Q2 2022 Galaxy Digital Holdings Ltd Earnings Call
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Good morning and welcome to Galaxy Digital's second 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, other than all of various factors, including those identified in our filings with the Canadian Security's regulatory authorities on CIDAR, and available on our website or in future filings we make with other securities regulators.
forward-looking statements speak only as of today and will not be updated. In addition, none of the information on this call constitutes a recommendation, solicitation, or offer by Galaxy Digital or its affiliates to buy or sell any securities, including Galaxy Digital Securities.
With that, I'll now turn it over to Mike Novigrat, Founder and CEO of Galaxy Digital.
Good morning everyone. It's actually a beautiful day here in New York.
we're gonna do this a little differently than we've done in the past the past you know i've read a script they mean and and chris and alice of all chimed in uh... but today we thought we'd take a different act i'm gonna kind of put you in the quarterbacks helmet and try to give you some sense of
how I'm seeing the world, how I saw the first half of this year, the opportunity set, and how I think about our company. Listen, no one likes to look at a
red $550 million number and try to feel good about it.
But I want to put this in context of the journey we've been on or the journey we're going.
you know jayden rake 2020 partners equity in the firm or book capital was roughly three hundred fifty million dollars
and at the end of...
you know, Q2, we were over 1.8 billion. What goes into that number? It goes, that gains we've made in our portfolio, less expenses we paid, rent, salaries, bonuses, taxes.
And so it's a hard number to grow that quickly. And so in some respects, I feel pretty awesome about it. And so in some respects, I feel pretty awesome about it.
the stewardship of that capital. Listen.
I don't take a salary, I don't get options, I don't get shares. And so for me, I'm a big shareholder. The focus is our book equity and our stock price.
And so you get here today a lot about risk management and how we're going to drive book equity higher and we're going to drive our stock price higher because that's where my real focus is. So you're going to be able to do that. So I'm going to be able to do that. So I'm going to be able to do that.
So, you know, put the year in perspective where if you took our losses this year plus our gains last year, we still made over a billion dollars.
in a growth business while we're investing a ton.
And so, you know, in the big picture, I feel pretty good about things.
When I break our business into the two hops, right, we have
four operating businesses are really eight operating businesses. If you want to take the inter-intermediation business and break it up a little bit.
And then we have a balance sheet that we manage.
And I look at the operating businesses and I've got a grin on my face. I am proud of how they operated. I think in each of the businesses, and I'll get to them, we did really well. We didn't make the same mistakes some of our competitors did. Our risk management.
both from security selection or token selection to counter party selection, to credit management, all was top notch and we think should be a model for how this industry self-regulates.
And so I feel pretty great about that. On the balance sheet side, you know, high to low this year, we're down 29%. You know, luckily July and beginning of August have been much better months. And so that number is smaller today than that quarter-end print. But that's in context with the crypto market down 65%.
The good news is last year we sold over a billion dollars of stuff or last year in the beginning of this year. I guess the bad news is we should have sold more. You know, managing a big balance sheets tricky. Some of its big illiquid positions in the private side, those have been marked down. Some of it was liquid positions that we either didn't hedge fast enough or held on too long or had the wrong market call. And so.
You know the great thing about trading or investing is the numbers are the numbers you see them there you can compare them to our peers
But I feel like listen, we're sitting here at the end of the quarter with over a billion dollars in cash, a billion half dollars in liquidity and operating businesses that I feel pretty good about. in ready for the template.
happens in big bull markets, your cost structure gets a little bit heavier than you'd like and that's just I think a natural in any you know bull market and so what we've done in the last
eight weeks
has been to take a really serious look at each of our businesses in essence and re-underrate each business and look at our cost structure.
We've taken out over 20% of vendor costs.
That's from marketing and tech spend. And so that's just going through 500 line items on our sheet and making smart decisions.
The biggest cost in this business is people. Luckily for us, we've got a variable comp structure, right? A lot of our comp comes in bonuses. In a year where we make 1.7 billion, those bonuses are pretty high. In a year where we're losing money, those bonuses are less high. And so, adjusting the comp pool down...
We took some selective shrinking of our team. Those are usually in areas where we had under performers or where we thought we could find synergies by combining a few businesses.
And so we took a few people out of the field, we're adding people. You know, we started the year less than 300 people and we're about 375 right now. And I think we'll finish the year over 400. And so...
While the crypto landscape is less certain than it was, my confidence of where it's going in the medium term hasn't waned a bit. We are a growth company, we are investing in people, and products and engineering teams. In products and engineering teams.
you know for not the next six months but for the next six years and so I think that's the message I really want you to hear today. Listen we we've taken our cost structure if I look at
a normalized 12 month go forward cash.
cash outlay down to roughly $175,777 million. And if you add the equity comp that would go along with that, it's about a $200 million number. I feel very confident that our operating businesses. I feel very confident that our operating businesses.
will make that much in revenue. And so I'm looking at a company that should be cashflow positive and have a very...
big and well-managed balance sheet and an opportunity to be offensive.
And so is that is that 553 headlight number feels? I don't fear nearly as bad as I thought I would. And I hope it's the worst quarter this firm ever has. And I hope it's the worst quarter this firm ever has.
Let's really, real quickly, touch on each of the businesses.
When I think about our sales trading credit derivative business, like I said, I feel pretty great. In credit, you've probably seen the competitors monster losses in lots of places from retail credit to institutional credit.
We've had an unbelievably well-managed business. Chris Ferraro came from a credit background. Luca, who runs our credit business, they've been conservative, they've been over collateralized. We did have our first loss in credit in the firm's history this year. It's filed as public. We put a claim into the three arrows.
that's in their filing.
It was...
Within context of our balance sheet small, it was hedged so the losses were mitigated. And it was frustrating, right? You don't like to lose money or anything. But to lose $8-9 million relative to the hole that it created other people's balance sheets was something we swallowed. The business was still profitable on the quarter. We liquidated.
lots of other art are are are strong for balance sheet in a really managed way with lots of other counter parties uh... and think we've got
We've got Margaret Shared a game there as most of our competitors have been wounded and we're not.
Our derivative business continue to make money.
has up to rob a gucky and his team there uh... it's a business that we think again we've got the right to earn more market share as competitors got wounded our otc businesses uh... are are
quantitative trading business from my end of care as used to be called Blue Fire all continue to be profitable.
And so I flipped asset management. You know, we are, we are.
We are raising capital in a tough environment. We've launched a good product. We have an alpha fund that is just getting launched. Run by Chris Ryan. That I think is going to be a wonderful product. The interactive fund is doing their second close.
We have a cup environment. We have launched a good product. We have an alpha fund that is just getting launched from my Chris Ryan. I think it's going to be a wonderful product. The interactive fund is doing their second clothes. So.
you know we got a you i'm back to two point one billion at the end of this month uh... we think that's a business we should do well then we finally got i think the right product and so
That's a pretty easy one for us. Mining is a business that...
We had invested a lot in you're gonna see our mining revenues start to grow Pretty rapidly. There's no magic to that. We had invested we finally are plugging in our mines that we bought At low low power places and so that's going to add to the revenue going forward in our investment banking business You know run by Michael Ash is just doing a great job. We're in the middle of a ton of activity
We're benefiting from a couple year investment in developing domain expertise in that space.
Again, when I look at those businesses,
I'm pretty optimistic on each one of them.
You know, in the balance sheet, like I said, we've marked down our R.
private positions pretty aggressively. We are liquid in our liquid positions. We have less diversity. We've got bigger bets in the more liquid tokens that we think will go higher.
and you know we feel pretty good about where we sit.
Listen, with Biggo, we're in constant contact with Mike and his team.
We're evaluating what's best for both businesses that's been frustrating, that has taken as long as it has.
With the listing in the US, we continue to...
plow ahead and you know there's a long queue of other firms that are better with the SEC.
We remain hopeful and doing the best we can there.
I want to stop before we go to questions and...
You know, just talk a little bit about crypto.
crypto is not going away. And as much as it feels when the whole market went at 80% that people got really nervous, I didn't. And there were a few different reasons. One is I look at the 15 analysts that we just hired. And I scratched my head and said, geez, I couldn't get a job at my own firm if I was 22 years old. You know, from great universities, diverse group all over the place who know more about crypto that a lot of our more senior people, right? These are young people who believe in this revolution.
When I look at our meetings with institutions.
You know, while retail retail really got hurt in this.
You know institutions were just starting to get in and so we see nothing but forward progress there There was a big announcement this week with BlackRock opening up their Aladdin platform To crypto for the first time that is actually a monumental shift And it just tells me that more and more access to crypto is coming right the total Addressable market the TAM of crypto is much bigger than people think it is
And so we're going to invest accordingly.
With that, I think I'm gonna leave it for questions. You know, I want you to, oh no, not question. I'm gonna bring in Alex Yafi to just run you real quick through the facts of our numbers. But I want this to be interactive. I want this to, you guys ask as many questions as you want. Alex. Yeah, thank you Mike. Good morning. We'll keep this short. In the tough market conditions of the second quarter, our business performed well.
We ended the quarter with one billion in cash on the balance sheet.
and 1.8 billion equity capital.
after reporting a loss of $555 million.
most of it from unrealized marks to market.
In the quarter, we mark down our principal investments from 1 billion to 750 million.
and unrealize marks on digital assets for negative $200.30 million.
Our total liquidity was one and a half billion dollars at the end of the quarter.
consisting of 1 billion in cash.
220 million in that liquid digital assets.
and 250 million of stable coins we use for exchange settlements predominantly USDC issued by circle.
With that, I will hand over the call to the operator to take questions. Thank you.
Thank you very much.
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One moment please while we pull for questions.
We have a first question from the line of chase, why to with Comverse Point, please go ahead.
Thanks, good morning guys. So a couple of questions. So in general, do you guys see your prudent risk management in the face of the recent crypto market events kind of leading to galaxy taking additional market share going forward? And when could we start really seeing that come into force?
Yeah, I'll take that one chase and welcome. And it's great to have you covering the company. Well, let me hit on a few fundamental components of our risk management of credit. And then I'll get to your mic a chair question.
you know, as we think about our overall portfolio.
The key things that we are very focused on are concentration risk.
So if you think about our concentration limits, the Chris and Luka and the team manage our book towards no counterparty concentration is above 1% of partner capital. And so you can reverse engineer that, that the largest loan that we have out there is $40 million. Some other key things for you to know are, you know, over 60% of our loan book is directly to track fire service players. So think about family offices. So think about family offices.
traditional hedge funds, high net worth individuals. And the book itself offers a lot of diversification benefits at different market segment levels across both TradFi and crypto players. And so our ability to manage our asset liability components extends well outside of the crypto native environment. And I think that's an important component to think about to answer your question around market share. And so...
As you can probably appreciate in the back end of 2021, our Salesforce were giving Chris, Mike, myself, and others a pretty hard time about our conservative, you know, alone agreements that we wanted to put in place and some of our competitors stepped in and took that market share. That lending market share, often like it does on Wall Street comes with trading market share and we took a back seat and we felt a lot of pressure. That's reversed.
substantially as we've come out of the other side of this tradable bottom in crypto and a lot of those customers that were choosing our competitors in the back end of 2021 are now doing business with us. The terms of these loans not only are they at higher collateralization levels than we had implemented throughout 2021 they're at slightly higher NIMS and we anticipate being able to enjoy you know an environment that has both of those things safer loans at higher NIMS.
for the relatively near term and potentially the medium term.
One thing I'd add is, listen, I think the credit business can be a big business. The cost of capital for the overall space has gone up.
And so we are working really hard to figure out ways.
to BA.
You know, better borrower, right? You know, better borrower, right?
If we could borrow cheap and lend expensive, we've got a pretty good business added to an item. And so that will be the real governor to how fast this business can grow will be access to
to good for the answering.
and by the way we are borrowing cheap we have half a billion dollars at 3%
5-year term on the balance sheet.
Makes sense. Thank you for that color. And then you mentioned in the release that there was a prominent shift towards M&A in the market right now. Can you help us kind of size that opportunity up? And how quickly could this kind of M&A shift take place? Like is it happening very quickly and then it will be over quickly or is it kind of a prolonged environment do you think?
Yeah, so let me give you a little bit of color around that and some data. The answer is we don't know a lot of...
the
contributing variables to the answer to that question, a link to capital and whether or not it will continue to flow into the sector. If you look at the data that we use in our advisory business, you know, M&A in 21, where you look at at least one company in the crypto sector, being part of that transaction, we saw 190 transactions. We saw 190 transactions.
the answer to that question, I'll link to capital and whether or not it will continue to flow into the sector. If you look at the data that we use in our advisory business, you know, M&A in 21 where you look at at least one company in the crypto sector being part of that transaction, we saw 190 transactions.
In the first half of this year, that pay succeeded last year with 92 deals looking at the same metric. If you look at what Sam and the FTX team have done in the very recent past, they've been extremely active in this down market. Reference BlockFi, BitVogue, Embed just in the last two months alone.
assets raised or capital raised by companies in the sector You know in July alone 1.3 billion continued to get raised that was across 89 deals and so here today capital raised is just over 21 billion dollars
And so...
You know the capital raising side in terms of financing has slowed a little bit that's reflected in what our bankers are working on We have been very active on the buy side for some of our customers that continues to be the case And I think you're going to see a lot more M&A Than the run rate suggested in 2021 in the back end of this year and the first half of 23 But you know I think that's going to be the increase will be largely led
We have next question from the line of Deepak Kaushal with BMO Capital Markets. Please go ahead.
Oh, hi, good morning guys. Thanks for taking my question.
I've got three, I'll try to make some brief. First just on the US listening process, I know it's hard for you guys to talk about it. Any other color that you can give us, Mike, I mean, is there still some back and forth going on, or is there a stall, or is there a bit of a...
Summer pause here until we get back in the fall. What's kind of the activity level on how does that change it? I would, I guess. I would, I guess.
going into the other companies that are in the same process, right? You think about bullish and circle and... you think about bullish and circle and...
be Toro and you know there's a bunch that have
a Bittoro and you know there's a bunch that have bit in the same queue and
just looking at those it doesn't seem to be.
Great progress. I think...
you know when the market sold off as aggressively as it did it probably took a lot of a few sources.
Okay, thank you.
and a sense of caution.
We're hitting a new equilibrium. Things have kind of balanced out. The players that needed washed out were getting washed out. And so I'm hoping it gets back to normal and we make that progress. But I can only tell you what we're seeing.
It is a big slow.
Okay, got it. We can leave that at that then. And then just on the competitive side.
Obviously, BlackRock and Coinbase have their partnership in that top coin basis. And that's the top coin basis. And that's the top coin basis.
Let's talk a bit.
Are you finding
you know that you're handcuffed from a prime broker's perspective.
from a prime brokerage perspective.
that you haven't been able to close BitGo yet? Is that not affecting you guys competitively at all? How's that side of the market shaping up?
Let me give you some color around that. And I think...
It's really important to ask the question of what is prime brokerage mean. It's a term that gets thrown around a lot both in track by an sector. And I think when you dig into it.
different providers and different clients, what they really think about can be different. The layer of services that we're building at Galaxy that are very important to our institutional cost.
our execution, liquidity, margin lending and netting and leveraging all of the additional service and products. It's ultimately going to be critical for us to be able to stake ETH when that comes online. We're going to have to re-hite Bitcoin for customers that need that. So all of the things that we have become expert in for our own principally activity, we're going to roll out to our customers and that will happen agnostic to the downstream custody provision.
Galaxy today in our asset management business and in our balance sheet leverages several different custodians to provide the back-end solutions that we need depending on what the coin is that we need custody and the services attached to that. We can plug in the downstream custody services to our Prime from a number of different providers if needed and of course we're...
We're hopeful that BICGO will be one of those. So really from a prime services product delivery perspective to institutional clients, that front end service solution is what we're good at and what we're continuing to build. And so that will not limit us in any way to providing services to institutional clients. And so that will not limit us to providing services to institutional clients.
Okay, so it doesn't sound like it's a competitive handcuff.
At the moment.
But is it delaying the opportunity that you haven't been able to close the deal yet?
I would say no for the reasons I highlighted. Listen, we are investing a lot in our technology.
build out here and so you know it's building product that will serve as institutional clients. I mean the interesting thing is when you think of it something like Aladdin it's an agnostic platform. They will have lots of people that plug in once their product to plug in.
So our race is to get that product built sooner rather than later.
Okay, thanks. And then my last question just on the MNA front, again, it related to competition. I think the prior question for an MNA, I think a lot of the answer was related to your investment thing, besides this, how does Galaxy... How does Galaxy...
M&A activities, you know, you mentioned that PX.
You know, buy more to companies. What's your first to market? Like, you haven't some half lot on the street yet, Mike, to pick around things or? Hey, I was really focused on cleaning our house, getting our understanding of how we spend money and where we spend money. Getting our eight businesses, our eight operating businesses. Getting our eight businesses, our eight operating businesses.
you know, really mission driven and steely-eyed and focused. So kind of stage one.
clean our own house up and get set in stage two look up look for the offense. We've been going through lots of opportunities during stage one as well and haven't found the exact fit yet. It will. It will.
It would have been a huge mistake to have gone through this full cycle and not done something offensively. It was a million dollars in cash and we feel... In the end over and over again...
We think we're on a cash flow positive operating run rate at this point. And so I want to be offensive. And so I want to be offensive.
and we're looking.
It's.
Okay, that makes a lot of sense.
to mulchers quarter. When you guys are on the right side of the regulations. When you guys are on the right side of the regulations.
When do you think you start getting credit for that?
You know, look like I used to.
you know, sit at conferences and tell the
The space, especially when it's much smaller, that we need to self-regulate as a space.
You know, the regulators are going to regulate us and...
When I look around at some of the behavior of our industry, there was not a whole lot of self-regulation going. There was asset liability mismatch, there was excessive leverage, there was all kinds of craft behavior in our space. We are hoping to be a model of what regulation should look like. That's been our play. I do think the regulatory landscape in DC is...
still a bit of a standstill, right? There was some great legislation by partisan pushed either through the Ag Committee recently to move Bitcoin and Ether to the CFDC. We'll see if that gets any traction, probably not until after the election. But my sense is we're not gonna see much movement till after the election. And...
Add is going to be one of these frustrations. So our plan is to stay in contact with everybody to try to be a role model. And hopefully you will see.
you know what what markets crash and get everyone gets scared the first reaction everyone kind of running for the hills i think what you're going to see next is companies realizing hey i've got a sustainable business model i don't uh... and this is where we talk about the m in a activity picking up i think you'll see some people go out of business others others grow you're seeing trade by guys deciding to get in at this opportunity so
I think the next six months will be pretty interesting for us and hopefully you know our...
our framework on how we do business.
Leave, leave us in a good position both.
with regulators and helping set the new rules, but also with customers.
Okay, well, look, I'll leave it at that. I mean, it looks a lot better than it did in 2018. So kind of billion dollars in cash is great. So thanks for taking my questions, and I'll talk to you.
Thank you. We have next question from the line of Ken Worthington with JP Morgan. Please quiet.
Hi, good morning and thanks for taking the questions.
maybe first higher level is the contagion from Terra and Luna over, and if we're going to see more fallout, where does it come from and what drives it?
Yeah, listen, I think what you saw was a...
big deleveraging of
a whole group of players that...
you know, had in many ways borrowed, you know, customer deposits in these lending platforms if it was Celsius or Voyager or Block Fire, many of the exchanges and then lent them out into less liquid and longer duration assets. I think that's the leveraging happened. That was the wash down to, you know, 850 in Ethereum and 1800 in Bitcoin. We've seen a bounce from there as...
had in many ways borrowed customer deposits in these lending platforms if it was Celsius or Voyager or Blockfire, many of the exchanges and then lent them out into less liquid and longer duration assets. I think that's the leveraging happened. That was the wash down to 850 in the Ethereum and 1800 in Bitcoin. We've seen a bounce from there as the fear went away.
Those companies still are going to be absorbed or liquidated. And they'll sit. So there'll be some pressure on it, you know, asset sales that happen over time, but it becomes a smaller and smaller portion of the market. I don't think there's a lot of pressure on it.
Another shoot-of-fall in terms of...
bad credit or or someone who needs to be liquidated. I think now the industry needs
new energy, right? So energy comes from narrative in our industry and so we're seeing it in Ethereum with the merge and so Ethereum is outperforming because there's a story to tell and there's a really exciting...
you know.
shift in in the supply demand Equation of a theory right so you're gonna you're gonna have a less inflationary currency You're gonna have people who are insented and paid to hodle or to to state their the theory of and so you know prices are set on the margin That's a story that That's a story that
you know, Ethereum is shifting into a new chapter. So the Bitcoin story continues to just slowly gain traction and adoption. We'll see what the macro environment is.
into a new chapter. The Bitcoin story continues to just slowly gain traction and adoption. We'll see what the macro environment is.
if the Fed flinches, if we have inflation reaccelerate. But I think that story is less exciting than it was certainly when.
central banks from pumping in tons of liquidity. And the third part of our business, which is really the long, long lasting part of like, building out Web 3, that just keeps grinding away. And it takes time, right? So if that's the end of key space, that's the DeFi space. That's not going away. There's a lot of venture money funding that. But again, I think for the industry to kind of take that next big leg up, we're gonna need to see, since institutional money come in, we're gonna need to see that narrative.
And again, is it going to happen in the next two months? I cross my fingers and say a few Hail Marys, but we're taking a much more sanguine view that over the next 18 months, 24 months, all this stuff will happen.
Great. And then following up on M&A, which seems like the topic is your, so you talked about comp getting outsized in the bull market. And I guess my opinion is a bull market can also support maybe too many companies. So is the crypto ecosystem in need of some consolidation? And if so, what parts of the ecosystem seem to be more ripe? I think you mentioned the lenders might be ripe. And then you also mentioned that tradify buying into crypto, what parts the crypto ecosystem do you see tradify firms most?
and the customers are really resilient and really sticky and pretty good business. I think you'll see some consolidation there and you've seen that with Sam and FTX already with both Voyager and BlockFi. And I think you're gonna continue to see some consolidation there. When you think of things like custody, you're gonna need a lot more custodians if you really believe. If you really believe.
that we're going to start having tokenization at one point in the future of other assets and that the crypto economy is going to continue to grow. I think you'll see some, you know, we already have.
big traditional players investing lots in custody they don't have the the regulatory framework to do it yet but they're investing in advance and so that'll be an interesting space and so that'll be an interesting space
You know, what we do, there's not a ton of competition in, you know, we have competition in each of our segments, but, you know, in the derivative business, you know, institutional lending business.
Genesis is a big competitor. They've had their own issues recently. They, I think, they'll continue. They'll, they're not going away. But we don't, we don't have a lot of...
kind of institutional level.
broker-dealer, you know, derivative businesses to compete against or even, you know, credit businesses, right? Our, the big credit business that had suffered so much were places that were taking in retail dollars and then lending them back out. So I think that game is probably over for a while.
dealer, you know, derivative businesses to compete against or even, you know, credit businesses, right? Our big credit business that had suffered so much were places that were taking in retail dollars and then lending them back out. So I think that that game is probably over for a while. Can I just add a couple of things to the other too?
To help answer your question in addition to Mike's comments. I think every sub-sector of Digital assets has a group of Firms that are larger and in many cases they were able to raise capital in the 2021 and 2021 of 22 period and a lot of these subscale smaller firms Weren't as able or inclined to do so.
And so I do think you're going to see a natural runway driven M&A cycle in almost every subsector, you know, Mike mentioned a bunch of them. And that's going to be something that we're right in the middle of in our advisory business. You know, we take a lot of cues from that through our venture investing business, where you know, Chris and the team really monitor very carefully all of our portfolio companies, which now total 100.
And to give you a sense, I think an interesting stat for our portfolio, the average runway across the majority of those companies is just over 33 months.
And
That informs a lot, I think, when you look at the sector through that lens and where runway is, it really is more prevalent in...
some of the larger firms and that's why you'll see a driver of roll up an M&O. And the last thing I'd say in flip my head for a second, the one area that I think needs capital and got off-size in the space was mining. and got off-size in the space was mining.
right i think the mining space it just looked like it was such a good business that people were raising capital instantly committee into by chipsen and and and and and shell space in the future and so that space we find pretty interesting we think we've had a role to play in in both lending and in potentially consolidation in that space but uh... if you think about you will be our panel we??
The one sector that's probably got the weakest legs right now are the most challenges. It could be the mining space.
Great, thank you very much.
Thank you. We have next question from the line up George Sooten with
Quick, Halum, please go ahead.
Thank you. Just one question. Mike, I appreciate the bifurcation you made relative to retail versus institutional. In past calls, you've talked about a mountain of institutional capital, teeing up to investing crypto. Obviously, the world has changed a bit, but where does that stand today in terms of potential on your view?
That mountain looks more like a hill for 2022, but the momentum is still headed that direction.
Right, so even one of a publicly big, big...
funds that said they were going to put a whole bunch of money in. They're going to put some money in this year and a lot more next year. I think this sell-off slowed people in just think of the process of investment committees.
a more conservative institutions.
They don't like to put themselves in harm's way in the middle of.
they perceive crises. And so I think as this space bottoms out and starts rebuilding both narrative and price you're gonna see those institutions come in and you know Damien has been on tons of calls as has Steve Kurz, as has Michael Ast. You know, our team is out there talking to people and we don't see a retreat.
We see a pause, but just kind of a slow march forward. I read something this morning about Morgan Stanley hiring more people.
I don't have the full story, but we're seeing that consistently. And so what was refreshing is...
I didn't have to in my conversations to re-litigate the basics of why we were doing this.
people still get it and still believe in Web 3, still believe that Bitcoin is going to be a macro asset for a long period of time, and still believe that we're going to build a more decentralized.
a public blockchain ecosystem, that things will be built on in the future. That's things will be built on in the future.
And so after you know 80% sell-off sometimes you worry like, oh are we starting over? We absolutely weren't starting over.
And so in that respect, you know, we don't have the mountain of capital coming in this year, but I still feel like there's a...
a puto most in terms of time and capital marching towards our space.
That's great. Actually one other question I want to think about it. You did mention the Senate Ag Committee proposed bill. They're suggesting the CFTC be the regulator. Could you give us your thoughts on the CFTC? Obviously, I understand it's sensitive role. We have CC right now, but I'm curious your thoughts there.
We just want clarity.
What has been so frustrating.
you know, as a guy who's been in this space since 2013, is the lack of clarity.
Once you tell us the rules, we'll play within the rules. But when I constantly ask...
The players.
to figure out what the rules are when the rules aren't clear. It really makes things complicated.
The nice part of the CFTC is it's got a pretty straightforward regulatory mission.
It's not consumer. And, you know, the SEC has got a much bigger workforce, a much bigger mandate. And so, I just want them to make a decision.
Perfect, thank you.
Thank you. We have next question from the line of Rich Rippetto with Piper Sandler. Please go ahead. You're welcome.
Yeah, good morning Mike. I guess the first question is just looking at or listening to a lot of your comments, as you describe yourself, Sanguine. And would you compare, like looking at the length of potential correction here, is it comparable to the Internet for a few of us that were around, the Internet bubble bursting which went for probably three years?
Have you done any comparisons or are any clues that you have into the length of the collection time here? I'm sorry. I'm sorry.
You know, I've looked at all those analogs. I looked at them in 17 and when we crashed in 18, that was the first thought I had. Like, how long is this going to take and what has been...
Refreshing and surprising the may is just the resilience of this community.
And I think it's because it's a purpose-driven community, it's like a revolution in lots of ways, like the young people still believe.
This is their right and if you think about why people got into crypto it was this breakdown in confidence
institutions and if you look around the world at our institutions.
If you look at a potential election between Trump and Biden, people are looking at politics and economics, and the whole system, I mean, Nancy Pelosi is going to Taiwan and almost creating a World War III. So the frail state of relations with China, with Russia, there's nothing in the world that says, hey, this is the great moderation. And we're going back to the good old times. We have this breakdown of trust.
which is really fuel for the crypto revolution. And so what's interesting is how resilient it is. Even retail. I mean, you can beat the heck out of retail and they still keep coming back. And you know, it surprises me.
in some ways how strong this community is. And so I'm more optimistic than I would normally be as just a macro thinker, that things could come that quicker. We're preparing to be pessimistic and hoping to be optimistic, and so that's how I'm thinking and thinking. But what we're seeing is really promising. And I'm my best. And I'm my best.
Ford indicator is the smart kids coming into the space. And I said this in my remarks, if you look at our 15 analysts, you're like, damn, those guys are as sharp of an analyst class you're going to get it any firm. You're going to get it any firm.
you know from big tech firms to big Wall Street firms.
And so as long as that youth is pouring into our space, I'm pretty optimistic.
Got it. That's helpful. Mike, and then you talked earlier about M&A and you talked about certain sectors. You might be more interested that there's gotten more beaten up, like mining or co-lending. But I guess the question is, as you look for your own M&A, how have the guidelines changed? Are you more focused on?
sustainability and resilience versus valuation or strategic fit with other galaxy like
Has anything changed in the lens that you look at?
M&A given what's gone on here for the last several months.
What I look at our businesses, and if I, you know.
keep our balance you decide for a second because in our balance you, we have lots of future, you know, future hopeful businesses, right? That the businesses are gonna chase what things happen. When I look at our businesses, in lots of ways they're bred in butter businesses, that will be here in a year, that will be here in four years and in five years.
lending derivatives, asset management, advisory. They're kind of core businesses. In some ways, they're the more boring businesses than what the future is going to hold. And so when we think about M&A, is there something that could roll into what we do already and strengthen that position? That's one.
One lane, the other lane is
Do we bolt on something or do we think about acquiring something that place to where the world is shifting in the next 36 months? It was also started near where the world was shifting in the next 36 months?
And so we're looking at both.
You know, the...
the more decentralized, you know, if it's tokenization, if it's...
that space appeals to me personally, because that's kind of why people got into this revolution. And so that's on my radar. But it's something I think we can be a little patient with. What I like about the portfolio of businesses we have now is I'm...
Completely certain that in four years there will be important businesses.
that in four years there will be important businesses.
The move to a decentralized world is not happening in the next four years, when everything is decentralized. I don't think it will ever get there, but we will trend that way.
Why I felt pretty strong coming into this call is like I look at each of our businesses and I was like hey we should gain market share in each of them and we should be profitable and their good solid businesses run by a really strong team.
felt pretty strong coming into this call. It's like, I look at each of our businesses and I was like, hey, we should gain market share in each of them and we should be profitable and they're good solid businesses run by a really strong team. And so,
I think if you see his add something, unless it's a fill in, it'll be stuff that we don't have.
Got it. And just, I want to squeeze one quick one on regulation because you did, you seem like you had a tilt at the CFTC.
might be a little bit more of...
You as a friendly I guess because and you make I think I think you were referring to like their principal based sort of regulatory you know
What do you call it? Oversight. I'll ask Melola for a few maybe 30 minutes chill but I guess the question is
You know when you look I think the SEC is certainly got to get some portion of it, you know with tokenization what check ends with things is you know really securities. So.
Maybe a little bit more on the balance between the CFTC and the FCC. We know how aggressive, I guess, Chair Genzer is as a regulator too. What has frustrated me is I saw a lot of...
maybe a little bit more on the balance between the CFTC and the FCC. And we know how aggressive I guess Chik Genza is as a regulator too. But what has frustrated me is I saw a lot of companies are collectives.
Issue tokens and the token economics were created to kind of get around this archaic.
security definition that comes from whatever 1936 or
whenever the how he test showed up. And so, it's not the way it really should work. I think token economics needs to do a better job of reflecting.
what people want to get out of buying those tokens. And so some do look like security tokens or should look like security tokens. But maybe the lane that we have existing right now is too restrictive. And so there hasn't been any good back and forth dialogue of creating kind of a new system of companies as a coalition to Yeah, there looks great there.
a new regulatory framework for this new technology, which is not exactly the same as what it is used to look like. It's not just a new technology, but it's not a new technology, the small security used to look like. All security used to look like this. Right? security used to look like.
Why is the CFTC appealing for something like Bitcoin and Ethereum? It just takes those things off the plate. Okay. Why is the CFTC appealing for something like Bitcoin and Ethereum?
We know now that they're not in the mix. And yes, the SEC is going to be involved somehow unless they create a new industry. And so I just want clarity so we start moving forward. Because quite frankly, I think our industry needs to create token economics for lots of things that I can convince my mother, hey, this is why you're buying this token. And it's not some.
you know, mumbo jumbo, but she can actually understand it. And you know, that's not the case and lots of tokens out there. you know, that's not the case and lots of tokens out there.
And so, and I think part of that is because the creators of tokens were operating and trying to figure out how to operate in this this gray space. And so, we were operating and trying to figure out how to operate in this this gray space.
So, like, let's get out of the gray space.
And Richard, just to be clear.
We welcome clarity in the rules and we look forward to working with all regulators. Thank you.
Thank you. We request participants to limit their questions to one participant. Thank you. Thank you. Thank you.
We have next question from the line up Mark Palmer with BTIG. Please go ahead.
Yes, thank you. Good morning.
We are seeing a lot of the crypto institutional trading focus on the derivative space which It has been huge in the rest of the world for a long time. It's really beginning to be some traction in US or at least it was prior to the the recent downturn Can you talk about? galaxies derivatives offering how you are shaping that up to not only fit
client needs, but also taking to account the competitive environment in the regulatory state of play. Thank you. Thank you.
Sure, we think it's one of our best businesses and one of our advantages. And one of our advantages. And one of our advantages. And one of our advantages.
And partly that's just the team we have on the field and their knowledge of how to run a derivative book. You know, when I think about
are loans to minors.
You know why we didn't suffer any losses in this big drawdown It's because we went to most of them and said hey we think you should collar up your loans
buy, put, sell calls and build it into structured notes or build it into their loan agreements. And so that's that collaboration between our credit business and our derivative business.
And I think our clients were happy that one.
You know crypto went down, they didn't have to...
puke out all their Bitcoin. We were happy because it made our loan book much safer.
their Bitcoin. We were happy because it made our loan book much safer.
And so I think that structured product, actually selling.
Trapefiant and crypto hedge funds, you know, volatility products.
using it for private equity people that want to hedge, that business is only going to grow. And so our derivative business is kind of almost a classic trade fight derivative business moved over to crypto.
When people talk about crypto derivatives, mostly what they're talking about are the futures that players like FTX and Binance offer which are...
overnight are actually instant representations of a potential token. So we're not in that business yet. We trade them a lot, but that's a business that we're not in. And that's, so that word derivative is a little tricky in the crypto sphere. Our derivative business looks more like a trade-by derivative business in terms of...
It's a big options book, it's structured product. And we think that's only going to grow.
Thank you. We have next question from the line of Owen Lowe with Oppenheimer. Please go ahead.
Good morning and thank you for taking my questions. So given what the industry has been through over the past few months, and I know Mike, you just talked about regulations and we appreciate your color, but what are the top priorities that the industry can do to regain some of the credibility?
And then in terms of directing your investment dollars into private companies, have you changed any of your philosophy that you would allocate more into certain projects that the industry should do more and also less on certain projects that you think the industry shouldn't go further. Thank you. So I think...
The big takeaway from the last quarter was that...
The on-chain, you know, why people get into crypto, one of the
the dominant reasons was transparency.
the dominant reasons was transparency. And so if you think of things that were on chain. And so if you think of things that were on chain.
on-chain lending, it was all transparent. And so no one's bitching about Compound or Aave, you know, these on-chain lending platforms. I just know it's all right there, where it was the lack of transparency.
at places like Celsius or other credit shops where
retail depositors left their Bitcoin or their area and more their stablecoins, and next thing you know, had their money levered up 30, 40 times, time as it invested in other projects and they were taking lots of risks. And so I think if there's one lesson, it's the industry needs more transparency. You could run those same businesses and actually put the portfolio on shame. And so...
We're somewhere halfway in between and that we're a public company. We offer transparency quarterly. We run a much more conservative shop.
We, we, but we are still a trade by company that deals in crypto. And so
But we are still a trade by company that deals in crypto. And so I think that...
pushed having
Certainly those retail facing clients, a lot more transparent. They needed to operate like they were regulated entities and they didn't. So now they're either going to get regulated or they got to operate with a lot more transparency. And I think there's probably a lane in there for us to exploit because I think we'll pull our skirt back and show our balance sheet and we do it every quarter.
Got it. That's very helpful. And then the public market has come back quite a bit so far in the third quarter. Could you please talk about the activity in the private market, maybe including how much capital on the sidelines, fundraising and valuation over the past few weeks compared to the second quarter? Thanks.
You know, there's still if there's a hot deal, it's still trading at you know, there's a couple deals out there that surprising me at you know.
the issue are getting terms that we don't think they should look like an old deal. And so if there's a really hot deal, it feels like lessons weren't learned, they're not a lot of those. And so really good teams and really good tackers still have. The issue is that we're not going to be able to do that. but after a little while, the last few days of a full national trade-off should have more options. But at last the issue is getting started. But there's some screws that Road works are getting settled on it. you
Attracting money and everything else seems to be a way to see like a way to see like
I think there's a come to Jesus moment coming where companies that raise at really high valuations.
have enough cash, but their next round might be a down-round, and there's probably a big opportunity in...
raising a convert fund or being in that restructuring biz. And so because people adjust raise money if you are lucky enough to have raised money, you can wait and see. But the private valuation game changes much slower than the public valuation game.
And so there's still like, like we marked our private book down a lot. Um, and, but you know, I'm not sure other people are marking their books down or how companies are thinking about it. And so I don't think you can expect that gap to close in three months. I think that's a 15 month.
you know, wait and see that.
Uh...
And I would tell you that a lot of participants, because it was only a bull market, don't even really understand the mechanics of when money's raised at a high prep valuation and gets crammed down what it does to the other shareholders or quite frankly the employee stakes.
Darn it, thanks Mike.
Thank you. We request participants to limit their questions to one per participant. We have next question from the line of Jamie Friedman with Susquehanna. Please go ahead.
Hi, thank you. David, I think in your prepared remarks, you were mentioning...
And it says in the press release that you onboarded over 40 new counterparties to the trading platform. So this one's about GDP.
And I was just wondering, yeah, how do we think about critical mass? Like I think you have 850 some odd
is boarding an incremental 40 important.
How much concentration is there within the 850 that you have on the county board side? Thank you.
Yeah, so the answer is a good question. The answer is it depends on who they are. Of the 40 that have been most recent...
you know, encouragingly they are some larger AUM organizations that have taken
time for us to get on board it.
the large TradFi asset management groups do you know as you would expect an extra amount of diligence and the ISDA negotiations just take that much longer as people have to get comfortable with our credit and a whole host of things and so the 40 that have come recently in a lot of cases have been really significant institutions so we're very excited by that. The competitive landscape that we've talked about a bunch on this call has
allowed us to advance those onboarding and develop those relationships more quickly as services that those clients need are less easily available from some of our competitors than they used to.
And so, you should expect to see a continuation of that. And I think a lot more of our on boards, as a percentage are in the tradfly space relative to the asset management groups of which there are many who are crypto-native and focused on crypto. And so they are important. And the second part of your question, much like in tradfly books, when you look at the Goldman Morgan, J.T. Morgan, the distribution of businesses, the 80-20 rule applies here in the same way that it broadly does there.
Got it. Thanks for the call. I'll drop back into queue. You know, one last comment I'll make. You know, I qualify this, and my numbers aren't going to be perfect. But when I think about...
you know, how to maybe even 400 people, you know, I look at our stock sometimes and we're at trading, I was like, Jesus, last time it was downer, we had $700 million of book and our operating businesses probably were doing less than $15 million a revenue and we think built it, it's close to $200 million this year. You know, we really, you know, we really,
had a business plan in late 2019 for great operating businesses, but not a lot of juice flowing through the machine. And so, you know, in the last two years, we spent a lot of money, time and effort building up these franchises, which are starting to hit critical mass. And so I don't want, you know, sometimes the volatility of our book.
had a business plan in late 2019 for great operating businesses, but not a lot of juice flowing through the machine. And so, you know, in the last two years, we spent a lot of money, time and effort building up these franchises, which are starting to hit critical mass. And so, I don't want, you know, sometimes the volatility of our book just......you know, sometimes the volatility of our book just...
you know, outways are obscures the actual business of that we're trying to build, right, which is a long-term sustainable business servicing the institutional clients. That's why we have 400 people, right? If we were just an investing business, we'd have 40, our 50. And so...
It can frustrate me at times because the way we set this company up has both businesses under the same roof. But I just want to keep that focus on really this kind of grinding growth path to building sustainable profitable businesses on the institutional front.
Thank you. We have an express train from the line of Kevin Dede with HCWN Wright. Please go ahead.
I'll gmry my thanks for fitting me into the end. And listen, I'm just kind of curious, as you see sort of.
You know, the whole crypt of space moved through this downturn.
Which businesses do you think, you know, your eight operating businesses respond most favorably as the environment changes? I mean, you talked about your derivative business being pretty strong and helping manage your lenders, and you're also talking about your mining business, wanting to see more investment there. What do you think is the best way for us to think about, you know, Galaxy rebound here?
Yeah, I guess what mining is just going to happen because we invested in it and the mining miners are coming off online. And so you will see us going for mining. I don't know if it's one or two coins a day towards 10 coins a day over the next period of time. That's going to happen. I think general.
Yeah, I guess mining is just going to happen because we had invested in it and the miners are coming off online. And so you will see us going from mining, I don't know if it's one and a half to two coins a day towards ten coins a day over the next period of time. That's going to happen. I think in general, it's a real big opportunity.
consolidate mining. But it's a tough business. A lot of money got invested and so hash rate continues to stay high. People are having a hard time finding good places to plug in their chips.
And so being excellent at mining means a lot more than it did in a complete bull market. Being excellent, what do I mean by that? It's having access to low power. It's having teams that actually know how to keep your chips online and actually having shell space. The business I think we have the most upside in is, from where we are now, is our asset management business.
Listen, we did a lot of our best investing on balance sheet at the expense of growing asset management in the past. So if you look at our balance, I talked about it at the start, we turned $359 million into $1.9 billion or whatever we are today.
you know, with spending a lot to finance the rest of the growth of our business.
That wasn't an asset management and so we're now building out we think world-class product right our interactive fund our venture fund to fund business our alpha fund and I think you'll see that as a continuing theme
And so growing that business is a real focus here. We've got great partners. But in some ways that suffered at the expense of our balance sheet growing, right? We had a lot of our best investors on the balance sheet side. And as we migrate more of that to the asset management business, I think that should be a big growth opportunity.
Growing that business is a real focus here. We've got great partners. But in some ways that's suffered at the expense of our balance sheet growing, right? We had a lot of our best investors on the balance sheet side. And as we migrate more of that to the asset management business, I think that should be a big growth opportunity.
Thanks Mike. Thank you ladies and gentlemen. We are breached the end of the question and answer session. And I'd like to turn the call back over to Michael Novogrid for closing remarks. Over to you sir.
Yeah, guys, I hope you got my enthusiasm for our team. Listen, I didn't tell you it like we're bullish. We've come up with a new brand. We're rolling up a complete new brand for Galaxy.
Cool logo and a feel with our website or brand that our marketing team had worked on for a long time in the next few weeks We've got our new office remodeled a bit and so we are
We're in there for the long haul.
where, like I said, I will never be happy losing 29% of my balance sheet in six months, and as an investor, it has kept me up at night.
But I'm really optimistic about the runway for our businesses. And I still think this is a space that over... And I still think this is a space that over...
the next two to five years should be a really interesting and bullish place to be.
And so I hope you got those messages and look forward to talking to you next quarter.
Thank you very much. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Stop.
I have a conference center. It's a next available conference specialist. We'll be with you momentarily. Bye!...... you