Feb 25, 2024,06:30am EST
Long before cryptocurrencies regained popularity, Mike Novogratz, the founder and CEO of Galaxy Digital, had already established himself as a significant figure on Wall Street. He commenced his investment journey at Goldman Sachs in 1989 and rose to become a partner over the course of a decade, during which the firm remained privately held. Novogratz then transitioned to leading a macro-focused hedge fund for the private equity firm Fortress Investment Group before eventually assuming the role of the firm’s president.
Today, at the helm of Galaxy Digital, a crypto investment firm and merchant bank, Novogratz stands as one of the early advocates and staunch supporters of digital assets. Since its inception in 2018, Galaxy Digital, listed on the Toronto Stock Exchange, has been pioneering various aspects of the industry—engaging in trading, lending, and investing across 223 portfolio companies within the digital asset and blockchain ecosystem. As of January 2024, Galaxy boasts $6 billion in assets under management, with Novogratz holding the largest stake valued at approximately $2 billion. However, not all of his crypto investments have proven successful. Notably, his backing of Luna, the token associated with the algorithmic stablecoin Terra USD, resulted in a spectacular failure in 2022, wiping out approximately $50 billion in value within a week. Novogratz’s dedication to Luna was so profound that he even tattooed its logo on his arm.
Following the turbulence of 2022, which culminated in the collapse of Sam Bankman-Fried’s FTX, Galaxy and other industry players are striving to expand access to digital assets. Recently, the U.S. Securities and Exchange Commission greenlit 10 applications for the first U.S.-listed spot bitcoin exchange-traded funds, marking a pivotal moment for the broader crypto sector.
The subsequent interview occurred at the iConnections Global Alts summit in Miami, conducted by Maneet Ahuja.
Forbes: Mike, much has changed over the past year. Could you provide us with a high-level overview of where we stand, both in terms of macroeconomics and the crypto industry?
Mike Novogratz: In the cryptocurrency realm, 2021 witnessed a significant transformation as the Federal Reserve shifted its policies and embarked on aggressive rate hikes. Typically, one might anticipate hard assets like crypto and gold to decline under such circumstances. However, this decline was exacerbated by widespread fraud and misconduct within the industry, exemplified by entities like Celsius, which caused embarrassment and pessimism regarding the future of crypto. The market, built fundamentally on trust, experienced a loss of confidence due to these factors, resulting in a classic market capitulation where sentiment turned overwhelmingly negative. Despite prevailing pessimism, periods of extreme downturn often present lucrative buying opportunities. For instance, in hindsight, bitcoin’s drop to $7,000 in 2018 proved an excellent entry point for savvy investors. The tide began to turn with the Federal Reserve signaling a shift toward a rate-cutting cycle. Additionally, key events such as Grayscale’s legal battle with the SEC and endorsements from influential figures like Larry Fink contributed to restoring confidence in the crypto industry.
The resolution of concerns surrounding major exchanges like Binance further helped alleviate systemic risks, paving the way for a more stable environment. However, regulatory uncertainties persist. Nonetheless, bipartisan consensus on legislative initiatives, with few exceptions such as Elizabeth Warren, suggests the imminent establishment of a regulatory framework. Coupled with the recent introduction of crypto ETFs and anticipated rate cuts by the Federal Reserve, this sets the stage for increased institutional adoption—an exciting prospect.
Forbes: Bitcoin saw a 150% rise last year. Part of this surge can be attributed to the limited supply of bitcoin in circulation—more than 70% of the supply in the market did not change asset ownership. Why is that?
Novogratz: To understand this, we must delve into the origins of bitcoin and the vision of its creator, Satoshi Nakamoto. Nakamoto crafted bitcoin’s white paper as a response to mounting concerns regarding centralized financial systems.
The essence of Nakamoto’s white paper lies in its vision of decentralization, contrasting sharply with the monetary policies observed under recent U.S. presidencies. During both Donald Trump’s and Joe Biden’s tenures, government spending surged, notably evident in Trump’s pre-Covid spending spree. This normalization of excessive spending, with the federal government consuming roughly 25% of GDP, deviates significantly from historical norms. Despite the urgency of the fiscal crisis facing our nation, there seems to be a lack of political will in addressing the issue. Calls for measures akin to the Simpson-Bowles bill, aimed at tackling budget deficits and restoring fiscal responsibility, have fallen by the wayside. This neglect poses a pressing challenge that demands attention and action from policymakers to avoid exacerbating the fiscal crisis, undermining economic stability, and compromising future generations’ well-being.
Forbes: Why hasn’t this issue been addressed?
Novogratz: We’ve experienced a prolonged period of low interest rates, where money seemed abundant and easily accessible, akin to the principles of modern monetary theory. While attendees of conferences like this one may navigate inflationary pressures, many Americans face stark realities. Over the past decade, we’ve witnessed a significant rise in the cost of living, particularly evident in soaring housing prices. For instance, the average house price in 2010 was $289,000, whereas in 2024, it surged to $400,000. This rapid inflation has left many Americans feeling economically disenfranchised, contributing to the rise of populism and disdain for elite institutions.
Forbes: Let’s discuss bitcoin’s role as a store of value. We now have spot bitcoin ETFs, including one from your company. What demand do you anticipate for these products?
Novogratz: The adoption of bitcoin represents a generational shift, with younger demographics embracing it to rebalance economic scales inherited from Baby Boomers. As registered investment advisors cater to this shift, ETFs tailored to their preferences mark a significant milestone in bitcoin’s journey toward mainstream acceptance.
While some may dismiss bitcoin’s value as a social construct, its significance as a store of value, akin to gold, cannot be overlooked. Despite skepticism from traditional investors like Ray Dalio, the growing acceptance among RIAs and retail investors underscores its enduring relevance. I foresee a gradual increase in bitcoin allocations within investment portfolios as RIAs recognize its potential for diversification and wealth preservation. This influx of capital represents the next phase of bitcoin’s evolution and promises to be a significant catalyst for its growth.
Forbes: Let’s talk about outflows, including what happened at Grayscale. What observations do you have?
Novogratz: Grayscale’s bitcoin product faced SEC scrutiny and criticism for its high fees and structural flaws, leading to investor losses when the fund traded at a premium. As arbitrage opportunities dwindled, investors turned to alternative ETFs offered by industry giants for lower fees and improved transparency. This shift underscores the significance of trust and cost-effectiveness in investment choices, with Grayscale’s product losing appeal to more efficient alternatives in the market.
Forbes: The market is competitive. You mentioned there will be two to three winners. Besides BlackRock, who are the others?
Novogratz: We launched our initiative with Invesco, but the uptake has been slower than anticipated. However, we’re optimistic that within the next six months, after gaining approval from institutions like Morgan Stanley, we’ll see significant progress. BlackRock and Fidelity are also poised to join this group.
Forbes: Will the new ETFs drive more retail demand? Where do you see the strongest growth in the next 12 months?
Novogratz: Yes. ETFs provide more capital-efficient trading options and open the door for increased leverage, driving gradual institutional adoption, starting with IRAs and extending to pension and endowment funds. Legislative clarity will encourage more investors to enter the market. While growth may not mirror past frenzies, we anticipate significant retail demand growth driven by increased awareness of crypto assets’ long-term potential.
Forbes: Do you expect the SEC to approve an ether ETF next? What about the Coinbase lawsuit?
Novogratz: The recent legal battle over the bitcoin ETF highlighted inconsistencies in the SEC’s approach to regulating crypto assets. The court criticized the SEC for denying a spot bitcoin ETF while allowing futures ETFs, pointing out the illogical reasoning. Looking ahead, regardless of the next SEC chairperson’s political affiliation, many lawsuits initiated under Gensler’s tenure may be dropped, reflecting the growing recognition of crypto’s integration into the financial system. However, the regulatory uncertainty surrounding digital assets remains a challenge.
Forbes: Due to regulatory challenges in the U.S., you mentioned relocating some operations overseas. What are your plans while waiting for regulatory clarity?
Novogratz: Regulatory uncertainty is profoundly frustrating, particularly for firms like ours that prioritize compliance. While some may adopt a rebellious stance, we understand the importance of adhering to regulatory standards. However, this commitment comes at a considerable cost, exacerbated by the lack of clarity. Clear and comprehensive regulatory frameworks are urgently needed to foster innovation within the industry.
Forbes: Finally, what are your thoughts on the macroeconomic outlook and the 2024 election?
Novogratz: Speculation about a Fed rate cut amid easing inflation warrants a closer examination of the broader economic landscape. Unprecedented government spending has provided substantial stimulus, sustaining economic growth despite challenges. Sectors like housing and automotive remain resilient. However, concerns about economic growth and inflation persist. The Federal Reserve’s decision-making will likely focus on maintaining stability and supporting sustainable expansion.
In politics, we need a seismic shift away from entrenched politicians to address societal challenges and fiscal irresponsibility. Whether through new leadership or a reinvigorated commitment to change, we must forge a path toward a brighter future.