Q4 2021 Galaxy Digital Holdings Ltd Earnings Call
Good morning, and welcome to Galaxy Digital's fourth quarter 2021 earnings call. Today's call is being recorded at this time I would like to turn the conference over to Galaxy Investor Relations team. Please go ahead 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 <unk>.
These regulatory authorities 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 constitute the recommendation solicitation or offered by Galaxy digital or its affiliates to buy yourself securities, including Galaxy Digital Securities.
With that I'll now turn it over to Mike Novogratz, founder and CEO of Galaxy digital.
Everyone.
It's a beautiful day in New York at least if you're in New York.
Listen 2021 I think galaxy will look back on is really a seminal year in our history and one I think in the whole industry of crypto that really shifted this from being a Ah maybe business to Wow. This is now an institutional asset class and so.
We had a really exciting 2021 .
You know our results speaks for themselves our fourth quarter capped off an amazing year, one $7 billion.
Net comprehensive income if you'd asked me that two years ago that would have seemed like a stretch.
But lots of positive things happen for us.
For the industry.
Partners capital at $2 6 billion leaves us one of the most equity highest and strongest balance sheets companies in the crypto space.
More importantly, I think it's the human capital we added right. We've added almost 250 people since January one 2020.
And that's really where the excitement comes.
I know how this works people look at you.
Your last year's earnings.
Thanks, but what's next.
And so I'm going to actually leave.
The real analysis of the earnings to Alex Chris and Damian later on and give you a little sense of what's next.
2022.
We came into 2022 and it looks like it should be a more challenging year from a macro perspective. The fed is hiking rates I think chairman Powell will.
To try to regain the credibility of that institution by speaking hawkish and being hawkish.
<unk> has created lots of volatility in asset markets.
We had a war breakout.
In the Ukraine, where Russia has invaded that's interesting is it creates lots of.
Inflationary pressures through the commodity cycle it creates lots of.
Risk risk off behavior and anxiety, but it also adds to our narrative.
In crypto, which is really positive and continues to accelerate adoption. What's interesting. This this has been a year of push pull and crypto with macro headwinds and adoption tailwind and we continue to see that those adoption tailwind part of its story like I said when.
When Europe and the U S told Russia, those those reserves really arent your reserves.
For the first time in my investing career people said wait a minute if that could happen there what about China's 1.4 trillion dollars of treasuries.
Our treasuries really a risk free rate and so the story for bitcoin and other crypto assets Ah got more of a tailwind I don't think that is going backwards I think we're in a balkanized world and where crypto assets fit in.
Is it going to continue to be debated, but it's going to grow in scope.
It should not be.
Missed that secretary yellen.
Janet Yellen and our last comments.
Took a much more sanguine approach towards crypto right the political wins and D. C are changing I think Democrats, who had been more opposed to crypto are realizing.
That voters really like this asset class and so youre seeing a shift in the regulatory regulatory front.
Let me go to Big go Uh Huh.
We remain committed.
To integrating big go in becoming an institutional crypto platform period.
Yeah.
In keeping with that we've extended our deal to the end of the year.
With the goat.
We adjusted the deal some for progress that <unk> has made they've hired close to 150 people.
Our more than 150 people since since.
We originally signed and so it's a bigger and better company.
And it will continue to work on integration side by side until we close the deal.
Regarding our U S listing.
As previously announced subject to all the regulatory and approval processes. We remain in progress to re domicile to the U S. We publicly filed a registration statement on January 28th However.
However, we're still in the comment period with the SEC.
And why are we.
Certainly expect this process to be completed at one point we're not.
And we're going to make every effort we can to be a U S. Public company, we can't really provide a great.
Time frame.
Given that it's in negotiation with the SEC.
Right.
We said in our release.
Between the second and fourth quarter.
That's a pretty broad window.
And I think.
We're going to hope for the best and we're going to continue to engage with the FCC theyre very thorough.
<unk>.
We expect this to get done.
Okay.
Now let me tell you about the future we continue to invest for growth period, and so we raised $500 million and a.
Convertible in December and when we went on the road, we told investors that money was going to be to build platforms and it continues to be.
How do you invest for growth you hire higher and higher and I think what gets me most exciting is human capital right, we're coming innovative ways too.
To recruit to.
Young talent, we came up with new training programs are flagged program.
Theres, a big engineering focus we brought on Alex field to run our engineering team He's got to.
He's been on has had his plan approved it's a big increase in engineers across our firm.
We've also brought in a new CMO Sebastian Benkert. He came from arc, where he did an amazing job building out Kathy Woods brand can't be more excited to have him.
We've got at Felix cooler.
Our risk management side, Tom hair up to optimize our balance sheet any schwartz to be our chief Security Officer. The list goes on and on and so when I think of what makes a great company and its people.
And I couldn't be more proud about the people we brought in in the both the work ethic and the and the quality of talent and so when I look.
Going forward.
Yes, we put up we put out a <unk>.
Already released somewhat what Q1 looks like at first glance.
I would tell you that all of our businesses are profitable all our all of our operating businesses are growing.
Our balance sheet.
You know is going to continue to be volatile with with the crypto market we continue to.
Hopefully outperform the crypto market and balance sheet are and you know I think.
When I look forward from here I am pretty optimistic crypto I had said originally I thought this would be a range a year right 30050 thousand in bitcoin and whatnot, but given the adoption.
Cycle, I'm, seeing and giving the way markets trade and how I should see new people wanted to get in the innovation, we're seeing in web three and in the meta versus space I've gotten more constructive than I was at the beginning of the year and so it wouldn't surprise me to see crypto significantly higher by the end of the year.
With that to talk more about our actual earnings in the quarter.
Hand, it over to Damien.
Thank you, Mike and good morning, everybody before I jump into performance for watch for asset management and investment banking segments.
Didn't want to contextualize, a few of the macro trends specifically impacting how our clients are investing in early 2022.
Venture capital invested more than $33 billion into crypto and blockchain startups last year.
More than all prior years combined just think about that number.
With much of that happening in the second half of the year at a pace of about $1 billion per week.
67% of that total went to fundraising rounds with deal sizes above $100 million.
And at least 43 companies that raised venture capital and 21 Utica wells.
Seat deal counts continue to decline while series I in light of growing or saw in the companies built in the 2018 to 2020 crypto bear market.
Curing.
And I'm seeing that play out substantially in conversations with our clients of our asset management Division allocated specifically continue to put money to work.
Sector predominantly as I mentioned on our last earnings call for the moment through allocating to venture and other early stage fund management product.
Turning internally to our business segments, and beginning with our asset management business.
There remains strong demand for our fund products across our passive and active strategies.
And we launched.
Some exciting new products during the quarter and saw AUM growth across our business.
I'll also highlight I'm seeing growing demand specifically for active product suite, which indicates a maturation of the space is starting to occur.
During the fourth quarter, we saw strong inflows into our fund management suite assets under management increased by 29% from the end of the third quarter of 'twenty one reached.
Reaching $2 9 billion, which represents our AUM growth of 256% for the full year.
Net client inflows in the quarter exceeded $500 million confirming that the investment case for crypto currencies in a fund structure remains very compelling.
Looking year over year that is nearly $1 $7 billion of net inflows.
So even in a quarter, where crypto asset prices were rising backing out the impact of price increases we continued to see net new capital coming into the Galaxy platform.
Now a quota to date against the backdrop of a modest market contraction in digital assets. We've seen AUM declined to $2 4 billion as of the end of February consistent with the reduced total crypto market cap over the same period.
Even with that reduction in overall AUM, a key element of galaxy strategy is providing our expertise and volatile and tricky or market conditions.
Demonstrated in our over three year investment management track record.
On the new product front, we were excited to launch the galaxy Salon of funds during the fourth quarter, which are passively managed funds seek to track the performance of the Bloomberg Galaxy Salon Index Fund and.
In February of this year.
Can you I shouldn't have a long partnership with Ci, we launched the galaxy multi crypto ETF, which is designed to capture the upside of investing in both bitcoin and ethereum.
Whilst maintaining the volatility of these assets by systematically managing portfolio allocations between the crypto currencies and cash.
We're also thrilled to continue our partnership with Goldman Sachs is Goldman has made our theory and funds available to their clients. This is just one of the many ways galaxy's working with Goldman and Chris will touch on other examples in a few moments.
Goldman Sachs or Morgan Stanley continue to be first movers in offering their clients access to bitcoin and a theory through galaxy passive fund structures, demonstrating the amount of demand Clos have for exposure to the asset class.
Turning now to our actively managed funds I'll start with a fund of funds business, which is actively raising its third fund a diversified multi manager fund of funds investing in leading global crypto and blockchain venture firms.
Giving our clients access to a diverse portfolio of crypto adventure specialists when it comes to geography stage and sector focus.
We look forward to updating you on clauses with that fund shortly.
Additionally, our Galaxy interactive strategy had the first close of its third fund growing total strategy AUM by over $17 million to $735 million.
This fund will be dedicated to immersive virtual worlds and investing at the intersection of content, social Commerce and technology.
We were also excited to announce the launch of LNG plus a new co investment consortium focused on the web three gaming space I guess.
Alexey interactive partnership with Republic, Crypto and elevated research and G plus will continue to invest and cultivate the next generation of token watch video games.
These investments will flow directly into Galaxy Interactive third fund.
And it's important for shareholders to remember the Galaxy digital will retain a large LP interest in all three of Galaxy interactive funds and in our vision Hill fund of funds strategy, providing our shareholders with collective exposure to some of the most exciting areas of private early stage crypto investing.
All in all we are now proud to offer our clients 15 different fund products to choose from across our passive and active strategies.
And last but certainly not least we are really thrilled to welcome Chris run to the team as our new portfolio manager focused exclusively on long only active strategies.
Chris was previously head of strategic equities, and a portfolio manager at Cowen and Skus.
Look forward to sharing more details on the strategy as Chris is focused on during our next earnings call.
Turning now to our investment banking business, we continue to build on the momentum we've demonstrated over the prior few quarters.
We announced a number of deals for the quarter and as of last week have an active pipeline of deals representing mandates of more than $1 billion in potential transaction volumes.
Among the significant deals announced with two deals for black Diamond, a leading institutional grade blockchain infrastructure company for node management staking.
Are there acquisitions of Jim and any block analytics.
Our banking team acted as the exclusive financial advisor on.
And both of those transactions building.
Building on our strong relationship with the block time and executive team.
I've seen the Guy and served as the exclusive financial advisor to B I D.
Their acquisition by Coinbase in November this transaction will further accelerate corn basis capabilities within that coinbase wallet business and allowed the wallet users the opportunity to migrate their assets to corn basis as well.
We were also involved as placement agent on a bridge financing convertible debt for payments infrastructure provider in December demonstrating the broad breadth of offerings provided by our advisory team.
And lot last month, our team worked on to fundraising rounds Credo is 85 million series, a financing where we were exclusive financial advisor and sole placement agent and compute notes 80 million series C financing, where we advised compete north and their teams on the equity financing.
Notably over 2021 and full our team closed eight transactions more than we've closed in all previous years combined and given out 2022 part one we expect our investment banking franchise to continue growing at this rapid pace.
Proving that point just last week it seemed close another transaction, where we acted as financial advisor for the Thunder bridge for spec and its merger with Cowen check set to closing list in the second half of this year.
And building on Mike's earlier comments staffing up to serve both our asset management and advisory business is critical.
We are constantly looking for top tier talent and have brought on the likes of Blackstone Executive Bill Burke, our CFO of our asset management business, Chris Ryan as I mentioned earlier and one of my old Goldman colleagues, Danielle Johnson, who most recently was head of venture capital coverage at credit Suisse to join our advisory business is head of capital markets.
We're really pleased to welcome Bill and Danielle to our ranks.
I'll now hand, the call over to Chris Ferrara, who will walk you through details for our trading and mining businesses as well as give you all an update on our portfolio of companies and our areas of focus for our investments.
Thank you Damian.
I'll cover the performance of our trading mining and principal investing businesses.
Our trading business finished off 2021, and strong fashion benefiting from both increased trading activity and the increased depth of our relationships across Spartan derivatives lending and market making services.
To start by providing greater visibility into our reported results recall that I FRS disclosure of our trading results includes one our core net long Treasury holdings to our own proprietary trading around that core net long as well as three all of our market neutral counterparty facing a liquidity provider activities.
The latter bucket our market neutral counterparty liquidity activities for full year 2021 contributed approximately 10% of the total G. T net revenues, which we define as realized and unrealized gains for the entire trading business after netting associated funding costs and interest expenses, some of which show up below the line in operating expenses.
Now, let's look at the business performance from our execution desk within those results counter.
Counterparty spot trading volumes increased by just over 60% quarter over quarter broadly in line with the record volumes, we saw during the second quarter of 2021.
While February and March have definitely seen dampened activity across the market broadly volumes through most of the first quarter have remained in line. If not ahead of third quarter 2021 levels.
Derivatives volumes saw similar strength in the quarter rising over 50% sequentially to Mark another record for the Frac for franchise activity.
And Furthermore, with a notable uptick in volatility in Q1 2022, our derivative franchises had its best quarter lifetime to date.
We've noted for several quarters now that derivatives and structured products remain a cornerstone to our differentiated approach for meeting increasingly sophisticated demands from institutional investors and hats off to the entire team effort for a strong finish to 2021 and into 2022.
Turning to lending, we've continued to add new and deepen existing client relationships.
As a reminder, we believe originations tells a clear story for growth given the volatility of crypto asset prices that can cause notable shifts the size of our overall loan and yield portfolio at any point in time.
We added roughly one $5 billion of gross counterparty loan originations in the fourth quarter of roughly 7% sequential increase which put full year originations originations at over $5 billion.
This drove a 20% sequential increase in the size of the counterparty loan and yield book to $736 million as of year end.
That's a greater than 500% increase in the size of our loan and yield book versus the end of 2020.
And as of earlier this week that book stands at over $900 million U S. Having delivered over $2 billion of net originations year to date in 2022.
To reiterate our focus on building a strong risk adjusted financing business is core to our DNA and doing so with a non retail institutional counterparty base is what we believe will add the most enduring value to the galaxy franchise over the long run.
And finally, I want to touch on Gtt's ability to not only differentiate against crypto competitors, but for its role as a reliable execution desk for tried five standard bearers.
We announced just last week the GTT executed the first OTC non deliverable options transaction with Goldman Sachs building on our strategic partner for ship from last year, where we were chosen as a liquidity provider for Goldman's Bitcoin futures block trades on the CME group.
While it's still very early in these trades are not material drivers of our business today. They do provide evidence of an increasingly open door to the traditional financial world for established platforms like Galaxy and what's more is it speaks to our position as a trusted partner for and beneficiary of try five adoption not as a target for dis intermediate them not us.
Target for disintermediation.
Now moving to our principal investments business, we've continued to aggressively pursue and invest in the most compelling opportunities across the ecosystem.
Excluding our portfolio of companies interact interactive business. We now have 122 investments across 86 portfolio companies on balance sheet.
Throughout the fourth quarter of 2021 and year to date in 2022, our team continued to grow our strategic portfolio with new investments initiated in the polygon network as it has gained traction around gaming and Ftes smart contract verification and evaluation firms our Torah, an airdrop labs, which provides crypto enabled experiences for e-commerce like N F T V.
Receipts.
We continue to see record breaking fundraising with over $33 billion of venture deployment around the sector last year and several of our portfolio companies have benefited as investors look for exposure to the most innovative platforms in the ecosystem for.
For example, fire blocks are leading custody technology platform. We supported from its earliest stages successfully completed its series E fundraise at an $8 billion valuation.
Other notable examples include our early investment in interoperability protocol XR.
Onramp technology services platform ramp and leading zero knowledge based developer platform Alea, which just raised at nearly $1 $5 billion valuation.
In Galaxy has been a differentiated supporter and investor taking lead or co lead positions over the last year and other highly covenant in fast growing companies, such as smart contracts simulation and security tools provider chaos labs compliance tool developers sealants and defy execution platform Skolan.
As well as making notable later stage strategic investments in platforms like acorns, where we see significant opportunities for mass crypto adoption in which the broader galaxy platform can play a meaningful role.
Importantly, our primary focus on being largely early stage with our deployment and partnering to support the scaling of these businesses also means we're doing far less riding of the increasingly crowding investing ways in later stage growth companies.
Which has led to private company valuations gapping out relative to net lower public market valuations.
Turning to mining where the team continues to build momentum in both prop mining and its minor finance offerings and proprietary mining. We have remained on track for previously disclosed orders that will bring us to nearly two <unk> per second of delivered orders by year end 2022.
And in December we added another set of orders, which will put jdm's total purchase capacity of just over two five <unk> per second delivered by the year end we.
We expect to use that capacity to fuel both proprietary and minor finance operations and will apply hatch rate Opportunistically, where it makes the most sense for the business.
While cost of mine has increased across all miners ourselves included due to growing network hash rate and increased cost on machine orders amidst supply chain constraints, we continue to mine bitcoin and an over 65% discount to fair market value using our full cycle cost of mine, including equipment costs.
And given bitcoin is hovering around 47000 that is pretty remarkable operational efficiency by the team through different throughout different bitcoin price and hatch rate regimes.
Turning to our client facing business, we achieved nearly $300 million in new mining not mining related originations, our mining and lending teams continue to provide miners with a comprehensive suite of financial services and products, including asset backed loans and leases project and equipment financing Treasury management and capital optimization hedging and other trading solutions.
We think these facilities and lending arrangements speak to the growing demand for the offerings across our business as institutions look to manage price volatility improve their treasury manager strategies and shore up access to funding amidst turbulent capital markets.
So all in all Q4 was a very strong quarter that included some record results continued positive signals for institutional adoption and more examples of how our mix of businesses can reinforce and hedge the value of one another.
And while year to date has undoubtedly included some volatility and tougher market macro conditions for crypto and for traditional markets. We don't run the business for any individual quarter, and we feel as optimistic as ever about our positioning within the sector and our ability to serve institutions in a differentiated way with that I'll turn the call over to Alex to walk everyone through the specifics of our financial performance Alex.
Thank you Chris good morning.
Galaxy earned the remarkable $1 7 billion last year, we earned $521 million in the fourth quarter, a nice finish to the year due.
Due to market volatility, we give up approximately $110 million to $130 million in the first quarter of this year.
Our equity capital was $2 $6 billion at the end of the year. This was up from $800 million at the end of 2020.
In addition in December we raised $500 million of convertible five year debt with a 3% coupon.
This continues to position galaxy to take advantage of abundant opportunities in this rapidly developing market.
Our equity capital tripled in 2021, this was driven by our long term strategy of maintaining alone digital assets portfolio our.
Our diversified principal investments in this sector.
And our growing operating businesses capital markets investment banking.
Asset management and mining.
To elaborate.
Digital assets taking.
Taking the realized and unrealized gains together digital assets gained one 5 billion in the year excluding.
<unk> gains from Noncontrolling interest liability, which is money from outside investors in funds that we consolidate.
Our gain on digital assets was $1 3 billion for the year.
Note that we renamed Noncontrolling interests to Noncontrolling interests liability and.
And moved to position of this line item on the balance sheet and the P&L statements.
This did not change the nature of the line item for our earnings.
Still represents money from outside investors in the funds that we consolidate for technical accounting reasons invest.
Investments.
Pivots investments continue to be a great part of our story, we gained $710 million $718 million on investments this year.
Our portfolio grew to include 86 companies and.
And was valued at $1 1 billion at the end of the year. Please.
Please note that many of our investments are made at the early stages and are not immediately liquid or trade publicly.
<unk> investments at cost or a discount to market value.
We have a rigorous internal process supplemented with third party evaluations to make sure that reported values are reasonable.
Recurring revenue, we have seen rapid growth in our operating businesses trading advisory mining in asset management. We expect this growth to continue and for these segments to take over as key revenue streams for galaxy overtime.
On the cost side.
Compensation was $114 million for the year up from 34 in 2020.
The large increase was driven by growth in headcount from 89 to 280 people in 2021.
And higher cash bonuses per employee this year versus last because of outside results.
<unk> results.
Similarly equity compensation was $75 million for the year up from $12 million in the prior year.
This was also driven by a large increase in head count.
And from roughly doubling of the 2021 grants from the time they were communicated to them. Please in the beginning of the year to when the blackout period associated with our Bitcoin acquisition was lifted and the grants could be made in the second quarter of 'twenty one.
General and administrative fees were $35 million up from 15 in the prior year driven by increased spending for technology.
Marketing higher depreciation for mining equipment.
And we wrote off our old lease in New York City, having moved to a larger nicer space in New York.
Professional fees were $53 million for the year driven by expenses from Bidco and vision Hill acquisitions U S listing and convertible notes.
We expect continued elevated legal and audit costs related to the U S listing in 2022, but a drop off in 2021 in 2023 and additional reductions in future years.
Balance sheet, we held $800 million in cash at the end of the year. This included $500 million in convertible notes raised at the end of last year.
Equity stood at $2 6 billion at the end of the year.
Digital assets are large parts of our of our balance sheet.
Digital assets, including digital assets receivable and excluding Noncontrolling interest liability other People's money were $2 3 billion at the end of the year.
Further removing digital assets borrowed and collateral received from Counterparties.
Net of digital asset Slant and collateral posted net digital assets were $1 1 billion.
Removing stable coins takes us down to $900 million.
We use this measure.
To assist our net exposure to digital assets.
We remove stable coins from the mix because they typically maintain a one to one correlation to Fiat currencies.
We use stable coins to facilitate operations.
Because they can be settled 24, seven on digital asset market centers, which trade 24 seven.
Private investments were $1 1 billion at the end of the year.
Accounting changes.
As part of moving our public listing to the U S. We retained KPMG is our auditor starting in the third quarter of 2021.
As I mentioned earlier in consultation with our new auditor, we renamed Noncontrolling interests to Noncontrolling interests liability.
This is money from outside investors in funds that we have to consolidate in our financials. We now display noncontrolling interests in current liabilities section of the balance sheet and.
And we display gains and losses attributable to noncontrolling interests in the expense section of our P&L.
The earnings and equity that belongs to the company remain the same.
With that I will turn it back to the moderator for questions.
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.
Tom will indicate your line is in the question queue.
May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys, one moment, while we poll for questions.
Our first question comes from the line of Mark Palmer with BT AIG. You May proceed with your question.
Yes, Thank you and good morning.
Could you provide an update on <unk> recent performance.
Including assets under custody.
And.
Tell us a bit about the integration activity what is feasible.
In terms of integration ahead of the deal close.
Good morning, Mike Thanks for the question.
We're not going to provide with.
This earnings release, an update on <unk>.
You see our other operating metrics you can look forward to those.
In coming months.
I would tell you the the way we're thinking about navigating what is clearly a prolonged closing of the transaction is to really focus on making sure that both companies are delivering on the products that we're building for our customers in a way that has the least amount of distraction possible.
And so we have an integration plan that we architected very clearly in the back end of last year that plan exists, we continue to refine and optimize it.
But we want to make sure that we're continuing to deliver particularly on the big coin support and downstream services on all of the different products that we're hearing from our customers that they need from us and so.
The simple way to think about it is we're going to continue to build maintain our integration plan and as soon as we get through the process with the SEC and close the transaction, we'll be really well positioned to swiftly integrate both firms along the way, we're really going to operate as best we can as a combined unit for our customers.
And we already started that in the third quarter of last year, where we will provide the front end liquidity derivatives lending and other services to lots of customers from our galaxy entities.
On stream custody solutions customers need for <unk> and so we have a process for on boarding that minimizes any.
Disruption or friction as best we can on that approach.
Thank you.
One more question, obviously, you had a very strong performance.
Performance in the current quarter with regard to derivatives.
What are you seeing in terms of <unk>.
Client flows.
Onto the platform.
Yeah, a lot of the figures that we see have to do with trading volumes and the like.
What can you tell us about the adoption of digital asset by institutions as reflected by client flows.
Yes.
So on the derivative side, specifically I would say it is it as broad based growth some key themes we've seen there.
Seen a pretty significant uptick in activity on the bitcoin bitcoin mining sector and using derivatives to hedge.
Hedge treasury positions.
When should we think is actually natural and we're pretty far ahead of in terms of making sure.
We had a mining business in relation to managing group to make sure that we were able to see those flows the mining sector has exploded in terms of big large public companies, who have raised money and those companies naturally build net long bitcoin treasuries as part of their core business and so yeah.
Using our derivative desk or using drugs in general, but our derivative desk, specifically as a way to either get liquidity our hedge those positions are color them up the way sort of a lot of other.
<unk> businesses outside of crypto in the commodity space would do has been a pretty big driver. We've also seen a fair bit of activity from institutions.
Who had begun their digital asset adoption in 2021.
Now either hold core long positions and want to hedge those positions are wanted to sell call overwriting strategies to enhance yield.
On when.
When they have a view that there is a trading range for a period of time and so that's a that's a pretty specific update in terms of market color that we've seen.
On the derivative side and then in general in terms of in terms of spot trading.
We have seen general uptick in traditional hedge funds 21 was a big adoption year for crossover funds, taking their first position in spot coins bitcoin and ethereum to start with.
And so yes, I think that's pretty much the.
The landscape we're seeing.
Thank you I'll get back into queue.
Yep.
Our next question comes from the line of Deepak Kaushal with BMO. You May proceed with your question.
Oh, Hey, good morning, guys just a quick question on regulations.
For whoever wants to take it.
Mike I think you said last quarter that youre going to be spending more time in Washington, When you look at the activity level regulators, how big of an effort is responding to buys his executive order in terms of how just tracking it is is it to other efforts that the regulators need to do in <unk>.
General.
So I think there's a bigger story and it's a combination of didn't really started with the the infrastructure Bill when Washington woke up to a barrage of phone calls from.
Crypto loving.
Voters.
Powerful wealthy contributors to to retail.
Yes, the lives of Senators and congressmen and.
<unk>.
I have made it up.
Personal mission as well as lots of our competitors to to start reaching out and talking to politicians more often and I really do think there is a change in mindset on both parties that you can't be anti crypto and you've got to figure out.
Can't kill innovation, if you're a Democrat you can't kill innovation and.
This really does it is a technology that can really help the little guy right the retail investor.
In long run when you think about.
One in $5 now in and remittance payments are happening over crypto rail so thats, a huge increase from where it had been and so I think on the Democratic side, Theres, a shift and that got through.
The President's.
Sure.
They're active.
You saw that with yellow when she came out she had always been anti crypto and she came out very balanced last time, She said, hey, Im still worried about some things but.
Crypto has a role to play and it's now an asset class and so I thought that was the single most important thing that came out of any.
I won't call Janet Yellen, a regulator because she runs treasury, but someone with lots of.
Influence and what's going to be the landscape and so how that flows into actual regulation.
We will be seen.
There is still some tension between the <unk> and the SEC.
The Ah <unk>.
The SEC continues to.
To to March to.
Their beat but I have to think as the political landscape shifts regulators pick those regulators are political Ed just like everyone else they pick those queues up and so I'm more optimistic.
Today than I was two months ago.
These efforts are really just getting started and youre going to see I've had.
Three Democratic Congressmen come through the office within the week or on zoom and it was shocking how well versed a few of them were in our space and I would have told you six months ago.
There was almost no one who is well versed in our space and so again, there's nothing specific to point to in our regulation that makes me excited but the whole tone in D. C has shifted.
Yes, it's a pretty seem pretty clear with the order on its a good color. Thank you just sticking with regulation.
We didn't get any immediately immediate clarity and you mentioned FSC marching to their feet.
Kind of in contrast, with the FTC, how does that impact galaxy business.
Interim while we don't have that clarity is that a benefit or a hindrance.
That's compared to a lot of other players that perhaps offshore.
We are we are trying to build a company that is in institutional crypto company and Thats, our commitment and that means working within our regulatory framework and so the faster we get regulatory clarity the better it is for us, we probably take less risk than our offshore.
Competitors in <unk>.
Lots of aspects of this business, which.
You could even lead to frustrate you are you can see it as hey, this is our superpower, we're going to figure out how to operate.
In the long run to deal with institutions to get institutions into this space, which the space needs.
Essential and so I stopped letting it frustrates me and say, okay. How do we how do we actually become part of the solution.
Got it and then and then.
Struggling to try and get a sense of.
What kind of percentage of the industry is just kind of on the closer to the compliance side of regulations versus.
The wild west side of <unk>.
Of the market.
Pretty hard to gauge, but do you have a kind of a gut feel of if I could call. It the cleanup factor here.
Is it something that you guys kind of gave her or kind of get a sense of it.
I think that as a percent of the market is kind of an excess how much how to clean up before things kind of move back to growth.
It's a it's a slippery slope because all of this stuff is very judgmental right. I mean, if you think of.
Trading on defy.
<unk> Ky CNA ml platform should do it.
Is it retail one thing we have going for us. It makes our decisions easier is we don't deal directly with retail.
And so if you're in retail there is a separate set of decisions you've got to make.
And so.
So people are making their own risk judgment on where theyre going to see that balance.
And.
We'll see how the cards fall in time.
Think of the players that you read about there are people taking wildly.
<unk> risks.
And.
And youre going to see this breakdown of our industry, because theyre going to haul people often paddy wagons by any stretch. These are very subtle decisions and it would help a lot to get clarity around some of them.
Okay. That's helpful.
<unk> is a big topic, so I'll leave it at that.
And I'll give some air time to the other guys.
So thanks again for your time.
Thanks, so much.
Our next question comes from the line of Owen Lau with Oppenheimer. You May proceed with your question.
But again, thank you for taking my questions. So I have a broader questions.
In 2022, so looking ahead this year.
Which business lines Galaxy needs. Most excited about where we would you aware you will invest more money into and do you think can expand materially this year compared with last year and how do we approach these opportunities in 2022.
Yeah, I'll start and maybe I'll, let my colleagues chime in.
Listen I think our biggest investment this year is going to be in and around engineering building out product for our customers and that's both in <unk> and Galaxy.
Right I said at the beginning here to our firm is like this is more challenging macro headwinds, we're not exactly sure.
Where where markets end up I'm more optimistic like I said now than it was at the beginning of year, but I know one thing we need to build build and build and so most of that investment is engineering the.
The second place I think there is opportunity for great growth.
Is in the asset management business, we have.
Develop the platform.
Institutional platform that we know are going to put.
Different investment strategies on top of and so Damian talked a little bit about that.
With some of the new hires and some of the new strategies, but I think.
2022 for us you're going to see our asset management business really grow and I'm optimistic about that.
I guess the last piece I'd say is.
And credit to Michael Ash and his team in investment banking.
They are way ahead of my mental schedule of where they would have been at this point in terms of establishing a real credible voice in that advisory side of crypto.
We have great domain expertise, we are doing far more deals than we had budgeted in our mines and that business seems to have a great great tailwind to it and I do think youre going to see consolidation in this space youre going to see lots of needs for capital raising and so.
That that business as well.
<unk> really really excellent so it's kind of funny.
The platform businesses that we thought we'd be investing in really I see lots of optimism and I am still like I said bullish crypto, but theres certainly more uncertainty around around the balance sheet.
Got it.
And then for your partnership with Goldman could you. Please size will look a bit deeper.
Let's see.
Providing battle.
OTC trade.
And also <unk>.
Yeah.
And then Goldman Vince and need to do stimulatory.
Okay.
Up in this market.
Yeah, I can take that I couldnt quite get the back end of your question, but I get complex.
Firstly Morgan Stanley Goldman Gotcha Gotcha.
We've spoken for the past three earnings calls about our expectations of how the banks would.
Not to participate in our sector.
Obviously with a close eye on what they are allowed to do given their regulatory status and you may recall one of the things. We guided early was an expectation that the banks with large wealth platforms would would probably be the place that they first dip their toe into the water to start to offer there.
Customers.
Access into the sector and that's certainly what we ended up seeing and hence the the.
The product partnerships that are public with both Goldman and Morgan Stanley .
Our asset management business into their wealth platforms.
The continuation of the banks moving into the sector has really culminated with the news recently of the OTC business that we conducted with Goldman Sachs and really the way to think about that as well.
Whilst the banks certainly in the case of the law.
Firms like Goldman Morgan Stanley Jpmorgan et cetera, whilst they are not able to handle coins directly.
They will.
The needs of their customers, whether that's in the alternative asset management space, all the way through to their structured products businesses by creating exposures to our sector through OTC derivatives that galaxy is well positioned to.
To serve them with and hedge on our side and so we will provide synthetic exposure to the banks in their markets businesses as they develop products suitable for their customers on the other side.
And so really it's a.
It's a phrase that you might want to think about co op petition where.
The banks are really leveraging our connectivity in the cryptos sector, our expertise certainly in warehousing large derivatives risk to provide them with the exposures that they need.
Their advisory businesses are also active in our space and the one to look for I think in the back end of this year is going to be the opening up of different forms of wholesale lending by the banks into our sector.
Which we're tremendously excited about because it will obviously reduce our cost of capital not just for galaxy for the sector.
And there are some really thoughtful innovative ways that are being manufactured to do that safely to the banks.
Got it and then any pushback from other banks and you are not looked at as well. Thank you.
Any pushback from banks nowhere I think so I mean, you have if anything.
I can tell you from our.
Our banking on boarding process since the news of the Goldman transaction.
The news that hit the type of that cowens entry into a digital service platform in the sector.
If anything we have had acceleration requests for the onboarding of <unk> and trading documentation with a broader range of banks that we were working with.
To make sure that they are up and running quickly. So to me it feels very much like the top of house at lots of Goldman and Morgan competitors have accelerated.
The teams that they have focused on digital assets to get get moving and they do not want to be left behind.
Got it thank you very much.
Our next question comes from the line of Jamie Friedman with Susquehanna. You May proceed with your question.
Hi, Good morning, just curious what you might make at the block fly in Voyager regulatory developments at least on a high level. Some perspective, there would be helpful.
Sure Jami. Thanks for the question this is <unk> taken it.
So.
First off I would say.
We have had and still have tremendous respect for Zach in Florida in the Black Knight team and the Voyager team.
That day.
They're doing the hard work and their version of the crypto sector to create product and meet client demand and customer and retail client demand, where it's there and they've done great jobs and building big businesses.
But as you guys know we were seed investors in block five support supported back in Florida, and the whole team all the way through that journey. Voyager is also a big customer of ours on the on the trading liquidity.
The the.
They chose to go down the retail route because they saw a strong opportunity to grow our platform and there were strong retail demand, particularly across a background of zero interest rates, which we all know sort of what's been driving that and retail individuals didnt want that and they wanted to find yield on their on their money and so they provided for them.
I think that the.
The end state now where they are coming in a regulatory pressure was kind of inevitable based on their business model.
And so I think the block Fi settlement is encouraging.
The most recent news with Voyager should have been expected based on the news with block five.
And I think that the challenge for them and we hope for the industry and back them and figuring out is how do they evolve the business model to serve retail clients and a new asset class and a business model of that sort of looks like a bank, but isn't regulated like a bank or do they evolve.
So.
We've chosen a different path as you know, we don't run that business model.
We have invested in some of those companies and we partner with those clients as backend liquidity and financing partners.
But we don't face retail directly and so I think that was just the.
Whether it's pressure or not that was an early decision on our part which different differed from theirs and the net result is regulators require are.
We're inevitably going to be more worried first about business models around retail clients.
So.
Thanks for that Chris I was just curious I will drop back in the queue.
Yes.
Our next question comes from the line of Rich Repetto with Piper Sandler You May proceed with your question.
Yes, good morning, and first congrats Mike on the progress we made in 2021.
Yep.
My question I don't know whether you can answer this but you did allude to sort of the the filing to be a U S listing and the negotiations and again I don't know, whether youre able to disclose but in broad strokes can you tell us.
What are the issues.
That you're dealing with.
In these negotiations.
In general terms I guess.
Yes, I would just say that the SEC is being very thorough.
And so thats their right to do it.
It can frustrate the industry at times, but.
There's nothing.
Unfriendly about the interactions, it's just they're very thorough and throw in as it takes a lot longer than.
People are used to and so I mean, I think that that's the best way to categorize this whole thing.
And so.
Yeah, and I jump in I would say for a little more specific color, but in general as it relates to our conversations.
One of the biggest focus is.
Not just for us, but everybody migrating from private markets or non U S exchanges through the SEC processes is accounting and so.
As you look at the whole landscape I think looking at.
U S GAAP and its ability to work.
Where it treats how it treats digital assets on which line items of the balance sheet in which piece of the P&L.
Is something that so it's not adversarial, it's literally we're not sure. How this treatment should be should should flow through yet and so it's an iterative process and trying to get to the underlying of how this how the new technologies did us its work and therefore, how is the SEC and the PCB in the big four comfortable representing financial statements from our view.
GAAP perspective, because it's new it's new territory.
And so that that would be that's really the biggest focus for the industry broadly and in the long run what's gonna have to happen is gaps going to have to get revised.
The way GAAP is being applied just intuitively makes no sense to anyone who looks at it and so they are in this weird box. These are the rules and so youll see balance sheets and income statements that don't reflect.
What you had hoped it would reflect and that's frustrating.
Got it that's helpful. Mike.
My one follow up.
We've talked of you've talked a lot about regulation on the call.
<unk>.
Pretty much pretty.
Pretty much agree with everything you said.
I guess, what you alluded to might cause.
The issues of.
The CFPB and the SEC. It just seems like now at least you got an executive order.
Hear you about the politicians about yellen.
But now we go back into sort of a black hole of who does what.
And I guess the question is weird, where do you see the next progress being made now that the executive order is out there.
And you sort of alluded that there is still some.
Debate for tariff at least that's what it implies to me.
On the regulatory front in the U S.
Yeah listen I don't think youre going to see anything coming from Congress right away, given the midterms coming up and <unk>.
Democrats don't have.
Don't have the I don't think that.
The stroke of a pen.
Congress to pass any legislation thats going to radically change how crypto gets done and this has to be bipartisan at one point.
What's interesting is you are starting to see those bipartisan linked show up a little bit right again, no one wants to lose to the crypto vote.
And the crypto vote is becoming.
Powerful at a at a speed no unexpected it to be.
And so I don't think we're going to see any real progress in the next few months.
But the whole tone is shifting and I think that's really positive and so like we all sat here always in fear of the tail risk that really something stupid, what's going to happen and I don't think anything say, if that's going to happen.
And that's a big plus I don't think we're going to get clarity of the way, we'd like to certainly with the setup, we have right now and so.
The the effort.
To educate both the crypto community educating D C, but the DCF community educating themselves.
Literally kicked off three months ago, and I am impressed at.
How fast that's happening.
As to some of them Mike.
Our colleagues and competitors for the efforts, they're putting in kudos to the people in D. C for the intellectual curiosity that they've taken.
Yes, it's usually not.
Intellectual curiosity.
Oh damn I better come up the curve because this is important.
But we're seeing it in so that leaves me much more optimistic but I don't think there's anything in the short run that we can look to.
Okay.
Michael you addressed I think the political sort of our divisions.
Debates.
The connected but the agency.
I sort of view that there is some agency debates on territory as well maybe that's how you how do you call it.
Wait them out as to the political side, but you've got like.
Mike You mentioned, the FCC and CFT see sort of.
Viewing things a little bit differently as well, yeah, I'm not smart enough on that chess board to understand how that plays out I do think it becomes a political decision in the long run.
I do think the only thing I'll add to Mike's comments is.
There is work happening in the industry, which I think.
Stands a chance of making some decent progress which could see the CFT C.
Take a broader role than they are currently in regulating some of the products and so I would I would keep it on that.
Got it that's helpful. Thank you very much.
Our last question comes from the line of Chris Allen from Compass Point, you May proceed with your question.
Good morning, guys. Thanks for taking the questions I.
I guess first I just wanted to sort of a follow up comment before about different forms of wholesale lending coming into the sector as I've understood. That's been held up by the lack of regulatory clarity.
Do you, what's the catalyst for wholesale London to come into the sector, but what do you think the impact is going to be because I know, there's a lot of players out there that are kind of waiting.
Improved financing.
I would think it's going to help drive those spreads down overtime.
Yes, I think I will.
The first crack at it and then Jamie can jump into.
A couple of things I would point out from my perspective, I think one.
Market volatility declining and.
And sort of safer and safer and more institutional custody and.
And back.
Back in operations and processes to be able to hold store track and recognized digital assets is kind of a core core piece for wholesale fundings come in because of that.
As a financier you need to be able to understand your collateral.
Get to it and believe that you can sell it to get your money back or else you wouldn't provide wholesale financing. So I think reduce volatility so that the risk of losing money and all the core guts of being able to recognize and hold digital assets has to sort of get there and it's getting there very fast.
I think regulatory capital treatment.
Going to be another one that we haven't got there yet but.
A wholesale financers ability to provide capital against collateral debt that gets treated one way or not on the from a capital treatment standpoint is probably a pretty big hurdle from it from the cost of capital.
And the provision so.
I think those are probably wanting to on my list of of.
Additional dominoes sort of maturation you have to see happen for in big ways wholesale financing to come in.
And as a business in the interim our role has been to create new structure create structures be the wholesale financing provider for the industry.
As a as a bedrock to cementing our self as a key player in the industry before that happens and so that's been a big opportunity and will be a big opportunity for us as we see it come in and as we see the money come in our expectation is that that wholesale financing.
If we do our jobs right should flow into us.
One of the key nodes or gateways into the industry to then provide.
Additional financial solutions to the industry and so that's how we've positioned it and that's how I think about it.
Yes, the only thing I would add I think Chris summarized it perfectly.
The cost of capital in the sector.
Is increasingly looking very attractive to lenders in the traditional financial world and so I would say theres a lot of innovation taking place.
On their part to figure out how they can be comfortable lending into a sector, where the predominant collateral which is bitcoin and ethereum.
Can be utilized effectively.
Scenario, where they can't touch those coins physically if collateral gets cold and so liquidation agents and such.
Innovation around that are providing.
Mechanism for people who have evolved.
<unk> view that seeks to take advantage of where spreads are to be able to participate and that will continue.
Understood and then just wanted to ask on trading.
You noted.
For the full year 2021 client facing trading lending was 10% that was mid teens.
The September quarter.
I'm, just kind of I'd love some color just in terms of what happened in the fourth quarter to bring that down what could be a pretty material amount and then any way you could actually give us any dollar amounts around that.
Sure Yeah. So the.
First question more specifically.
<unk>.
The percentage is kind of it is.
Because our entire sort of digital asset holdings, and treasuries, all kind of together and are trading around the treasury's come together.
The more we outperform.
Just in our holdings of the market outperforms by definition, the lower the percentage, but the actual notional dollar amount of revenues and net revenues in the counterpart.
Counterparty facing business.
Is continuing to grow and has grown quarter over quarter over quarter and so it's a function of of the total number growing faster than the.
And then the actual gross dollars, but thats not to suggest.
So yes, there isn't growth in both because there is.
Got it.
Just in terms of what the actual dollar amounts from the client facing businesses.
Yes.
To get there I would I would go into we report segments right. So this is meant to if you go to the trading segment and you look at the net revenue results minus minus the the direct costs that we each outline.
Times our guidance.
Youll get there.
I appreciate it guys. Thank you.
Yes.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Mike Novogratz for closing remarks.
Guys. Thanks for your time today listen I think the takeaway messages. We are optimistic on our prospects. We are growing we continue to grow.
Are ready for a volatile year, that's what we get give.
Given the headwinds in macro.
But we're certainly excited about.
Without getting through the SEC process and getting big go.
Integrated with us as fast as we can we really think it is.
Combined entity is going to be a powerhouse in this field.
Our real focus is talent and we're going to continue to.
To build our culture and cultivate our people. We think this is a long term a long term battle longterm Revolution that we're part of and.
And so that's where we're taking a long term view.
And thanks for your time.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation during the rest of your day.
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