. Given the events of 2022, not just in crypto, but throughout the broader financial system, we believe trust and transparency will be the quintessential factors for early success. We've recently launched a demo of the trading stack and have been giving sneak previews to prospective beta customers. Initial feedback has been overwhelmingly positive and people have been asking for documentation to onboard. We intend to release our beta to select customers in Q2, fast followed by margin and secured funding capability in the second half of the year. We've also begun the groundwork of the future of Galaxy 1 beyond just Prime. We're aiming for it to be the single pane of glass for Galaxy customers to access existing and new products that Galaxy can offer. This includes SaaS-based offerings integrating with GKA for out-of-the-box financial services infrastructure. These capabilities can give rise to future Galaxy offerings for global settlement, payments and commerce and through a potential SaaS partnership, help elevate the entire ecosystem. We can also expand into private markets and look at issuance, tokenization and fund management. This is all still very early, but we intend to prove our product and engineering capability step by step to meet the market as it evolves. Second priority in the Asset Management business is an acute focus on launching liquid active and alternative investment strategies in order to grow higher fee-paying AUM while leveraging a growing regional partnership model to expand our passive product reach. One key initiative that is well underway at Galaxy today is the migration of all of our alternative venture investing teams into the asset manager with a goal of creating a unified venture platform for institutional LPs to access our talent and our products. And as a result, soon, you will see previously reported balance sheet investments reflected in the AUM of Galaxy Asset Management. But that does not mean shareholders no longer receive the benefit of the venture investments on balance sheet. On the contrary, Galaxy will continue to own and manage our existing portfolio and is committed to seeding new funds we bring to market, ensuring shareholders retain exposure to venture investing through our stock. However, what this will do is add larger investment buying power to the Galaxy platform, while at the same time, generating incremental high-margin management fee and carry interest operating revenue streams alongside our already scaled Galaxy Interactive Venture product. In addition, we also intend to expand our actively managed liquid product suite to include a long-short fund, providing investors with lower-vol, risk-managed exposure to liquid crypto assets and expect to launch this fund in the second quarter. We've also added some exciting LPs this year as well. Galaxy Interactive Fund II received a capital commitment from Texas teachers just this February. And also in the fourth quarter, we announced a strategic partnership with Itau Asset Management to develop a comprehensive suite of Brazilian-listed, physically backed digital asset ETFs and are actively exploring regional partnerships in both Europe and Asia. Finally, the third party Mike mentioned is integrating and scaling our recent acquisitions in our digital infrastructure business. In terms of our mining strategy, we are focused on significantly growing our capacity for both proprietary and hosted Bitcoin mining, expecting a total targeted hashrate under management of over 4 EH/s by the end of 2023 with an approximate 50-50 split between prop and hosted Bitcoin mining. That's nearly 3x where we were at the end of 2022. This is all while mining Bitcoin well below its fair market value, growing reoccurring hosting fees and focusing on our energy management strategy. We'll get there by integrating the Helios site we acquired in December, which provides access to tax-efficient mining infrastructure and removes any material reliance on third-party hosting providers we've previously had. We expect to energize approximately 200 megawatts of mining capacity at Helios alone by 2023 year-end. And with incremental investments, the facility has the potential to scale to north of 800 megawatts. Another important element to this operation is how we manage power. While the previous owner was generally unable to enter into fixed price hedges, we do have this capability due to our creditworthiness and have already begun to implement this strategy. As of today, we have also begun to energize our smaller organically built mining site in Diboll, Texas with a plan to have over half of the site energized in the next 3 weeks with the full 16 megawatts of capacity scheduled to be available by the end of Q2. Finally, we remain committed to our goal to reach an 80% sustainable energy mix and are actively pursuing multiple long-term solutions to achieve this target. Additionally, on February 21, 2023, we acquired the assets of GKA, a secure institutional digital self-custody solution. The transaction accelerates Galaxy's product innovation and development by adding a team of nearly 40 professionals mostly in technology and R&D roles that include cryptographers and blockchain engineers. The deal also expands Galaxy's international presence with the addition of an office in Tel Aviv, where just this week, we have a team over there working with integration and product road map with Lior and Shahar. Galaxy will assume all GKA clients, a majority of which are net new to the firm. We believe the market opportunity for GKA's custodial technology services is expanding rapidly, particularly as institutional demand in the asset class grows and as the need to safely and securely hold cryptographic key material has become a global focal point for regulators and market participants alike. As such, our primary focus today is to let that talented team there do what they do best: Build great cybersecurity tech while we help to invest in GKA sales footprint and existing product road map to begin capturing market share this year. We also intend to utilize GKA's custody solution as an internal customer in the ongoing development of Galaxy One. Now looking ahead to 2023 and starting with our capital allocation priorities. As Mike shared before, we are positioning our balance sheet in a conservative way with more cash held in U.S. depository accounts and less balances on exchanges. While you can look at our financial statements for results as of December 31, 2022, I'm more focused on the quarter-to-date preliminary results we published this morning. You'll see our preliminary 2023 year-to-date earnings estimate of approximately USD 150 million as of Friday, March 24, bringing our partners capital back above USD 1.5 billion. Our liquidity position remains intact even after recent dislocations in the commercial banking sector. In the first 3 months of the year, we are expecting to show both net profits in our operating businesses as well as positive gains from our balance sheet holdings of liquid coins and investments. Our trading operating business benefited from heightened market volatility, increased volumes from existing clients and counterparties as well as market share gains. Moreover, we remain focused on surviving downturn crypto markets by continuing to manage costs with the goal of running our operating businesses at breakeven or better. I was proud to see that in our cost control efforts in 2022, including while our overall cash compensation rose 12% because headcount rose nearly 40% year-over-year, we were laser-focused on variable compensation and subsequently reduced 2022 cash bonuses on average 63% per employee from 2021 levels, noting that cash bonus reductions disproportionately impacted the senior team. We also focused on cutting nonpersonnel costs with professional fees down almost 50% year-over-year. However, we do expect our audit and legal costs to remain elevated for the time being as a cost of doing business as a highly regulated public company in our industry and in the United States in this environment. Turning to capital markets. We continue to remain focused on the U.S. listing and are working diligently through the process, which has remained frustratingly slow. We also purchased and canceled $55 million worth of the 3% convertible notes we issued in December 2021. We purchased those notes for approximately $30 million, including accrued interest. We will also plan at this time on restarting a share buyback program in May when we are allowed to by the TSX. Before handing over to Alex, I just want to reiterate some of Mike's comments from earlier and share an update on the impacts of the business from the banking crisis earlier this month. We've continued to operate business as usual while helping institutions navigate highly uncertain volatile market conditions 24 hours a day. As we previously disclosed, Galaxy has no material exposure to SVB nor do we bank with them. Moreover, we continue to have no material impact from additional bank closures, including Signature and Silvergate. We have a diverse group of U.S. and global banking and brokerage relationships across our business lines as part of our vigorous risk management process and we remain committed to helping clients navigate the ever-changing market environment and ensuring firm and client assets remain secure. Most of our deposits are at a large U.S.-base banked. All company and client assets are currently secure and accessible. Moreover, in the midst of a banking meltdown, our trading desk saw one of its busiest days in terms of client activity and volume in its history with no interruptions. This is even with the loss of the Cigna and Send networks. Our desk continues to settle Fiat 24/7, and we remain over allocated to stable coins in order to ensure our ability to serve our clients. We've seen many market cycles in both crypto and TradFi. While we continue to use that experience to successfully navigate short-term downturns, we remain committed to ensuring Galaxy is positioned for the inevitable adoption of digital assets. With that, I'll turn the call over to Alex to briefly cover financial results.

Yes. Thank you. Good morning. Mike and Chris covered a lot of ground. I will stick to essentials. Market conditions for crypto were challenging last year with a number of adverse events during the year, ending with FTX market failing in the fourth quarter. In light of that, our business performed well. We ended the year in a strong balance sheet position with over $0.5 billion in cash and $1.4 billion in equity capital. We reported a loss of $1 billion for the year and $288 million for the fourth quarter. These losses were primarily attributable to unrealized mark-to-market on our investment portfolio and on our long digital assets positions. In the first quarter of this year, some of these marks reversed. Overall, through last Friday, we estimate profit before tax of $150 million, which brought our equity well over $1.5 billion, a good start to the year. As Chris mentioned, we navigated recent discombobulation in commercial banking without issues. At the end of last year, we held approximately $960 million in liquid assets, consisting of $540 million in cash, $130 million of net liquid digital assets and $280 million of stable coins. Now back to the operator to take your questions. Thank you.

[Operator Instructions] The first question comes from Andrew Bond with Rosenblatt Securities.

Just in light of the recent banking crisis with the most widely used baking off ramps being shut down over recent weeks, have you seen any impact to your trading business? And when you look at the impact of a tighter lending and venture market, can you talk about the opportunity to win share across your businesses and perhaps make more strategic acquisitions where others are capital constrained?

Andrew, and welcome to join us here at Galaxy and covering us. Really appreciate it. Yes. So as I mentioned in the -- in my prepared comments, the banking crisis actually provided a pretty good opportunity for us to prove, a, our resilience and the fact that we had multiple providers. We actually operate it as a pretty important liquidity center during all that for market participants. We saw some of our best volume days we've ever had in the history of the firm. And we also -- we're here for portfolio companies. We spent all weekend with portfolio companies, working on different potential alternative financing solutions for them, for our portfolio companies and companies that weren't in our portfolio in the instance where those banks ultimately fail, which they didn't. And so ultimately, they ended up not being a problem broadly. But I think the -- that event proved the resilience of the way we've built the business, proved our own risk management. And those are the kinds of events where if we've done things right, we can actually act on the front foot and be offensive which we did in a way that, as Mike articulated, like we were all very proud and humbled at from the team side. So yes, we think it's -- we performed well. We were there for clients. And going forward, I think it is an event that we will look back on it historically, and it will give us the opportunity to now be one of the main go-to places in the market going forward, who has those relationships that are going to -- with major banks that are going to be scarce to find going forward. And so since we have those, we think it actually positions us quite well as to be an aggregator for the end client point in the industry going forward.

The next question comes from Deepak Kaushal with BMO Capital Markets.

I got a lot of them, but I will try and limit it to one. Just big picture, you guys refiled your S-4. What's left to be done between the back and forth with you and regulators before they consider effectiveness? Is there more on the to-do list? Or is it just to wait and see how the SEC feels about your filing application? Any thoughts there?

Deepak, maybe you should e-mail [email protected].

dot gov.

dot gov, right. Listen, we are answering the questions they ask us, and we send our answers at them and then we wait for their responses. I am not optimistic that this happens quickly, just given the overall tone of the SEC and the Biden Administration towards crypto. I think the people that we deal with at the SEC are answering our things earnestly. And they're -- they take their time to try to dig into these questions. But it feels like not one crypto company has made it through that process this year or last year. And so to be optimistic might be a little foolhardy. That said, from the regulatory environment, we've got -- we get lots of -- we have lots of touch points with lots of regulators. And we, as Chris mentioned, spend a whole lot of money and time answering questions, and we will continue to do so. I mean, it's the lane we chose, right? We chose this lane to be a regulated player trying to bridge for all the unregulated crypto community with institutions and it's a d*** painful lane. I do think there will be light at the end of the tunnel. I'm just not sure when.

Yes. Deepak, we cleared roughly 70 questions on the last filing. We'll see what comes back from SEC this time. It's been about 2 months since we submitted.

The next question comes from Michael Legg with Benchmark.

On Galaxy One, you mentioned that your fully licensed regulatory compliant. But in today's regulatory environment where we really don't know what's coming down the road, except that the government is obviously all over the industry, can you talk how you navigate that regulatory environment when we really aren't set on what we have down the road and how you can assure your clients of that? And then second, just on that, you mentioned margin in the second half. Can you talk a little bit about the leverage you'll allow and the collateral?

Sure. Thanks for joining us today. Yes. So the answer on how we navigate a dynamic and changing regulatory environment is we tried ourselves to be dynamic and to evolve as it changes. Today, we already have -- we already operate through FinCEN, a money services business, and we have 30 -- over 30 state level MTLs here in the U.S. and growing every day. We have line of sight to getting all 49, except New York. We are also in flight in process with NYDFS for New York BitLicense and Trust. And so from our layer, in terms of building the platform through which clients are going to sort of come in the door and then sit one level above the actual custodial layer, we intend to be U.S.-state regulated in all aspects that we understand allow that business to operate. And that's not a new regulatory regime necessarily in broader financial services. We sort of fit under the same umbrella. One layer below, we also only work with companies that we believe are qualified custodians that have state level trust charters here in the U.S. today. And obviously, we're looking hopefully for the OCC and maybe for the federal side to come through and provide those charters for digital asset custodians as well. And as that happens, those groups are going to be at the front of the line to plug into Galaxy One. We're really meant to be a regulated transparent layer for clients to interact with who then have integrations to other best-in-class regulated participants. It's also important to note, we're -- we have the ability to operate that platform outside the U.S. through regulatory licenses in, I think, seven different international jurisdictions today, and we're looking to expand as we see demand show up for it. On the margin side, the -- we're not -- we haven't yet finalized exactly what the level of collateralization and the margin trigger levels are going to be, but you should think about it that as being a white glove institutional platform, but having a lot of technology and a lot of prescriptive automated rule sets around risk and margining and deleveraging and moving on collateral and things like that. And so we're going to operate that business with a lot of tech behind it, but in the same way that we've operated our lending in the past, where I think objectively on the lending business, we've done a pretty good job in terms of risk management understanding volatility when you're adding a small amount of leverage to these assets.

The next question comes from Chase White with Compass Point Research and Trading.

So you guys have obviously grown counterparties and continue to do so in the trading business. I'm curious if you're seeing the average counterparty increase? It's kind of activity in recent weeks, given the move in crypto prices. And kind of following up on that, I mean, would you expect in a normalized environment for newer counterparties to be bigger traders than earlier onboarded counterparties? Or is the kind of average trading volume per counterparty getting smaller on the margin?

It's a good question, and I don't have the exact numbers in front of me, but we can certainly get back to you with what they are. What I've seen anecdotically is there are some TradFi hedge funds that all had good 2023 -- I'm sorry, 2022, right? If you think of the multi-strat, you think of the macro funds. That have all created a crypto sleeve or a crypto pod. And those guys are well capitalized. And so there are new participants or enhanced participants, right, from the kind of traditional hedge fund space, both here and in Europe that are participating. That weren't as big last year. And so those are bigger tickets. The crypto hedge fund universe really got knee capped in 2022. And so just starting with a much smaller asset base. And so while they've had, I'm sure, a decent first quarter, it's coming from a smaller asset base, right? If you do the old math, someone who's down 80% and then makes 50, that 20 goes to 30 and they're still down. They're still down 70% from the high, right? When you have losses like people did last year, it takes a while to kind of rebuild that. What's promising and what has driven crypto broadly this year is two things. One, all the selling that needed to get done got done, right? There was so much bad news. If you had to sell between tax law selling and just the nervousness of, Oh my God, this thing could go to [indiscernible] people were in sheer panic. You have seller's exhaustion. But you've had Asia reopen. China has, post the Xi protests around COVID zero. China took the regulatory boot off the necks of their tech companies, and that includes crypto. So you're seeing with Chinese traveling, you're seeing more activity from Asia. And you're seeing retail who is just resilient. They believe in this space. And it's one of the things that drives me crazy with our politicians who try to be paternalistic and say we need to protect retail. I said again, Bitcoin and Ethereum have been the best risk-adjusted investments over 2 years, 3 years, 4 years, this year, year-to-date. And retail gets that. This has been their way of participating in financial markets or one of their ways. And a lot of the price appreciation is coming from retail. And so we see that not directly because we don't do retail directly, but we do a lot of B2B2C as we see it through counterparties of ours. But the market feels strong. And when I look at it technically on charts, we've had big weekly closes, I'm surprised to hear myself say this, given where my mindset was in late December. But it would not surprise me if we were substantially higher, 3 months, 6 months, 9 months from now.

The next question comes from Bill Papanastasiou with Stifel.

Just wanted to focus on the infrastructure side of the business. The company is now guiding towards a 4.0x hashrate under management by the end of the year, and an increasing portion of that is expected to be derived from self-mining operations or a 50-50 mix with hosted mining. From a mining perspective, was hoping to gain a bit more insight on your outlook and strategy going forward, just given the fact that the halving is expected to occur in about 12 to 13 months?

Yes. So you have those numbers right in terms of what we're guided towards to the end of the year, this year. the strategy there in the mining business has really been -- was really solidified at the end of last year when we made the strategic decision to jump in and purchase Helios. So point one on the strategy was vertically integrating ourselves in the business was really something we decided was critically important if we were going to stay in the business. Because controlling our own destiny from a counterparty perspective, being able to be the manager of power, the #1 input cost in the mining business was something that we've just seen market participants whiff on over and over again over the last few years and was not something that we were going to do. We were going to go forward to relying on other parties to do. So owning the data centers vertically was strategic priority #1. What we're focused on there -- and the reason we chose that asset after looking at many assets was we believe that asset is one, located in a really attractive regional area that has long-term positive power dynamics for us because as you point out, as you think about the Bitcoin mining going forward as it relates to the halving overtime and competition coming in, what really matters is having a very efficient low-cost operating site with redundancy that can always have uptime and can drive costs down and maintain low power over time. And so those were the key criteria that allowed us -- that made us choose to go towards Helios. We've previously invested in ASICs directly in the business, which you've seen grow over the last 1.5 years. That investment in ASICs is as those -- is the investment today, we're prepared to make in terms of allocating our own capital to the ASIC specifically. Getting those ASICs online now in our new data centers that we own is going to be the process in 2023. And so that's part of the -- when we see that -- we talk about the ramp-up to ultimately being roughly 50-50 self-mine hosting, that's our own ASICs. We've already owned sort of coming in and being energized. We like the idea of having a balanced mix of our own ASICs and having hosted clients. We think that, that is a smart way to balance capital investment in the space, to add in clients to the Galaxy platform overall. It plays into the story of having a virtuous cycle here at Galaxy, where you can have a client who, for example, hosts a number of ASICs at your data center, but then also is a client of the markets business to manage its liquidity as they mine Bitcoin, to hedge exposure, forward production, et cetera. And so yes, our core tenets are vertically integrated, being a low-cost center, aggressively managed costs from a power management strategy and then balance our own capital investment with having clients who have their machines that they've invested capital in, come host with us. And so we have a balanced mix of capital-light and capital-intensive profitable streams going forward. That's the plan.

The next question comes from Rich Repetto with Piper Sandler.

And thanks for the, I guess, the assessment of regulation you did in the prepared remarks and contrasting what's going on in the U.S. and overseas. And I guess with your title too, you offer some balance, some optimism. But I guess my question, Michael, is when it comes to the regulatory environment here in the U.S., and you've been a spokesman for the industry, it appears like we're at rock bottom. Maybe the best thing is that the only -- that it is so bad. And then I guess the other part of the question is, you expressed some optimism but where the institutional adoption, do you think that they're getting -- seeing the same things -- the balance that you've sort of outlined in your title, the good, bad and ugly.

Yes, it's a great question. So listen, there -- we have checks and balances in our government. And the Republicans on the house, they are certainly more pro-Bitcoin, pro-crypto than the dems at this point. And there are lots of vocal spokespeople. Tom Emmer, followed him, he's the minority whip -- I'm sorry, the majority whip right now. He's on the side of fairness for Americans, right? That -- if I want to store some of my heart on wealth in Bitcoin, it should be my right. And so I do think you're going to see no legislation go through that really harms the industry. And then we've got the courts. We will watch these court cases very carefully. There are a bunch that will come up. Judges generally, you've got half Republican, half Democratic-appointed judges, and most of them are independent thinkers and not that political. There's some political judges on the fringes. But broadly, our judiciary is an independent acting body. And so while certainly, it feels like the Biden Administration, and this feels like it comes from Elizabeth Warren, who's been very vocal on Twitter and in speeches about hating crypto, and SEC Chair Gensler is very close to Elizabeth Warren. And so you can kind of at least guesstimate where this comes from, has not been helpful. Will -- there's an election cycle coming up. And so I think it's a stalemate with constant little punches. I don't think you push the thing over the edge where it unravels. And partly because the American voter cares a lot about crypto. And politicians yet that was funny before Sam Bankman-Fried, all the Democrats were coming around a bit. I was in D.C., I did the rounds. We did a -- we sponsored a big black blockchain initiative at Howard University. And Cory Booker was there, and I know Kirsten Gillibrand. They understand crypto. They get it. They like it. They want to make sure it's fair for everyone. And so it's -- this is, I think, a moment in time. There was a vacuum created with the Sam Bankman-Fried. I mean it was embarrassing for people, right? He was Biden's biggest donor. He was a huge donor to the Democratic party. He was very close with the SEC and then they fired their #2 guy at the SEC because of it. He was close with the CFDC. And so in a lot of ways, the whole group got egg on their face, all through this one guy and it just allowed this vacuum. And I don't think that lasts forever. As well as America's competitive at its core and to see this business going to Hong Kong and Abu Dhabi in Europe at one point, starts p****** people off. So the crypto industry, I remember -- I give you one metaphor. I was on TV randomly when they decided to try to push wrestling out of the Olympics. And I remember making this quippy line. I was like maybe the stupidest thing I've ever heard is someone wanted to pick a fight with 400,000 wrestlers around the world. I feel a little bit the same thing like picking a fight with this community that really believes in the technology that you've got over 250 million, 300 million people around, 50 million Americans that care desperately about crypto, that care about this new way of potentially orchestrating their finances in the financial system. And so picking a fight, it seems foolhardy. And I think that in the long run wins out.

The next question comes from Owen Lau with Oppenheimer.

Just going back to the previous question, could you please talk about how these regulatory regime could potentially impact your priority this year? I think you mentioned the profit in the first quarter. But can you also talk about any other potential opportunities for Galaxy Digital this year?

Yes, listen, I mean, the regulatory regime while it makes it harder for us, it makes it harder for lots of people. And so Chris gave one good example of we have good banking relationships and some of our competitors didn't. And so that, in the short run, became a competitive -- a short run, competitive advantage. I think banking will be an issue for lots of people without big balance sheets, without reputation, without inactivity, it's just harder for people to get banked. And so us figuring out how we can fill that void. In the long run, what fuels any new industry is capital. And so one of the real tricks is how do you bring capital into this space, right? If we're going to lend more capital, how are we going to get that capital lend? I think the first step is going to be from this crypto community itself, and it's tapping the $1 trillion worth of crypto wealth out there and doing that in very direct and smart ways. Over time, capital looks for returns, right, with short-term rates at 5%. If it's growth equity or if it's crypto, there's just a higher bar to be able to pull in capital from people that are used to making that asset allocation decision. But I think you hit an equilibrium and you start growing from that. And like I think we kind of bottomed out. But -- so that's the real trick. We think -- I mean Chris Ferraro came from a cap structure credit background. We think we understand how capital moves and how you can structure things and better than most of our peers in the crypto space. And so we think there's just going to be an advantage of being thoughtful and having a lot of knowledge and history of how to operate in challenging markets.

Yes. The only other thing I'll add is while it's hard to see right now where we're all sitting and where the market is sitting, we think that regulation ultimately long term, is going to be our moat. It's going to be the thing that really catalyzes all of the headlines that you've seen about institutions coming into crypto, about 90-plus percent of custodians and custodial bank clients wanting to be in crypto. It's going to -- regulation coming into the fold in the U.S. is going to catalyze the real wave of institutional capital comfort level of operating in the space, and we have built our business to fit into whatever regulatory regime comes. Now that takes a lot -- as I said, a lot of planning and then replanning and then refiling and relicensing and that's fine. That's what we're prepared to do. Ultimately, we built the company with the mindset of that's going to be our moat because as it comes, we're going to be the company in the space that has followed the rules and that has build an institutional-grade platform that's able to serve clients when they're ready.

And I guess, let me just last thing to chime in. I don't want to let off the hook, the crypto participants that we're fraudulent, that we behaved with stupid risk management that created so much of this reputation that the regulators are fighting back against, right? I want them brought to justice. I want them put out of business. They've cost me money. They've cost our investors' money. They've cost me unbelievable headaches. And so I, in some ways, welcome the sweep of the bad actors. What I don't welcome is this idea that you're going to throw the baby out with the bathwater. I referenced Katy Han's editorial like this is a real technology that people care about. This is a real alternative to a way to save money in a world where it feels like the dollar will be debased or all fiat will be the debased. The real way of monetizing IP, NFT space and lots of others like -- this is a tulips in Century Holland. This is a real technological breakthrough. When I think about AI, it shocks me that we're talking so much about crypto regulation and nothing about AI regulation. I mean I think the government has got it completely upside down. And in lots of ways, one of the best use cases for crypto is going to be identity around AI because pretty soon, you're going to get fake Mike Novagratzes, hopefully with hair. Like the deep fake world is going to be so much more prevalent and so how do you prove identity in a world like that. Crypto is going to -- and blockchain are going to be a huge role in that. And so it is dumb to think that we should cash this industry because Sam Bankman-Fried in the Bermuda shorts, period.

The next question comes from Joseph Vafi with Canaccord.

Just it'll be interesting, we kind of have talked about it a little bit here and there during this call, but just what are -- if you look at the current environment, it could not be more interesting. You got rates still rising. We've got this regulatory backdrop. We've got a lot of other asset classes not performing as well as ETH and Bitcoin. And -- so we've got kind of a -- we've got a lot of moving parts all over the place. What are institutional clients saying like right now in real time with Bitcoin where it is, and its outperformance on one side? But on the other side, we've got these overhangs on regulatory and this dynamic interest rate environment.

Yes. I think if you're talking like macro hedge funds, almost every macro hedge fund I know likes gold and likes Bitcoin, right? It's a pretty straightforward vet, right? You've got geopolitics. You literally had the President of Kenya, standing in front of his country, telling his countrymen to sell the dollar. That's unprecedented. And this war between China and the U.S. with Russia as a proxy is going to push the gold narrative and the digital version of that is Bitcoin. And so I think from a macro investor perspective, it's very clear. From a -- I work at the endowment or the pension, that game, everyone slowed down a little bit. And you've got a couple of different buckets. If you invested late in the cycle, you have burned your hands and you feel dumb and you're just watching. If you were just getting started, people are dipping their toes in more. I mean, Chris mentioned an investment from Texas teachers in one of our funds. That's a really positive sign. But we're not seeing a stampede there by any stretch. The institutional pace is still slow. What would change that? An ETF, right? And follow the news or follow the judicial news, Grayscale had a pretty significant short-term win in their fight with the SEC about approval of an ETF, where the judge basically said, what are you guys talking about to the SEC. You approve the futures ETF, and not a cash ETF. That just makes no common sense. And the security is like, oh, oh. And so we'll follow that. Like you could legitimately see an ETF this year. And that would be a huge game changer in terms of institutional adoption because institutions want to participate. They just don't want to participate and look dumb. And so because, again, so much Sam Bankman-Fried may spent his day staring at his naval. So much was set back by that event, and it just takes time to heal.

And the last question today will come from Kevin Dede with H.C. Wainwright.

Mike, when you look a little bit deeper, maybe a little more granularity on where you expect or what you've seen in the form of SEC pushback, I mean what we've seen historically in the space is more push on, again, blending and token creation. And I'm just kind of wondering what your big fight is with SEC pushback?

Well, listen, the basic issue that most people have had is what constitutes a security and what doesn't constitute security. And we have this Howey test, which is an early century rule that doesn't seem to fit the crypto architecture nearly as well as one would like. And the SEC has been very reticent to say this is a security, this is not, against where time says they're all securities and then in time you see Bitcoin is not and Ethereum is not, but Ethereum might be. And so there's just been a lack of clarity. And so for companies, and you can follow this live in the Coinbase. I think it's interesting that Brian Armstrong in Coinbase, it looks like plans to litigate this in the public forum. They say, Hey, we've gone to the SEC and said, tell us what our securities and they won't. And so there's this kind of Mexican standoff. And what we've been asking for all along is just clarity. Like give us a regulatory framework where we can work with them. And so Galaxy has a really detailed process on what we decide to participate in with our clients. And there's outside attorneys. There's a whole process that we go through it. We think we're doing the right thing and we'll see. And so it's a bizarre position to be in where you've been doing this since 2017, '18, right? So it's not like this just happened. There's 5, 6 years, people have been going there and saying, well, this is our process. What do you think? And not getting any clarity back from the SEC. And it's been disingenuous, well, just come in register, you can register online. It's actually not the case. There's lots of nuance about qualified custodians and not-qualified custodian. So it's a space where I would have hoped our government and our regulators would have sat down, worked with the industry, understood it's a new industry, and there's a lot of nuance to it to come up with rules, both for custody, for trading, for what -- who regulates what. I mean, one of the issues is if these things aren't security, the SEC has no standing. And so they're in this very bizarre position of playing poker in essence with do they have the right to regulate or not. And so they're not easy answers. And politics doesn't do well with nuance. And this has been politicized, which is d*** unfortunate because you need really smart people thinking about how do you take this new industry, create a set of rules that allows legitimate players to afford this industry in the U.S. and grow it, and it just hasn't happened.

This concludes our question-and-answer session. I would like to turn the conference back over to Galaxy Digital CEO, Michael Novogratz, for any closing remarks.

Guys, I appreciate all your time this morning. I hope you catch some of our enthusiasm. Again, it's not all wine and roses over here. It is tough sledding, but we're optimistic. We have a 400-person workforce that shows up, excited to work every day and is trying to forge ahead. I do think, like I said, this is a year we will surprisingly have macro tailwinds, and big ones, that I think allows us time to continue to build and by 2024, hopefully, the regulatory regime is starting to shift. But more importantly, from Galaxy perspective, our tech build comes online, our mining comes online fully and you start seeing the fruits of all our investments and -- that we've been working really hard on. And so I'll leave it at that. Thanks a ton and we'll be back.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.