Dan Weiskopf 00:21
Mike Novogratz from Galaxy digital, thrilled to have you here in the blockchain CEO series. We’ve been longtime fans, also longtime investors, and watched your company grow and expand and innovate. And thanks for the time, thrilled to catch up with you on this day, June 15. With the Fed action, just like you know, one hour ago, so the timing was pretty good. So just from a top down perspective, without getting into too much detail, talk to us a little bit about what you heard, and the macro environment, you know, with the Fed action.
Mike Novogratz 01:02
You know, Powell is a pretty straight shooter. Inflation is running hotter than they want. The last CPI number scared him a little bit more than the CPI number, it’s the inflation expectations. In the University of Michigan survey getting a little unhinged, they’re not unhinged, yet. But central banks care more about inflation expectations. And what that means is, if you start to expect inflation you’re negotiating with your boss for, I can’t work because food is gonna be higher, gas is gonna be higher, everything’s going to be higher in that inflation spiral is, is really, really the biggest fear central banks have. And so they raised 75, he said, You know, that’s not a sure thing for next meeting, we’ll look at the data, it’ll be 50 or 75. And that was a little more dovish than people thought he’d be, a lot of people thought he was 75, he goes 75 twice. So he stayed consistent in that there’s going to be flexibility around the data. Listen, everything we see is the economy is rolling over. And it’s rolling over faster than we’ve seen in a long time. And so you’re going to be faced with this stagflation issue, where he’s gonna see the economy rolling, and people are gonna start losing their jobs. You’re seeing already housing markets starting to head down, that’s been a big strength. Inventories are exploded, right, orders have stopped. And so but inflation is hard to beat. And we know foods going to be sticky, we know energy is going to be sticky. And so I think they’re at a tough spot, my guess is they raise again, either 50 or 75. And after that, you’ll start seeing enough weak economic data, that they’ll taper these. If that’s the case, you’re gonna see the moment the market smells, the Feds gonna flinch. You’re gonna see Bitcoin take back off, you’re gonna see assets take back off.
Dan Weiskopf 03:06
Yeah, I mean, along those same lines, I mean, we have to admit that we’re, at least from my vantage point, I’m a little bit disappointed with how Bitcoin has held up, or not really, has held up with inflation, right?
Mike Novogratz 03:22
Well, remember, so Bitcoin went up, because people feared inflation, and they feared the central bank was going to print money forever. And then Powell showed up in December with a whole new suit of armor on and said, I’m gonna be the reincarnation of Paul Volcker. And I’m gonna take my, you know, stick and bash inflation over the head. And he’s been very hawkish since and so the market saying, Wow, maybe we won’t have as much inflation, maybe this guy will take it seriously. And so when people think about inflation hedge, it’s a little bit of a misnomer. It was an amazing asset to own when people feared inflation, but with a central banker said he’s going to kill inflation and people started believing him. All assets, growth equities, baseball cards, fine wines, Russian relay watches, Bitcoin, Ethereum, NFTs all got clobbered. And I think that made sense to me. Listen, the extent of the sell off has been more dramatic than anyone would have hoped. I think, even in the last three weeks with both Celsius, or the last week with both Celsius and now Three Arrows, two the bigger crypto players that ran very large leverage books and very complicated books. With those guys appearingly to be stopped out and maybe insolvent are very unsovent, less solvent. I don’t know we would call it. That really has spooked the crypto markets and you’ve seen a lot of leverage, you know, everyone’s pulling back leverage, leverage goes away from a market prices come down. And so I would like to hope that we hit 1000 today and in theory when we hit 20,000, in Bitcoin, that that could be the bottom. I don’t say that with a ton of confidence. It was just the macro environment, I would have thought maybe, but you know, we’ve got this unique deleveraging in crypto, I think most of the leverage has been unwound. Like there’s been a tremendous amount of pain out there. But I’m not positive. Right. We’ve seen unwinding from miners on our side, from lots of players. But we’ll see. You know, I don’t think we go below that we stay there that long. But the market is definitely been damaged.
Dan Weiskopf 05:49
Yeah. You know, in that context, how do you track the leverage in the system? Because isn’t that isn’t that part of the question? You know, that it is essentially opaque and built off of-
Mike Novogratz 06:03
Well yes and no, because you look at you know, total value locked in DeFi, that’s just leverage, right? DeFi is a bank. And so that’s one, you look at the balance sheets of these big, you know, it was Celsius Block Fi, Genesis to a degree. Voyager, the one up in Canada, Moser that’s leverage, right, that’s people lending their money to try to get it’s like putting into the bank of crypto, all that stuff gets recycled, you look at leverage on the exchanges. And so if you can kind of add it all and get it and get a kind of leverage index, you’re looking at what people are paying premium on the perpetual swaps? Are they trading at, you know, a premium or a discount?
Dan Weiskopf 06:53
Sure.
Mike Novogratz 06:53
And so, you know, Bitcoin, the short Bitcoin yesterday was trading at minus 30%. And so you figured out people got short. Because there’s a lot of illiquid stuff out there, right, you’ve got, hey, I put my money in venture, investment, ABC, and it’s worth X. The other way to hedge it is something liquid. That’s a very dangerous game, but under duress people hedge illiquid stuff with liquid stuff.
Dan Weiskopf 07:21
Yeah, sure. So, so along those same lines, and, you know, we’re big believers in culture, you know, at our firm, and you’ve built a unique culture. At your firm, you’re now I think, 400 people. And, you know, what are you doing to, you know, foster that culture, and keep all your people happy in these tough times, while also getting them to work together? Because we need inspiration. You know, Mike, come on.
Mike Novogratz 07:54
It’s a great question. Listen, I mean, some of it’s just being an honest shooter, like, it’s a lot more fun in a bull market, and it is a bear market. People are gonna have to work harder for less pay. But great businesses get built in bear markets, listen, we will make hard decisions like our competitors, will, on, you know, what businesses to focus on and what businesses to, to put less focus on. I’m sure there will be, I think I’ve already counted 1500 people laid off in the industry, just from announcements, there’ll be a lot more layoffs, I think a lot of hedge funds will get closed down. All that said is it’s the natural cycle of a new industry, it is painful. And so I think being honest with your employees, try to have a long term vision, you know, where’s the ball going to be in two years, not where it’s going to be in two months, or the proverbial hockey puck, if you’re Canadian. You know, I think that’s it. Listen, you got to make it fun to come to work. I told our HR people that in some ways, you know, we do a lot of stuff like we’ll have Asian American month, we brought in David Chang, or we’re bringing any of the Romero who has the ACLU for Pride Month. You know, some great speakers and whatnot. I think in some ways that’s more important than downtimes at uptimes. That helps create connectivity to the firm creates culture. But it’s a tough business, right?
Dan Weiskopf 09:25
It’s definitely tough. And you came public in 2018 through a reverse merger given-
Mike Novogratz 09:36
The Canadian value of five and today it’s six. And so that’s a whole lot of stinking work to have that increase $1. Our book is four times the size or you know, roughly our firm is bigger, the talent we have is immensely more more capable. And so listen, you know markets, they took us up, they took us all the way to one up to 40. Down, up. And so listen, all I can do is focus on building a great business.
Dan Weiskopf 10:10
I wasn’t even going going there, by the way, you know, just to be clear, it was it was more about why you came public, then, you know,
Mike Novogratz 10:19
I went public originally, because I thought permanent capital would be important in this space, the Canadian market, which has turned out to be an ish market, I, when I say ish market, it got us public. And that was great. It doesn’t have the liquidity of the NASDAQ. And so while I originally thought, just like in the weed stocks, hey, this will be great, we’ll build a big business, I thought it would be easier to transfer the NASDAQ than it was. And that we’d be able to tap the capital markets, like we went public right into the first crypto winter or the 2018 Crypto winter. And so we really didn’t get a chance to use the Canadian capital markets. So I thought we would. To be a public stock is great when you trade at a premium. And it’s really crappy when you trade it book or below book. Because, you know, you don’t want to use your stock for something when it’s trading below book. When it’s trading three times book, it’s a pretty great acquisitive currency. And so, you know, our job is to tell the story, build good businesses now trade back up, we still plan on listing on the NASDAQ. That’s been a slow process. Not well, I shouldn’t say not our fault. It’s everyone’s you know, we’re engaged with the SEC on a regular basis, they have been very slow and very methodical and very thorough, not just with us, but with circle with bullish with eToro, with anybody who’s got crypto on their, on their balance sheet. And so that’s been frustrating. But, you know, I learned a long time ago, I was in India, and these great monks that, dude, just deal with your reality, not why it’s here. Not it’s fake. It’s just your reality. And so I tried to just deal with my reality.
Dan Weiskopf 12:09
That’s all you can do. You know, and I, I think you’ve got enough smarts to know that you can’t rush the SEC. They’re gonna do what they do. Unlike other CEOs who get angry on Twitter and quite honestly, seem kind of silly. But we won’t, we won’t talk about that. Now, is there a way you can talk a little bit about the Bidco deal? And how you see synergies across your many different sectors with that enterprise? Knowing that quite honestly, some of the hedge funds that are involved may not be there.
Mike Novogratz 12:56
Yeah, listen, I think having kind of a soup to nuts, you know, full stack opportunity in the long run will be worth something. Having a technology platform, you know, because one of the largest wallet providers will be worth something. There’s no reason for both of them to have a prime enough, us to have a prime, them to have a trading desk. And so there’s synergies amongst customers. I don’t think custody is going away. Quite frankly, I think it’s gonna get more important. When you see things like what happened at Celsius, where people, you know, should have known better, but they thought, hey, I’m depositing my my coins, they were taking credit risks, as opposed to what you’re putting the Bidco there, your coins held safely off, off off chain, you know, in cold storage. So they really are your coins. And I think people are gonna kind of wake up to that.
Dan Weiskopf 13:57
Mike, part of the reason why I’m asking that question is also to lead into how you’ve seen examples where your different divisions have worked together to add value at the firm level. And that ends up being a competitive advantage on a long term basis.
Mike Novogratz 14:16
Yeah, listen, our mining team has been wildly helpful to our credit business, right, like Amanda knows everyone in mining, mining credit is a great business. Mining banking, right. Our banking team has done some mining deals. And so the idea of having domain expertise across the space, our venture team brings in all kinds of ideas, some for the banking team, some for the trading team, right our trading business will deal with protocols. And so I think in general, that’s a big positive.
Dan Weiskopf 14:54
And banking, too, right? Investment Banking, if you know it all cycles through together. And whether we realize it or not, we’re in an information business. Right.
Mike Novogratz 15:07
That’s it,.
Dan Weiskopf 15:09
But on the same token, there are concerns around venture capital, you know, in terms of having access to capital, so that so that, you know, defi can continue to grow, right, is in there see venture capital in the space right now?
Mike Novogratz 15:28
There’s like $15 billion in dry powder on the sidelines. And so I think, venture should sit on their hands for a while to let things settle down. But I think there’ll be smaller seed rounds, but there’ll be plenty of them. And when people have money in their pocket, that usually burns a hole. And so I think you’ll see that venture money deployed, probably sooner than it should be. You know, people raised a lot of money, you know, Pentair, raised a round, A 16, raised a round, , Katie Haun has just raised a big fund. And so there’s a lot of, we’re raising one right now in our interactive fund, a lot of dry powder.
Dan Weiskopf 16:09
When I go back to a period of time, during the.com era, I remember that a lot of folks had business plans, and were able to raise money easily just off of business concept. What didn’t exist that I think does exist today is that it wasn’t a mission. I mean, this seems to be quite honestly more of a revolution. Then what happened back then, and in the comparison is more about change than anything else. To me, where today, I know a lot of young people are literally, you know, sleeping on people’s couches, so they can keep going on a protocol so that they don’t have to raise capital like they might otherwise. Do you agree? I mean, do I have it right? That the actual Trad fi isn’t as important as it was, when .com, or the internet was being built?
Mike Novogratz 17:13
Yeah, in lots of ways. I mean, listen the idea is that the crypto revolution is really important. And that’s why I think young people aren’t going to get fazed by price action that they see, they’re going to continue to come in and say this is what we’re gonna build this is going to be a tougher, you know, pill to swallow because the market cap. Like the first time we crashed, it was a billion into basically 100 100 out, you know, 100 million, this was three and a half billion down to 800. Right. And so, it was just the law and are much bigger numbers, much bigger, much, many more people. And so it’s gonna take a little bit more time to put Humpty Dumpty back together again. But the technology is not going anywhere. And people believe it, right, web three is going to be a revolutionary thing in time. I think it is important that the next part of the cycle will be to see utility, to see people build things that are really used, that are used at scale. You know, the user interface, the user experience has not been great. And so mostly even in the NFT space I think will be the leader. A lot of that was, you know, speculation, you know, almost gambling on on NFTs. And I think you’re gonna see NFT’s as digital collectibles, i.e. consumer products, you’re going to still see investments, you’re gonna see better art. It was such a world in less than a year into that space. And so yeah, we had a bubble that crashed. I don’t think the next iteration will look identical to the last.
Dan Weiskopf 18:56
Do you think though, that people will give Bitcoin the credit as the original Defy? That it arguably deserves?
Mike Novogratz 19:06
Yeah, I don’t think bitcoins got the brand and Vic, you know, people say what’s the use case of Bitcoin as like, or the you know, the killer app of crypto or it was Bitcoin? Bitcoin is a big point. It is this digital store of value that is a finished product. Everything else is a work in progress, right? The theory doesn’t work well yet. It’s the merger is going to happen. It’s going to scale projects that we’ve built on it. Polygon is going to be built. You know, they’re going to try to be their own blockchain. But they’ll certainly also work alongside and on top of Ethereum start where just raise the big round, you know, that whole space is going to evolve. And it’s going to evolve to be able to store data to process data to really be a global supercomputer that’s shared and decentralized.
Dan Weiskopf 19:59
Yeah, And, by the way, I had fortunate experience to spend some time with Amanda earlier today and she’s exactly what I had heard she would be, she’s inspirational. She’s visionary, and I enjoyed having conversation with her. And maybe the answer to the question about why you’ve got back into the mining business is a function. Something about her?
Mike Novogratz 20:26
Yeah, there’s a lot to it right? She is well respected, you know, ran Fidelity’s mining and because that was Fidelity, she knew everybody. She’s a Bitcoin maximalist at her core, it’s good to have a few of those around the firm, you know, keeps us to our roots. And she literally loves mining, you know, and I love people. I love people who love what they do. You know, I think that’s an important thing. And I love what you’re doing.
Dan Weiskopf 20:55
Yeah. So, going forward, we’ll say 5, 10 years from now, what do you think people are going to look backwards at? And say, Man, it was so obvious, why didn’t I think about that paradigm shift that was going to affect, you know, these industries.
Mike Novogratz 21:17
Um, you know, in some ways people say, Oh, my God, Goldman’s missing and Morgan Stanley’s missing it, they have huge, diverse businesses that are making fortunes. Crypto isn’t big enough yet, that it’s a threat to trad fi. We like to say in the crypto space, and, you know, it’s but it hasn’t been. And so I think when crypto comes of age, you’re gonna see big banks once they get the regulatory approval, getting engaged by crypto companies build. And so I think it’s a little bit you know, a false narrative, like there’s this grand battle going on. I mean, if there was a battle, it would be an elephant, and a bee or a young new industry iterating through, I think revolutionary technology. We’re going to try to disrupt not just finance but big tech, social media. Media companies, not just social media companies, entertainment companies, advertising collectibles. And so really a broad revolution in this idea of cutting out the middleman. It’s just not ready to have taken anyone down yet. Right? It’ll take down payment, you know, remittance payments, right? Western Union will get beaten up, it’ll slowly pick some fights and win. And then all of a sudden, you’ll see it hit critical mass and you’d be like, Wait, a blockchain is everywhere. And you won’t even notice it because it’ll be behind the TV.
Dan Weiskopf 23:01
Use of blockchain, and I actually obviously define it mostly as blockchain, but there’s also, you know, web 3.0, and metaverse. And if you, I wish we’d find some consistent definitions. But that’s, you know, that’s part of the evolution. Right. So, I guess my other question is, if you had to nail it down, which industry will be the most affected beyond finance, you know?
Mike Novogratz 23:33
Media. Media.
Dan Weiskopf 23:34
Media?
Mike Novogratz 23:35
They have these huge communities that are already connected, right? So you think of like Decentraland, right? You know, or Sandbox, they had a couple 100,000 users. IHeartRadio, one of my guys is on the board. They got 110 million users. And so you’ve got to think they’re gonna connect their radio base into their own Metaverse and have concerts where people can come in into, you know, Avatar form and buy and sell digital goods. And like, that’s where I see the world going. I think there’s going to be this collaboration between big companies with huge communities that already exist. Some of these games have hundreds of you have millions and millions of players. So they have these huge communities already. And so to be able to sell them unique digital goods or connect them in unique Metaverse experiences, I think is going to be kind of a big accelerator, the next part of you know what happens on blockchains.
Dan Weiskopf 24:34
And that won’t be, you know, impeded by regulation, because-
Mike Novogratz 24:42
Yeah, right now, it doesn’t look like it is. It’s also not impeded by incumbents saying, oh god, you’re gonna ruin my business so I’m gonna do everything I can to throw sand in the works. Right. That’s a tailwind like you think about Candy who does Major League Baseball memorabilia or NBA top shots, you know, with Dapper, NBA Topshop did I think 125 million dollars revenue for the NBA this year? Like, what do they say? Thank you. Thank you very much more next year, please. Not Oh, my God, you ruined my business. Right. And so you don’t have the lobbying against you. That you’ll find in defi in the financial?
Dan Weiskopf 25:24
Yeah. You know, I’ve long been a proponent that healthcare would be affected in a positive way, by greater use on the blockchain, where insurance companies would work together with health care companies. That’s going to take far more time. Right. That might be a five year or 10 year outlook on something, but I definitely see where you’re coming from, in regards to the gaming side of things. So Mike, I mean, this has been great. Appreciate the time.
Mike Novogratz 25:59
Awesome.
Dan Weiskopf 26:01
We’ll stay in touch and look forward to seeing you know, your company grow and continue to block and tackle.
Mike Novogratz 26:09
Thank you, be well.
Dan Weiskopf 26:10
Thank you. Bye bye.
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