Q4 2020 Galaxy Digital Holdings Ltd Earnings Call
Good morning, and welcome to Galaxy Digital's fourth quarter 2020 earnings call. Today's call is being recorded at this time all participants are in a listen only mode.
During the formal remarks, we'll conduct a question and answer session webcast participants can submit a question on line directly through the webcast further instructions will be provided as Q&A begin at this time I would like to turn the conference over to Galaxy investors Relations team. Please go ahead.
Good morning, and welcome to the Galaxy digital fourth quarter shareholder update 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 on various factors including.
Those identified in our filings with the Canadian Securities regulatory authorities on theater and available on our website.
We're looking statements speak only as of today and will not be updated in.
In addition, none of the information on this call constitute a recommendation solicitation or offered by galaxy digital or its affiliates to buy or sell any securities, including debt Galaxy digital securities with that I'll now turn the call over to Mike Novogratz, founder CEO and chairman of Galaxy's edge at all.
Sure good morning, everyone.
It's an awesome Sunny day here in New York City, that's a great day for our earnings you know I walk to work and you really get the sense that we're on the downslope of Covid the cities reopening lift.
Let's cross our fingers and hope that in the next few months life is back to normal.
Life has been anything but normal for us here at Galaxy I couldnt be more excited to talk about our earnings today I don't want to Bury the lead right. We had a massive fourth quarter a record earnings.
We're off to an amazing start this year, our first quarter will far exceed all of last year.
And so the business couldn't be better.
There are a lot of details to go through I'm going to leave a lot of those to Damian and Chris and really try to focus on but I think the real story is.
We started galaxy really three years ago with this idea that we would set up a company that would give public shareholders access to the entire ecosystem of crypto bitcoin other other crypto currencies to businesses to venture, let's be a holistic place where people could invest and take advantage of this new.
Asset class with a real belief that institutions would move into the asset class and we built and we invested in we weighted and it was at times a painful way.
Really starting last May you know post COVID-19 and.
And accelerating the world changed it in the last four months the last six months really.
With no uncertainty.
And clear the market in the World has said crypto is now on asset class.
I think it's a spectacular important thing to just pause and think about certainly for all of our employees, but also for all our investors.
What does it mean first and foremost it means we are very confident in pursuing an aggressive growth strategy.
We have hired.
70, plus people on the last six months really doubling.
The size of our work force.
The amount of debt the amount of talent the type talent, we're getting makes me smile.
While every day and we had a company call just to get to know each other last Thursday, and as we went around I just kept grinning and I was waving to one of my.
Kids, who was in the in the room because it was on zoom and I was like we're going to look on the sky and look at the Sky.
And so we're hiring talent, we couldnt get before I used to be able to tell people is very simple story I'd say youre coming here, you're taking you're taking more risk than I am right. I'm 56, I've already made lots of money and had a career I really believe this is going to happen.
But its more risk for the younger people and now younger people see it the other way now they are saying its more risk staying in traditional finance than coming to crypto debt. This is a growing asset class and so on a lot of ways. It's been derisked and so I think most important is that message that we're now in growth mode, because we have <unk>.
Our employees have confidence and more and more investors have confidence that crypto isn't a flash in the pan that it will be a fundamental part of the financial and consumer infrastructure of the world.
You know because of that we are pursuing a strategy to move to a U S listing in the second half of the year I'm not going to say a lot about that just I'm going to say that Shannon from you can take it as you will but I think that's exciting.
Crypto continues to have three major tailwind.
It's the tailwind of adoption right every single bank in this space is now moving into the space, mostly are starting in the wealth management front.
We will talk about the joint venture we did with Morgan Stanley.
The first broker dealer to get into the wealth space.
Launching a galaxy Bitcoin fund with us.
But all the banks are heading that way in the wealth fund and then slowly to trade in custody.
And so we're seeing the tech companies all move into this space.
You'll see this this quarter I believe if not certainly in the next two quarters.
<unk> books DM project launch that's $2 2 billion people have a crypto wallet overnight.
And so you're seeing this across the board you're seeing it in new products, everybody who's been listening through the Internet.
Are searching the Internet has heard about in NSP is these days right and F. T is using the same technology as as bitcoin right, taking something scarce and putting it on the blockchain for IP for art for collectibles.
And so there is an explosion of opportunity that we're seeing we're.
We're taking advantage of it we are building.
Each of our businesses as fast as we can I'm proud to say that in the fourth quarter, all our businesses with the exception of when we adjust startup we're profitable.
All of our metrics are up and so could it couldn't be more excited.
On.
Before I pass this on to Damian I want to tell you that we are on.
We are excited to have a new CFO.
Yeah.
That we brought in Alex I off is joining us.
He spent two decades in CFO roles, most notably a 10 or 12 year stint at interactive brokers.
Lastly, coming from Virtu financial another public company.
You know Alex has got great skills, and we're excited to have him takeover, we can't think ash.
Paul enough for his service.
In this amazing growth period, our team has worked unbelievable hours and ask just decided that it was time for him to spend more time with his family.
He leaves us well positioned to grow we think in Bhutan and with that I'm going to turn it over to Damien.
Thank you Mark and thanks again for the warm welcome I am excited to be on my very first earnings call as Galaxy co President.
When I joined Galaxy.
At the beginning of the year I was already impressed with the company that margin Chris is built and the size of the opportunity that they were targeting now.
Now nearly a quarter into my tenure here I'm, even more excited and confident in the galaxy team strategy and opportunity.
And on our ability to execute on.
Spent the last few months with our business leaders and our clients learning about their goals pain points and ideas with an eye towards scaling the galaxy platform.
Some of my immediate areas of focus have been on how to serve the increasing demand from trading services.
On building out key teams and functions across galaxies businesses.
Corporate departments on integrating on two recent acquisitions and on identifying both organic and inorganic opportunities for the companys future growth.
Before I dive into some updates on the businesses I.
I'd like to share some corporate updates based on where I've been focusing my time.
I'm thrilled to share Galaxy grew out of a 33% just in the fourth quarter of this year alone now being north of 150 people, adding key hires across sales research business development trading and finance.
In February this year, we appointed Alex on his head of firm wide research Alex joins us from Fidelity investments, where he spent over a decade. Most recently as co head of the Bitcoin blockchain focused venture cap fund affiliated with Fidelity investments parent company.
Alex and his team are building out proprietary research to help our clients navigate this sector.
Further in galaxies commitment to guide our clients and the industry through this digital transformation.
We also hired key talent in the executive office, Elsa Bella and Steven Wald to build out our Investor Relations Nf P&I functions as we focus on growing our corporate finance and analytical capabilities across the firm.
And yesterday, Mark Toomey joined us as head of institutional sales.
Focused on expanding our institutional client base and building out our coverage team.
Mark has spent over two decades in traditional capital markets at Goldman Sachs with Mei and J P. Morgan Chase, where he managed equity derivative sales teams and we're delighted to have.
Him and his team on board.
Now turning to our business units I'll provide an update for our asset management and investment banking segments, and Chris will provide updates on our investment portfolio trading and a new mining business.
Yeah.
Beginning with our asset management business, we continue to see strong demand from both passive and active exposure to bitcoin and other major crypto currencies.
Moreover, we remain committed to providing affordable and diversified exposure to digital assets and to providing portfolio solutions for investors seeking exposure to this increasingly in demand asset class.
Recent product launches include the C O Galaxy Bitcoin fund.
T. S X listed closed end mutual fund in another partnership with <unk> financial.
This fund satisfies our client demands for a more streamlined means of accessing bitcoin with the lowest management fee of any bitcoin exchange credit product in the world today.
We also launched the Galaxy, a CRM funds, which track the newly launched Bloomberg Galaxy. A theory index. This is the third in the Bloomberg Galaxy family of indices.
And in very exciting news for Galaxy and for U S investors interested in crypto currency exposure.
Just a few weeks ago Morgan Stanley began offering its wealth management clients access to bitcoin funds, including the Galaxy Bitcoin Fund LP and the Galaxy institutional Bitcoin Fund LP.
We are really proud to partner with Morgan Stanley for this major development in access to crypto currency through the traditional wealth management channel.
This is the first big U S bank to offer its wealth management client access to bitcoin funds and with over four trillion dollars.
And clients assets under management. We believe this is a significant step in the direction and acceptance of bitcoin as an asset class.
Galaxy Interactive continues to focus on investments in interactive Entertainment video gaming creator economies and web three point out and we'll be managing a new fund around this strategy.
Okay.
In addition to the rapid pace of product innovation within our asset management business. I'm also proud to share. We now have a $1 $2 billion in assets under management in both our Galaxy asset management fund products, a testament to the really hard work of our asset management team.
Headed by Steve codes.
Yeah.
Let me now provide some thoughts on Galaxy digital investment banking, where Michael Ash and his team continue to make progress for clients across financing mergers and acquisitions and other strategic matters with several active mandates in various stages of execution.
Some key activities. We can share with you include that same consulting on a recent crypto currency company's fundraising round and acting as a strategic advisor in connection with a prominent public offering in the Fintech space.
Beyond those important client mandates the investment banking team increased its client coverage to over 90% of their target universe building relationships with firms and founders across the crypto currency in digital asset ecosystem.
We've also been hiring aggressively to support the demand we are experiencing and expecting with the team doubling in size since we spoke last with you.
Overall I'm excited by the growth I'm seeing in our asset management and advisory businesses and the infrastructure, both Steve and Michael are building to support future growth.
Now before I turn the call over to Chris I'd like to close by sharing some of my key learnings with you as a wrap up my first 90 days as Galaxy co President.
Firstly, the white space in the addressable market for Galaxy is massive.
The macro trends that Mike explained in his remarks, a stronger and more compelling than ever I've been on calls with clients and potential clients. Almost every day since I've joined Galaxy asking me, how do I get into crypto.
And these calls from the largest and smartest companies and investment managers in the world.
Second GAAP.
Alex He has the right strategy and guiding principles.
Mission here is to institutionalize digital asset ecosystems and blockchain technology.
We accomplish this mission by acting as the bridge between the digital asset World and the institutional World.
We lead with a compliance Ford mindset harnessing our team's experience with Blue chip finance and technology firms.
Third as Mark noted a moment ago. This strategy gives us the right operational model to meet the demand and addressable market.
Galaxy is the go to trusted expert for one stop shop institutional access to this space, whether the Clinton wants OTC products completely bespoke structuring or strategic advice.
Now synergistic business launched provide access to digital assets in any method of client could prefer backed by the strength of a public company in order to balance sheet.
And lastly, Galaxy has the right team to take advantage of the massive opportunity in front of us.
I have genuinely never been more impressed by the talent already in the door of a company.
And we've shown on incredible ability to attract top talent from leading financial institutions with specialized experience in traditional finance innovation market structure and technology.
All in all Galaxy is addressing a large and growing market with the right operational model the right strategy and the right team.
I couldnt be more excited to be part of the Galaxy journey and play my part in the company's future growth.
And speaking of talent I'd now like to turn over the cold from my fellow co President Chris Ferrara.
Thanks, Damien and far too generous as always.
I wanted to begin my remarks today by underlining Mike in Damien's comments.
The past few months have been transformational for both galaxy and our industry.
Also on Echo damien's excitement about galaxy opportunity and some key strategic decisions, we've made to support galaxy's growth into 2021 and that would be on and all my time with the company since its founding I've never been as excited as I am today about our future.
Let's now spend some time walking through the performance of our trading investment business lines and elaborate on some of the specific opportunities and trends I'm seeing across the space.
This was a transformational quarter for trading as we continue the momentum from Q3 to win additional market share and grow our counterparty derivatives and electronic trading activities, resulting in yet another record quarter of trading activity.
Enter party trading volumes were up over 80% in Q4 from Q3 and over 230% year over year from the prior year Q4 2019.
That growth continued into the first quarter of 2021, thus far as we've shared in this morning's press release up another 40% sequentially versus Q4 and over 270% versus Q1 in the prior year of 2020.
Also within our trading segment the growth of our counterparty loan book continues to demonstrate the increasing demand for access to our balance sheet and lending services.
Our loan portfolio is well over 100% collateralized on average across the entire book, which we believe compares significantly better than most of our competitors in this space.
We remain committed to building a long term sustainable coining cash lending business in order to best serve our counterparties on our clients, while managing risk with a laser focus on protecting and growing firm capital. We firmly believe that we are doing our best by our clients and our counterparties in the long run by remaining disciplined today and methodically growing access to secured it.
<unk> financing solutions.
Within the fourth quarter alone our counterparty loan book grew in excess of 300%.
Over the previous quarter to approximately $110 million with gross new originations growing over 90%.
Since December 31, we've continued to experience even stronger growth in the first quarter with a loan book, increasing another 240% sequentially to close to $400 million with gross new originations growing an additional 400 per cent to approximately $560 million.
We are clearly seeing the benefits in both trading and lending activity related to the higher price of the digital assets, but it's important to note that beyond price levels. We're also benefiting from the capabilities new cost structure enhanced market access and structured products, we've added through the drawbridge lending and blue fire capital acquisitions.
We've also made progress towards our goal now providing a full service single dealer platform with currently 10 clients on boarded or on the process of being on boarded in beta and a pipeline of over 30 additional new clients ready to onboard as we add more prime brokerage capabilities in the next coming months.
We continue to be one of the few key players building an actual institutional grade offering that is equipped with the expertise experience and technology to address this bespoke needs of sophisticated institutions looking for exposure to digital assets.
These clients continue to demand from us access to a large audited and risk management focus trading counterparty, who can offer superior capabilities across the full suite of products.
As previously mentioned, our acquisitions of drawbridge lending and Bluefire capital are now largely integrated under the Galaxy umbrella, Jason Urban has assumed leadership of our franchise trading business, while Andrew Careless will remain CEO of our wholly owned subsidiary Galaxy Glu higher trading.
Beyond the expertise assets and best in class trading teams, both acquisitions added to Galaxy I'm excited to share the financial results. We are we.
We have recognized from our combined trading activities hats off to Jason Andrew and all their respective teams because in Q4 are trained businesses net income increased over 831% to $235 million from a loss from the prior year period.
And Furthermore, the trading businesses continued to grow sequentially across nearly all operational and financial metrics into Q1 2021.
Moving on to activity within our principal investing business. Our team has continued to pursue differentiated opportunities across the cryptocurrency and blockchain ecosystem. We now hold approximately 80 individual investments across 60 portfolio companies.
In the fourth quarter 2020, the principal investments team made seven new and add on investments totaling $5 $3 million, which includes a number of names in the day five space, including Taro labs spectral and centrifuge just to name a few.
Furthermore, in the first quarter 2021, the team has been hard at work addressing which seems to now be an ever expanding opportunity set for galaxy. We've been fortunate enough to have made 12, new and add on investments to date totaling $34 $7 million, including bullish global fire blocks of series C round radical growth labs.
Khomeini, new cash rate and tax debt to name a few and on a number of those investments we've gone head to head competing against and one some of the largest traditional fintech and silicon valley be sees in the world.
Big Big Congrats to the team for their performance as you can see here some of the key investment themes. We've been focusing on have been one continued growth exposure to critical institutional crypto infrastructure areas, including custody wallets coin movement exchange and tax.
On champion on chain financial transactions I E. Defy distributed incentive based collaboration projects for example, open sourced software development.
And for new killer consumer App companies that aim to simplify adoption on ramping and interaction with cryptocurrencies.
Within our existing portfolio. We were also fortunate enough to have been able to realize a significant liquidity events of over $125 million in the first quarter of 2021.
A testament to our principal investing teams growing successful track record in the space.
Finally, I'll briefly speak to our newest business mining, which has us all extremely excited Amanda.
Amanda and her team had been busy building out our phase one mining operations internally as well as growing our client pipeline speaking with over 70 companies in this space to date.
On a bitcoin mining operation is now up and running and based on the daily reports I'm getting on production, it's really exciting to see how the mine team is growing our company's bitcoin balance sheet every single day, not only that but we've been able to achieve an average marginal cost to create a new bitcoin are significantly less than 10000 U S per coin greater than 80 per cent discount to current.
Spot levels.
Demand for both mining devices and financing options for miners continue to increase as bitcoin mining receives growing interest and attention in the market and we are dedicated to first building out high quality Bitcoin mining operation with best in class industry Partners Chip manufacturers third party data center hosting et cetera, and then turning this apparatus around to offer institutional capital.
On dedicated miners low cost access and financial solutions to make their businesses better performers.
So to that end I'm quite excited to share that we recently closed our first two mining finance, our mifi deals and hope to see our team continue to grow our pipeline and book of business in the quarters to come.
With that I'd like to now turn it over to ash to walk everyone through the specifics of our financial performance in the fourth quarter cash.
Thanks, Chris will provide some additional details regarding our financial results for the quarter and year end 2020.
Net comprehensive income for the three months ended December 31st two adult $335 $7 million, which brings our full year comprehensive income in 2020 to $385 $5 million.
The predominant driver of the increased income in the quarter and year as shown on page eight of the press release or gains on digital assets and investment as well as stronger contribution from our trading business.
This brings our total equity on net book value, excluding noncontrolling interest to <unk>.
$198 $2 million as of December 31st or $3 24 of net book value per share Canadian or $2 54 of net book value per share.
Revenue of $256 $8 million in the quarter came predominantly from our trading segment.
Slight gains well reflective of both higher digital asset prices during the quarter, that's about a normal operational positioning all of the principal trading desk.
Operating expenses for the quarter were $33 $1 million.
Inclusive of equity based compensation of $3 6 million over the same period.
Expenses increased from a year ago quarter reflective primarily of high compensation and high borrowings while equity based compensation did decline by just over $1 billion from a year ago quarter. We do expect this is likely to increase going forward from current levels.
Turning to measures of capital and liquidity liquidity as of year end 2020 at approximate these $545 million from approximately 144 $34 million one year ago.
Mined out of a measurement of liquidity includes working capital and Nicky show assets, which has been netted against forward commitments and estimated future expenses.
Our liquidity is sufficient to continue to operate the business and take advantage of market opportunities.
Finally, I want to thank Mike always kind words earlier and that's both the opportunity to serve as CFO of Galaxy digital and being part of a galaxy family.
This has been a period of historic accomplishment for Wawa thumb and profit digital asset and blockchain ecosystem and I'm glad I got to play a pivotal role in helping us reach this point.
Current firm leadership paired with Alex aisles, capable and experienced hands insurance Galaxy will remain in great hands going forward.
And that's on the call back to the operator, so we can address questions from analysts and investors.
Any questions from our equity analysts.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May press star two to remove your question from the queue per participants using speaker equipment. It may be necessary for you to.
Pick up your handset before pressing the star key one moment, while we poll for questions.
Our first question comes from the line of Deepak Kaushal with Stifel. You May proceed with your question.
Hey, guys. Good morning, I've never congratulate on the management team on our conference call for the quarter I'm not going to start now, but it's certainly nice to see.
Nice warm summer starting for crypto prolonged cold winter from you guys.
Yes.
Mike I have a question for you you know its been a.
13 years since almost 13 years thousands bitcoin started.
Our long secular trend that's going to continue on the long term in our view, but it's Hudson violent cycles in the past.
What's your thinking these days about the cyclical versus secular nature of this industry and what kind of the macro risk factors that you're watching in the industry debt.
Might indicate.
That balance shifting either way.
So the biggest I think factor right now is adoption right. We kind of went over a hill and we started in motion.
Adoption cycles at so many different institutions and what I mean by that is so you saw Morgan Stanley come out with this product debt.
Aimed at their wealth channel, which will start taking in money in the next week to two weeks.
I can tell you that most banks, most big investment banks and banks are working on similar projects and so there is a bid below the market.
With those institutions with their massive sales force is going out to their clients don't remember most of their clients are baby boomers right. The bulk of the wealth in the World and certainly in America is held by 55% to 85 year olds.
And they haven't really participated in a big way in the crypto Revolution, yet and they're just starting.
And so we have this adoption cycle.
That's taking off and we're not just seeing it with that World class right. We're seeing it in insurance companies right. There are now 345 insurance companies that we know of and.
That's a trend and so youre going to see a lot more insurance companies with real asset managers right, you've you've read about Blackrock and.
And others that are now looking at ways to get exposure.
For their clients and so in almost every asset class, we're seeing the adoption curve and I think that.
On the downside a lot more than we used to have in the past right. This used to be at 95% retail market with lots of leverage on the Asian exchanges and so we can have these violent washouts.
We still have high volatility right big weight is still a 75 all asset.
Because of the the excitement of new people coming into the market.
But I feel really strongly that there is a bit below the market and it's not just guessing we see the bid below the margin.
And then you know Theres a lot of talk about central bank digital currencies and stable coin.
How how do you guys take advantage of that opportunity in particular from your business is that just flow through in terms of more adoption.
Anything no.
You guys can take advantage of them.
I think listen a lot of that is going to be built on the theorem network and so we have investments in theory, we have investments in.
Businesses that will benefit from more use case, so those could be custody businesses. They can be security businesses.
As we slowly shift over the payment mechanism for legacy payments to one that is built on crypto rails, our whole portfolio starts working and it's one of the reasons you've seen some big upticks in portfolio valuations by companies like fire blocks become really critical piece of financial infrastructure.
When everyone starts using crypto and so people used to say Jesus are stable coins are central bank digital currency is going to be batter are good for bitcoin well, it's an obvious answer to me, it's all going to be good because it's this complete shift of how we think about the architecture that stuff gets built on and so listen.
Ah Crypto dollar.
We'll we'll still be bought or sold versus other assets like gold or bitcoin based on People's belief and is it going to strengthen or weaken right. It's just.
We're going to shift how we buy things from the traditional payment rails to one that's built on crypto and I think that's just bullish for our whole ecosystem.
Got it.
Yes.
Sure Chris.
Got it.
You know what you said on your IPO.
Gene.
Yeah.
Good day.
That I can.
Okay.
Yeah.
You've added to your business.
What else is new that you could add to your business.
That this new crypto industry affords it wasn't there in the in the IPO days.
Well listen I mean the day.
The NFC space is an interesting one right.
The NFC space I talked a lot about NFC.
Philosophically back in 2016, 17, 18, right day, one day have art built on the blockchain because people would trust it it would be scarcen.
And authentic and out of nowhere really four or five months actually two to three months ago. It exploded right and so we have this business Galaxy interactive right the $300 million fund on San Engle, Martin and Richard Kim manage.
That has made have made 50 odd investments in the interactive space.
A lot of those in and around this NFC ecosystem right from game studios to to NFC makers.
And so we think that space is going to be fertile to continue to invest in.
We're out raising another.
Big fund to invest in that space right now.
We're going to put on a firm capital at work in this space and so.
I think that that will be something middle of next year, we're talking a lot about.
Got it. Thank you and then and then just for Chris and Danielle just.
Just had a question on capital allocation. It looks like you guys are split your digital assets across the trading principal investments and asset management roughly 52030 split.
With 50% on the trading side should we think of that as kind of your allocation to market neutral or on your balance sheet that you're putting towards your prime brokerage business and.
And then the rest of it kind of net long.
How should we think about cash.
So on capital allocation.
Location in the context of the <unk>.
Trading desk versus the net long.
Yeah, Chris you on that.
That's the hardest that's the hardest question so far.
Yeah.
That's why I'm here usually.
Yes.
That's right the allocation of digital assets the train business now.
Starting to shift and so you.
Digital assets, you know for us, but quite a theory on.
Show up in the trading business.
And a bunch of different ways now.
I was working capital right and so for us.
We provide liquidity to a.
Bigger and bigger Counterparties.
For us to be able to provide that service we have to have.
Our working capital and assets.
On a pool of different venues and so we have a working capital element to our trading business now that's growing and growing with customer activity. The other side of it as a R. R. Our lending business.
We're we're facilitating.
Lending coin in cash against coin in cash.
In additional coin in cash as collateral.
That that that begins a sort of a gross up cycle on the balance sheet of accumulating digital assets.
And then in our and with Blue fire capital in particular as well.
Andrew on that team R. R.
Our now very large participants on many of the biggest venues for crypto currency.
They're large market makers trading over 1 billion and a half.
Dollars.
Good day, and volume now and part of their strategies involve market neutral hedging and arbitrage and that that piece of the business means.
It means that will be will be.
In a non beta directional way accumulating digital assets there is low.
Got it so I think that's it.
It doesn't mean.
Yeah. So if I got it I'm trying to translate this all into kind of a an operating model for your business.
You guys did you guys give us a sense of like a target leverage ratio of target Roe for the trading side.
I think your cost run rate is up to 100 million Bucks annualized from 40, because they're growing.
Do you have a target margin for the operating side of the business. Just so we can look forward to our model as it close.
Sure sure.
Sure.
Asheville free to jump in.
Either correct me or be more specific on the operating expense side in particular, but I mean, if you look at if you look at the year end I believe.
We reported total liabilities of $372 million.
Against against close to $800 million of partner capital.
For all of our.
For all of our non directional non non.
All of our market neutral beta neutral trading strategies, which is becoming a bigger and bigger piece of our of our trading business as well as our counterparty on client business.
Think by on all measures were largely under leveraged relative to where we.
We would like a.
Perfect model to be right.
But put put banks on the on the far right as responsible but highly levered entities that drive return on equity.
Today.
A day, where we're under five times debt to equity.
And you know we.
We don't have to be.
Significantly leveraged because you know the asset itself.
We're bullish and generate high returns, but over time as volatility comes down I would I would model in an expectation that in our franchise trading business, we will responsibly take on more and more leverage net debt because the goal for us is going to be able to drive return on equity I think it's a little too soon to to for me to say confidently that we're.
Getting this return on equity because we look at bitcoin and you say well, what's the cost of capital decline and you will get you know annualized returns on bitcoin.
It's very very very high and so on and so the debt.
The idea of the target like a return on equity.
In this environment.
Clean vol is high and sort of adoption is growing I think is I think it's premature.
So we're looking at our balance sheet.
And we're we're methodically.
Adding in the leverage where it makes sense.
Recognizing that debt you know the necessity to do so today is just is just starting.
Yeah, you have to remember that we're trading.
75 of all asset as your base case, right with decline and then a theory.
Trading higher than.
And lots of the other smaller coins, even trading higher volume and so.
It's interesting because that that even so certainly from the proprietary side right for house capital you don't need a whole lot on leverage if any but for customer businesses as well.
Leverage you can get really dangerous really quickly.
And so I do think Chris is 100% right as this business matures and it will mature we're seeing it.
Vault comes down your leverage ratios will go way up.
And then on the Opex side to address that point, specifically Deepak.
As you should go in detail, but the.
Fourth quarter.
The fourth quarter and includes a at the very least day, they compensation expense number of debt.
That is a yeah. She used the right word it's that's true up for the full year of bonus accrual and so that's not a you know I don't think its appropriate annual annualized that as our as our new fixed cost base patchwork, yes, yes.
Okay, well I mean look you guys have worked on a really long and hard.
Since going public and it's nice to finally see.
Get the results on the market in that business that you've been planning.
So certainly pleased to see that profit line I'm sure. There's a line lineup on questions to be asked.
I appreciate you taking my questions. Thanks again.
Our next question comes from the line of Mitch Steves with RBC capital markets. You May proceed with your question.
Yes, I have a few questions I was just wondering if it was kind of started to say congrats on obviously on the big Morgan Stanley weighted but.
A few quarters ago I came on here on kind of asked about do we fight it was pretty much flat out nobody really knew what it was but after defy summer I'm just curious of what the.
Institutions, you guys were talking about or I guess, the high net worth individuals you guys talking about who we're talking to how far or the geography, if I round. It all are they aware of the differences between compound in and the Texas like curious walk in and the balance are there.
On a point, where they actually understand what's the difference between all of those or are they still kind of in rent revenue.
So let me let me answer that.
I am wildly bullish on <unk> like hear me loud and clear.
Having some of the smartest guys on our firms do nothing but spend time minute, we're investing lots of capital on it we're looking at regulatory compliant ways to participate in the in the process and we're making lots of money on it.
Clients in general go through the same.
Journey that most crypto Nato's go through they first learned of that Bitcoin and then they're like Wow on making money here and they'll move to a theory them and they'll say well that's a really neat project write this decentralized supercomputer.
And then that then theyre going into what's built on a theory them and so <unk> kind of the third step.
We have some hedge fund clients that have participated.
But not many.
And we have some.
Crypto high net worth and other high net worth that are participating but I would tell you that <unk> is still kind of a crypto native.
<unk>.
Project, our ecosystem and not on institutional ecosystem, yet and I don't think for the big institutions. It becomes one this year.
What we are doing is.
I had this conversation with debt.
CEO of one of the biggest banks on the World yesterday, I was saying guys.
Coin really isn't a threat to your business quite frankly, it was a missed opportunity to both trade asset manage and distribute a great product to your client base.
But you really should focus on day, five because <unk> will be a threat to your business over time.
And.
The banks arent there yet it's not big enough to for it to feel like a threat and so to me, it's a great opportunity to continue to invest in the best teams.
To grow our own domain expertise around the space.
But it's not it's not resonating yet.
With the big players.
Okay. That's really helpful and then secondly.
Just let me enter T spot.
You mentioned that digital art. So that's another one that im curious about it.
If investors really believe that this is just effectively by art or if they're up to speed in terms of projects like Timberlake and.
Immutable way on my own.
From what you're scaling in scaling up the NFC ecosystem ecosystem to the point, where basically all physical objects like your house and it became free NFC or they are they understand it I called touch or are they just still kind of listen I don't think at.
On the.
People from the people fiasco.
It is a bit shocking off.
It reminds me a lot of when we first started trying to sell bitcoin I would tell people hey.
This is a peer to peer decentralize digital money or digital goal and people are looking at like what are you talking about like not only people who called it this lump them or our tulips or mystery coin and it took a long time for people to get there.
Harms around that you could have this theoretical idea of where what what money is right. That's based on in code.
And a little bit to the same thing going on now the education process is much faster because of things like discord and and the big forums that everyone's on right.
And so everyone's kind of get it educated but this idea that we can take IP or art and make it unique and put it on the blockchain is about three months old and so people are kind of getting their head around it I would tell you that.
About 95 per cent of the buyers in Ftes in my mind, our crypto people, you look who bid and the people right. It was just in sign on the guy that and are buying it.
There's a lot of technical.
Things to get worked out and there are a lot of big flaws in some of the systems at this point right when you're buying on an FTE or you actually.
Are those pixels that create the beautiful piece of art actually embedded in the in the crypto or they held on some server elsewhere less debt.
That is it really secures you think it is because there's all kinds of issues to get worked out it will get worked out this will be a big big industry in 23456 years, who knows when it but it really kicks in.
We are investing all over the place in the space.
Because I'm positive this will be a big industry almost more so than I was that big Clinton succeed.
Why because it's.
Because it's being built on the back of having already.
Educated the world that blockchain work and that you can have a digital store value and youre going to have digital stable coins that are crypto stable point is debt that move around and payment systems and so this is just the next iteration of that.
And so it makes me more confident than I was like I said investing in crypto back in 2013, and 14, where it felt more speculative that said I do think we're at a short term bubble in <unk> right. There is supply.
Response every artist every musician, but I've ever met has contacted me instead on how do I participate and so that's kind of good news and bad news. The good news is it means this is going to be real the bad news is right now there's going to be a flood of supply and.
And not enough demand until the educational process of non crypto people can start believing that butte.
Beautiful art or great music can be.
Preserved and displayed right, we don't even have the display it.
In the next 12 months, Mark My words, Youre going to see NFC galleries, and youre going to see screens at Samsung or other companies develop where you can walk into your house and you can display a $69 million people.
But you're also going to see.
As in the meta versus that that are fantastic places to display your digital art and so I'm going to invite you to my zoom call in the meta versus and maybe like do check out the people.
And so right people buy things that a lot of times per display to show off to.
Feel good about themselves that they own the only one of the one of 10 off and so all of that still is being built we're seeing the projects, they're fascinating that are coming down the pipeline, but they are not here today and so you got to think of the NFC place as at play as a speculative venture play but it is.
One on I'm highly confident.
Perfect I was just one last one just in terms of just staying on understanding that's for galaxy, specifically so of your client base I mean, how much of your time accounts, but it's still a bitcoin that there what's your kind of 13.
<unk> 13 year old and nine year old technology, and then secondly to follow up with that just based on your comments on <unk> five entities.
Somebody who's, giving galaxy, let's say $50 million to invest.
Guys more bullish I guess on the N F T space or or day five I'm. Just curious where you guys are focused on right now in terms of investment dollars. That's a 64000 dollar question. We have two separate venture teams right. One works on interactive and one works on kind of define the kind of crypto architecture architecture space.
There are stupidly smart people in both groups.
Would allocate capital probably evenly.
We're going to allocate by opportunity that comes up but in my mind kind of an equal amount budgeted to both.
I really think they are both fantastically cool opportunities we are raising a fund.
The interactive space that will have its first close this month.
And I think we'll be fully fully subscribed.
Within within a few months.
And on the on the interactive space and on the <unk> side, we're going to all on balance sheet.
But it's a.
Those are two really really exciting opportunities.
I'm not sure if I forgot your first question.
I was just curious on currently.
People are your clients, whether they are investors.
Much time is still being spent on bitcoin and ethereum is it like 90 day.
For a simple without her listen for the institutional client base.
We I have this this.
Joking, saying that I wear a suit one day on a hoodie. The next right. The institutional client base is going to start with bitcoin.
Damian has three pictures of Volvo's in his office right, we want to make them feel safe to make them understand the thing and make sure. They know we're safe hands to participate with and so I think.
For most institutions it will be 95% bitcoin to start.
<unk>.
But then people further on the risk curve or moving into the rest of the space.
For investors people are putting money in venture funds, where venture investments that's coming on are mostly family offices.
Into that kind of a day five venture or the or the the interactive venture space, but from a big institutions move slow and.
You can't criticize them in lots of ways like up until 12 months ago, there wasn't enough liquidity, even in bitcoin for giant places like a blackrock or re gallows Bridgewater to really participate in any big way, we're certainly an insurance company and so asset classes have to gain.
Volume and market cap before they will attract institutional money.
And <unk>.
Most of the.
Fringe your stuff right the more fun stuff in lots of ways, where the innovation is happening doesn't have that that liquidity and or market cap yet to bringing the big institutions.
Okay, that's very helpful and honestly, a little bit surprised by that because I would think that the the.
The hedge fund delays so to realize that all of the alpha generation of on the edge attack now, but but that's our that's extremely helpful. Thank you.
Our next question comes from the line.
John Crane.
Bernstein Research you May proceed with your question.
Hi, Thanks for fitting me in question from Mike I really like the way you describe this as a once in a generation paradigm shift and to me, it's probably parallels the internet in terms of the long term significant it can create for society and business and culture everything. So if we look at the Internet is an allegory for the rise of crypto and digital assets to what similarities.
Do you see as important between those and then what are the most notable differences you see and then lastly, why why do you think this has been a much more polarizing paradigm shifts than something like the internet.
I'll start with the second question.
This came from.
In response to people being upset with the status quo for people being upset and Distrusting of centralized authority. The ethos of crypto was to go after the rent takers, but to go after the financial institutions.
It was coming out of the great financial crisis. That's until she wrote this paper, where there was a real breakdown on trust and so there were vested interest and continue to be vested interest that says hey, This young generation right. This is a millennial and Gen Z revolution that wants to kind of rebuild.
On the way things are done net feels more fair that.
That feels more again with Terry on that's more transparent and so.
They it wasn't a win win for everyone in People's Minds right, you think about how hard the J P. Morgan thought this right, Jamie diamond over and over and over and then finally kind of conceded and said Wow now we better start investing.
And that's not international play that he made.
Right up until literally 18 months ago.
Even if the company is biggest Facebook couldn't get banking for for the Libra project when it was called Libra.
From the traditional banks and so there was vested interest play I think going on here, which created some of the some of the tension I think a lot of that has shifted the banks. It said, okay, Hey, it's time to get on board on this because the world is changing.
What's most similar I think as network effects right.
What's so interesting is how fast the network effects can work and so when you think of projects like the theory on project, which is decentralized people working on it from all over it gets its value by the more people that program on it the more people that use it the more people that develop on it and so in that respect.
That viral nature of how fast things can go.
Very similar to what we learned on the Internet.
Absolutely that makes a lot of sense.
Testing the just as an anecdote we hit 100 million crypto users globally in January and that's about where the Internet was globally in 1997 so.
It's an interesting kind of a frame of reference from how early early on we are on that as well.
B B.
Sure.
Yeah, I was going to say that's the the pillow.
Philosophical question I did have a little bit more technical question here what.
What do you what do you view as the most important technological developments in crypto that'll help either accelerate the crypto.
Technology use case adoption or digital assets as an asset class and when I say technological developments I'm, referring to things like layer two scaling solution Oracle yes.
I would put it in two buckets right.
Like the one cool thing about big clients. It's a finished product. It works. It's done it's not going to look much different in 10 years.
We're a theory is not right and so having.
East to work and scale and get to get to decentralize.
Speeds, we need.
I think as where lots of focus on energy is happening.
We're optimistic we believe in it but it's not done yet and so I think that is.
If I had a genie that whispered in my ear with 100% certainty that we would have this spectacularly.
Both decentralized and fast.
Blockchain.
That would make me feel really good.
Second and maybe just as important is.
And this is really goes to defy is how can we.
Get a regulatory compliant defy how can we.
Operate in a world where.
Executing against the smart contract, but I know the smart contract on the other side is executing against somebody who is okay to trade with.
How do I get the blue check defy process and they are listed there are lots of projects that are working on this right now I have great faith that that will get solved.
But once that happens I think you're going to see a real acceleration of <unk>. Because then who's there to regulate right. These are companies that this is code and so it's not like you can regulate people and so I think that the.
The real threat to the legacy system is once this <unk> piece get solved.
And there are lots of creative ways that people are looking to do that and so.
Those two things if we spent a theory them up like we think we will with these two and we are.
Solve this this <unk>.
Embedded piece.
And I think.
Youre 1997 analogy would be a perfect one.
Really fascinated lastly, I just want to say congratulations to everyone at Galaxy digital the ability to combine vision with execution is really incredible with what you guys have done so congrats on hats off to everyone. There.
Thank you so much.
This concludes our Q&A portion I will now turn this call back over to Mike Novogratz for closing remarks.
Well guidance just wanted to say thanks for your support it has not always been an easy ride the galaxy shareholder it has been a great ride in the last year, we're hoping it continues to be a great ride.
In the future we.
We are working as hard as we've worked on our careers were.
Were hiring people as fast as we can so people don't have to work.
Different Ricky.
Yeah.
We see great opportunity and look forward to.
Updating you soon on some really exciting things that are in the works.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
Thank you.
Okay.
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Yeah.
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