Q2 2022 Galaxy Digital Holdings Ltd Earnings Call
Good morning, and welcome to the Galaxy Digital's second quarter 2022 earnings conference 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.
Various factors, including those identified in our filings with the Canadian Securities regulatory authorities on SEDAR and available on our web site or in future filings, we make with other securities regulators.
Forward looking statements speak only as of today, and we 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 security.
With that I'll now turn it over to Mike Novogratz, founder and CEO of Galaxy digital.
Everyone.
And 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.
I've read a script, Damian and Chris and Alex of all chimed in.
But today, we thought we'd take a different tact I'm going to kind of put you on 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 try to feel good about it.
But I want to put this in context.
Of the journey, we've been on the journey, we're going.
No January 2020 partners equity in the firm our book capital was roughly $350 million and at the end of.
You know Q2, we were over $1 8 billion what goes into that number. It goes that's gains we've made in our portfolio less expenses, we paid rent salaries bonuses taxes.
So it's a hard number to grow that quickly and so in some respects.
Uh huh.
I feel pretty awesome about.
The stewardship of that.
Capital Limited.
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 in 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 have a stock price higher because that's where my real focus is.
You don't put the year end perspective, where if you took our losses this year plus our gains last year, we still made over $1 billion.
In a growth business, where we were.
We're investing a ton.
And so I, you know and in the Big picture I feel pretty good about things.
When I break our business into the two half right we have.
Four operating businesses are really eight operating business, if you want to take the intermediation business.
This was mentioned as an answer.
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 a I think in each of the businesses and I'll get to them, we did really well.
You know we did it make the same mistakes some of our competitors did or risk management, both from security selection. Our R. R. Tokens selection to counterparty selection to credit management, all was top notch and we think it should be a model for how this industry you know self regulates.
And so I feel pretty great about that on the balance sheet side, you know high levels. This year were down 29% you know Luckily July beginning of August have been much better months in so that number is smaller today than that that month that that quarter and trend but.
But that's in context with the crypto market down 65%.
The good news is last year, we sold over $1 billion of stuff are last year at the beginning of this year I guess the bad news is we should've sold more.
You know managing a big balance sheets tricky.
Some of its big illiquid positions are in and the private side those have been marked down some of it was liquid positions that we either didn't hedge fast enough or held onto 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 where we're sitting here at the end of the quarter with over $1 billion in cash of $1 billion of liquidity and operating businesses that I feel pretty good about.
What else happens in Big Bull markets are 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 re underwrite each business and look at our cost structure. We've.
We've taken out over 20% our vendor costs, that's from marketing and tech spend and so that's just going through 500 line items at our sheet.
And and making smart decisions.
The biggest cost in this business as 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 made $1 7 billion those bonuses are pretty high in.
In a year, where we're losing money those bonuses or less high and so adjusting the comp pool down we took some selective she says shrinking of our our team those are usually in areas, where we had underperformers or where we thought we could find synergies by combined.
A few businesses.
And so we took a few people out of the off the field, but were adding people are you know we started the year are less than 300 people and were 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 but we are a growth company. We are investing in people in product and engineering teams.
Right.
You know for not the next six months, but for the next six years and so I think that's a message I really want you to hear today.
Listen, we we've taken our cost structure.
Looked at.
Normalized 12 months go forward cash cash outlay.
Outlay down to roughly 170 $577 million and if you add to the equity comp that would go along with that it's about a $200 million number 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 cash flow positive and have a very.
Big and well managed balance sheet and an opportunity to be offensive.
And so as bad as that 553 headline number feels I don't feel nearly as bad as I thought I would and I hope it's the.
The worst quarter this firm ever has.
Listen, let me 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 in credit you probably seen the competitors monster losses in lots of places from retail credits institutional credit we've had a unbelievably well managed business.
Chris Ferraro our.
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 its publicly we put a claim into the three arrows.
That's in there their filing.
It was.
It was.
Within the context of our balance sheet small.
It was hedged so the losses were mitigated.
And then it was frustrating right you don't like to lose money anything but to lose eight $9 million relative to the the whole that it created other people's balance sheets will suddenly we swallowed the business was still profitable on the quarter.
We liquidated a.
Lots of other or shrunk our balance sheet and are really managed way with lots of other counterparties are and think we've got.
We've got market share to gain there as most of our competitors have been wounded and we're not.
Our derivative business continued to make money.
It has up to Robert and his team there.
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.
R R.
Quantitative trading business from my new cars used to be called Blue fire, all continue to be profitable and so on.
I flipped asset management.
We are we are.
We are raising capital in a tough environment, we've launched a good product we have.
Alpha fund that is just getting launched.
<unk> run by Chris Ryan that I think is gonna be a wonderful product. The interactive fun is doing there they're second close.
And so.
You know, we got back the $2 1 billion at the end of this month, a we think that's a business we should do well and 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 youre going to see our mining revenues start to grow a pretty rapidly. There's no magic to that we had invested we finally are plugging in our minds that we bought at low low power places and so that's gonna.
Add to that the revenue going forward and our investment banking business.
You know run by Michael Ash.
Just doing a great job, we're in the middle of a ton of activity. We're benefiting from a couple of years of investment in developing domain expertise in that space and so.
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 marked down our our pri.
Divot positions are pretty aggressively.
We are liquid in our liquid positions we have.
Less diversity, we've got bigger bets and in the more liquid tokens that we think will go higher.
And you know, we feel pretty good about where we sit.
Listen with Big go we're in constant contact with Mike and his team.
And we're evaluating what's best for both businesses. It's been frustrating that has taken as long as it has with the listing in the U S. We continue to.
Plow ahead, and you know there's a long queue of other firms that are not or with the SEC Ah.
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 down 80% that people got really nervous I did it and there were a few different reasons one as I look at the 15 analysts that we just hired.
And I scratch, my head and say jeez I couldn't get a job at my own firm. If I was 22 years old are from great universities diverse group all over the place who know more about crypto.
Is 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.
Hi.
While retail retail really got hurt in this.
Right.
You know institutions, we're just starting to get in and so we see nothing but Ford progress. There there was a big announcement this week with Blackrock opening up their Aladdin.
That form a crypto for the first time that is actually a monumental shift and it just tells me that more and more access to crypto was coming right. The total.
The 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 going to leave it for questions.
Want you to Oh, no not quite so I'm gonna Bragan, Alex Yahi Ah Ah to just run your real quick through the facts of our numbers, but I want this to be interactive I want this to you guys to ask as many questions as you want Alex Yeah. Thank you Mike Good morning, we'll keep the short in the tough market.
Conditions of the second quarter, our business performed well.
We ended the quarter with 1 billion in cash on the balance sheet.
And $1 8 billion in equity capital.
After reporting a loss of $555 million.
Most of it from unrealized mark to market.
In the quarter.
Down our principal investments from 1 billion to $750 million.
And unrealized marks on digital assets were negative $230 million.
Our total liquidity was one $5 billion 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.
Coming into the U S D C issued by circle.
With that I will hand over the call to the operator to take questions. Thank you.
Yeah.
Thank you very much.
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One moment, please one of the people in for questions.
Yeah.
We have our first question from the line of Chase White with Compass 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 you know.
When when could we start really seeing that coming into force.
[noise].
Yeah, I'll take that one choice and welcome and it's great to have you covering are covering the company well, let me hit on a few fundamental components of the risk management of credit and then I'll get to your market share question.
As we think about our overall portfolio.
The the the key things that we are very focused on our concentration risk.
And so if you think about our concentration limits, the Chris and Luca and the team manage our book towards no counterparty concentration is about 1% of putting the capital.
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 tread for service players. So think about family offices traditional hedge funds high net worth individuals.
And you know the book itself offers a lot of diversification benefits at different market segment levels across both tread fly in 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, Oh, Salesforce, we're giving Chris Mike myself and others, a pretty hard time about a conservative.
Loan agreements that we wanted to put in place and some of our competitors stepped in and took that market share that.
That lending market share often like it does on Wall Street comes with trading Marketshare, and we took a back seat than 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 we're choosing our competitors in the back end of 'twenty. One 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 were slightly higher nims, and we anticipate being able to enjoy and.
An environment that has both of those things safer loans at higher Nims.
For the relatively near term and potentially the medium term.
But what's the 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 off.
And so we are working really hard to figure out ways to be a.
You know better borrower right.
If we if we could borrow cheap and lend expensive, we've got a pretty good business added an item and.
And so that will be the real governor to how fast this business can grow will be access to to good financing.
And by the way we are borrowing cheap we have $5 billion at 3% five 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 an M&A shift take place like is it happening very quickly and then it'll be over.
Quickly or is it kind of a prolonged environment do you think.
Yeah.
Yeah. So let me give you a little bit of.
Of color around that and some data.
Answer is we don't know a lot of.
The.
Contributing variables to the answer to that question.
Inked 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 'twenty, one where you look at at least one company in the Cryptos sector being part of that transaction, we saw 190 transactions.
You know in the in the first half of this year that place exceeded last year with 92 deals looking at the same metric.
If you look at what Sam and the F. T X team have done in the very recent past they've been extremely active in this down market referenced block fly.
Hum bit vote and that just in the last two months alone.
And if you look at assets raised capital raised by companies in the sector.
In July a one 1.3 billion continued to get raised that was across 18 on deals and so year to date capital raised is just over $21 billion.
And so.
The capital raising side in terms of financing has slowed a little bit that's reflected in what our bankers are working on we.
We have been very active on the bus side for some of their customers that continues to be the case and I think youre going to see a lot more M&A than the run rate suggested in 'twenty. One in the back end of this year in the first half of 'twenty three but you know I think that's gonna be the increase will be.
Largely led by tread fly players who are able to participate now in the sector valuation ranges that are a lot more digestible than they have been in the in 2021 and the first part of this year and so you know the activity that we're working on reflects that type of dynamic.
Got it very helpful. Thanks, guys.
Thank you we have next question from the line of Deepak cautions with BMO capital markets. Please go ahead.
Oh, Hi, good morning, guys. Thanks for taking my question.
Got three I'll try to make them brief.
First just on the U S listing process I know.
It's hard for you guys 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 has there been any.
Our summer.
Pause here.
Can we get back in the fall, what's kind of the activity level and how has that changed at all.
Well I would I guess.
Going into the other companies that are in the same process right. If you think about bullish in circle and.
Would it be Toro and and you know there's a bunch that have been in the same Q and just.
Just looking at those it doesn't seem to be.
Great progress I think.
Uh huh.
You know when the market sold off as aggressively as it did.
It probably took a lot of.
These sources.
Uh huh.
Yeah.
And in a sense of caution.
We're hitting a new equilibrium things have kind of balanced out the flyers that needed wash out we're getting washed out and so I'm, hoping it gets back to normal he makes progress but.
Ah I can only tell you what we're seeing and it continues to be slow.
Yeah.
Okay got it.
What can we thought about that and then just on the on the competitive side.
Obviously, Blackrock coinbase have their partnership help corn basis.
Let's talk a bit.
Are you finding hum.
You know that you come from a prime brokerage perspective.
<unk>.
Now that you.
Haven't been able to close because it's not affecting you guys.
<unk> at all.
How is that side of the market shaping up.
Let me give you some color around that.
It's really important too.
<unk> asked the question of what is prime brokerage mean, it's a term that gets thrown around a lot fuzzier trapped by any sector.
And I think when you dig into.
Different providers in different funds, what they really buy it can be different.
The layer of services that we're building a galaxy that are very important to our institutional book.
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 East when that comes online, we're going to have to rehaut 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.
It management business and in our balance sheet Leverages several different cost study and 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.
And so we can plug in the downstream custody services to a problem from a number of different provided providers if needed and of course, where we're hopeful that big go will be one of those so really from a prime services product delivery perspective to our institutional clients that.
Front end a service solution is what we're good at and what we're continuing to build and so that.
That will not limit us in any way to providing services to our institutional clients.
Okay. So it doesn't sound like it's a competitive Hancock.
At the moment.
But is it is it delaying opportunities that you haven't been able to close a deal yet.
I would say no for the reasons I highlighted and won't listen we are we are we are investing a lot in our technology.
Build out here and.
And so you know it's building product.
That will service those institutional clients I mean, the interesting thing is when you think of it as something like Aladdin. It's it's it's an agnostic platform. They will have lots of people that plug in and once they're there theres product to plug in.
So our our races to is to get that product built.
You know sooner rather than later.
Okay. Thanks, and then my last question just on the M&A front again it relates to competition I think the prior question around M&A I think a lot of the answer was related to your investment banking side of the business how about galaxy Emma.
M&A activities.
As you mentioned MTX.
By out of companies, what's your first to the market like you haven't seen enough out on the street yet.
Okay.
Hey, I was really focused on cleaning our house getting our getting our understanding of how we spend money and where we spend money.
Getting our eight businesses are eight operating businesses, you know really mission, driven and and and and Steely eyed and focus so it was kind of stage one.
Clean our own house up and get 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 date yet it will.
It would have been a huge mistake. So I've gone through this full cycle and not done something offensive later somebody a $1 billion in cash and and we feel we.
We think we're on a on a cash flow positive operating a run rate at this point and so I Wanna be offensive.
Yeah.
And we're looking.
Okay.
That makes a lot of sense I mean, it's certainly a tumultuous quarter. When you guys are on the right side of the regulations.
When do you think you start getting credit for that.
No listen I I used to.
You know at conferences and tell the space, especially when it's much smaller that we need to self regulate as a as a pace.
You know the regulators are going to regulate us and.
When I look around at some of the behavior of our industry.
Not a whole lot of self regulation going.
Right there was asset liability mismatch there was excessive leverage there was all kinds of.
Crap behavior in our space, we are hoping to be a model of.
What regulation should look like and so that's.
That's been our that's been our play I do think the regulatory landscape in D. C is still a little bit of a standstill right. There was some great legislation bipartisan pushed it.
You just use the AG committee recently to move big quantities or to the M. D. C. I will see if that gets any traction probably not until after the election, but my sense is we're not going to see much movement till after the election and.
<unk>.
It's going to be one of these frustration so our plan is to.
Stay in contact with everybody to try to be a role model and hopefully you will see.
Well when markets crash and get everyone gets scared the first reaction.
Everyone kind of running for the Hills I think what Youre going to see next is companies, realizing hey, I've got a sustainable business model or I don't.
Yeah.
And this is where we talk about the M&A activity picking up I think you'll see some people go out of business others, others grow you're seeing trade five guys deciding to get in at this opportunity and so I think the next six months will be pretty interesting for us and hopefully you know are.
Our Reagan our framework on how we do business.
Lee leaves us in a good position both.
With regulators and helping set new record help 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 back in 2000 $18 billion in cash is great. So thanks for taking my questions and I'll pass along.
Okay.
Thank you we have next question from that item, Ken Worthington with J P. Morgan. Please go ahead.
Hi, good morning, and thanks for taking the questions.
Maybe first higher level is the contagion from terror and Luna over and if we're gonna 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 in many ways borrowed.
Customer deposits are.
And these lending platforms, if it was celsius or wage or black fire. Many of the exchanges and then let them out into less liquid and longer duration assets I think that deleveraging happened that was the the wash downturn.
888, 50 in theory I'm in an 1800 and bitcoin we've seen a bounce from there as you know the fear went away.
Those companies still are going to be absorbed or liquidated.
And 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 is.
Another shoe to fall in terms of.
Bad credit or someone who needs to be liquidated I think now the industry needs.
New energy right. So our energy comes from narrative in our industry and so we're seeing it in theory and with emerge and so the theory was outperforming because there's a story to tell and there is a really exciting.
No.
Shift in the supply demand.
Equation of a theory right, so youre going to youre going to have a less inflationary currency you're going to have people, who are incentives paid to hottle ARPA to state their theory them and so you know prices are set on the margin story.
Matt.
You know the theory is shifting into a new.
A new chapter.
The Bitcoin story continues to just slowly gain traction and adoption, we'll see what the macro environment as you know.
The fed Flinches, if we have inflation Reaccelerate bus you know.
Think that story is less exciting than it was certainly a win.
Central banks from pumping and tons of liquidity and and the third part of our business, which is really the long long lasting part of like building out web three that just keeps grinding away.
And it takes time right. So if that's the end of T space, that's the defy space.
It'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 going to need to see this institutional money come out we're going to need to see that narrative and I. You know again is it going to happen in the next two months.
Cross my fingers and say a few hail marys, but you know we're taking a much more sanguine view that over the next 18 months 24 months all of this stuff will happen.
Great.
And then following up on M&A, which seems like the topic de jure and 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 right I think you mentioned the lenders might be ripe and then you also mentioned that tread fry buying into crypto what parts of the crypto ecosystem do you see trade five firms most interested in.
Well, what's so what's interesting is like who are the big winners in crypto and they were the exchange is an exchange is really weren't even exchanges right. They were they were broker dealers are in lots of ways. Some like Voyager was a broker.
A broker shop others.
Watching dot com or clean base.
I collected customers, who are playing in this new in this new world They were high margin businesses.
And the customers are really resilient and really sticky.
And so a pretty good business I think you'll see some consolidation there and you've seen that with with Samad F. T X already with with both Voyager and and block five.
And I think youre going to continue to see some consolidation there.
When you think of things like custody youre going to need a lot more custodians. If you really believe that we're gonna start having tobin as Asian at one point in the future of other assets and that's a crypto economy is going to continue to grow.
I think youll see some you know we already have.
Big traditional players investing lots in custody. They don't have the regulatory framework to do it yet, but they're investing in advance and so that'll be an interesting space.
You know what we do there's not a ton of competition you know we have competition in each of our segments, but.
And the derivative business lending institutional lending business.
Genesis is a big competitor they've had their own issues recently, they I think they will 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 are the big credit business that had suffered so much or places that we're taking in retail dollars and then lending them back out.
I think that game is probably over for a while.
Yeah.
Ken Ken I'll, just add a couple of things too to.
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.
Q1 of 'twenty, two period and a lot of these subscale smaller firms, where it is 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 sub sector. You know Mike mentioned, a bunch of them.
And and that's going to be something that we're right in the middle of in our advisory business, we take a lotta cues from that through our venture investing business, where 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 we're runway is it really is more prevalent in and.
Some of the larger firms and that's what that's why you'll see a driver of a roll up in Illinois and <unk>.
Last thing I'd say and it slipped my head for a second the one area that I think needs capital and got off sides. In this space was mining.
I think the mining space. It just looked like it was such a good business that people were raising capital instantly committing it to buy chips, and and and and shelf space in the future and so that space, we find pretty interesting. We think we've got a role to play in.
And in both lending and potentially consolidation in that space, but.
If you think about.
Have a.
One sector, that's probably got the.
Week has legs right now or the R. R.
The most challenges it could be the mining space.
Okay, great. Thank you very much.
Yeah.
Thank you we have next question from the line of George Sutton with.
Craig Hallum. 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 keying up to invest in crypto, obviously, the world has changed a bit but where does that stand today in terms of potential in your view.
It looks more like a held for 2022.
But.
The momentum is still headed that direction right. So even one of them.
Publicly big thing.
That said they were going to put a whole bunch of money and they're going to put some money in this year and a lot more next year and I think this selloff slowed people and if you just think of the process of investment committees are more conservative institutions, they don't like to see.
To put themselves in harm's way in the middle of a.
Ah proceed crises and so I think as this space bottoms out and starts rebuilding both narrative in price you're going to see those institutions come in and you know Damian has been on tons of calls as Steve curves as Michael as you know our our team is out there talking to people and we don't see a.
Retreat, we see a pause, but I'll just kind of a slow March forward I read something this morning about Morgan Stanley hiring more people I don't have a full story, but we're seeing that consistently and so what was refreshing is.
I didn't have to in my conversations re litigate.
The basics of why we were doing this people still get it and still still believe in web three <unk> still believe that bitcoin is gonna be a macro asset for a long period of time and still believe that we're going to build a.
More decentralized.
Watching the public blockchain ecosystem that things will be built out in the future and so.
After you know 80% sell off sometimes you worry like Oh are we starting over we absolutely were starting over and so in that respect.
We don't have the mountain of capital coming in this year, but I still feel like there's a a.
Ah put almost a in terms of time.
Capital marching towards towards our space.
That's great actually one other question, while I'm thinking about it you did mention the Senate Committee proposed bill.
They're suggesting the C. F T C. B. The regulator can you just give us your thoughts on the CFT see obviously I understand it's sensitive road the FCC right now, but curious your thoughts there.
We just wanted clarity.
What what has been so frustrating.
As a guy who's been in this space since 2013.
Is the lack of clarity.
Once you tell us the rules will play within the rules, but when they constantly ask.
<unk> to figure out what the rules are when the rules arent clear it really makes things are complicated.
The nice part of the CFC is it's got a pretty straightforward.
Regulatory mission.
It's not consumer.
And you know the FCC has got a much bigger work for so much bigger.
So I just I just want them to make a decision.
Perfect. Thank you.
Thank you we have next question from the line of Rich Repetto with Piper Sandler. Please go ahead.
Yeah. Good morning, Mike I guess, the first question is just looking at or listening to a lot of your comments.
You describe it yourself.
Sanguine and would you compare.
Like looking at the length of a potential.
No correction here.
Is it comparable to the Internet.
For a few of us that we're around the Internet bubble bursting, which went from probably three years have you done any comparisons are alright, any clues that you have into the length of the correction time here.
You know I've looked at all of those analogs.
I looked at him and 17, you know when we crashed in 18 that was the first thought I had is like how long is this going to take and what has been.
Refreshing and surprising to me is just the resilience of this community and I think it's because it's a purpose driven company 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 wasn't this breakdown in confidence and in institutions and if.
You look around the world at our institutions right. If you look at.
Potential election between Trumping by.
You know people are looking at politics, and economics with it and the whole system.
Nancy Pelosi going to Taiwan, and almost creating it you know what.
Four three.
The frail state of relations with China.
Russia like there's nothing in the World that says Hey this.
This is the great moderation again, we're going back to the good old times right. We have this breakdown of trust, which is really the fuel for the crypto Revolution and so what's interesting is how resilient. It is even retail I mean.
The heck out of retail.
Keep coming back and it surprises me in some ways, how how strong.
This community is and so I'm I'm more optimistic than I would normally be is just the macro thinker Ah that things could come back quicker.
We're preparing to be pessimistic and hoping to be optimistic and so that's how I'm thinking of things, but what we're seeing is really promising.
And my best.
Forward indicator is the smart kids coming into the space and I said this in my remarks, if you look at our 15 analyst Youre like Tam.
Those guys are as as sharp as an analyst class as youre going to get it any further.
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 you know certain sectors you might be more inches. That's gotten you know.
More beaten up like mining 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 vs valuation or strategic fit with <unk>.
The galaxy.
Has anything changed in the lens that you look at M&A.
M&A given given what's gone on here for the last several months.
When I look at our businesses.
You know keep our balance sheet aside for a second because in our balance sheet. We have lots of future you know future hopeful businesses right in that book of business isn't going to change the way things happen when I look at our businesses in lots of ways their bread and butter businesses that will be here in a year that will be here in four years and in five years right.
Derivatives.
Asset management Advisory alert.
They're kind of core businesses in some way if there's a more boring businesses.
And then what the future is going to hold and so when we think about.
There is there something that could roll into what we do already and strengthen that position.
That's one.
One lane the other Layne is.
Do we bolt on something or do we think about acquiring something that plays to where the world is shifting in the next 36 months.
And so we're we're looking at both.
You know the.
The more decentralized.
Polka as Asian, if it's.
Yeah.
That space Appeals to me personally because that's kind of why the people got into this revolution and so that's 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.
Completely certain that in four years there'll be important businesses.
And the move to a decentralized world is not happening in the next four years.
When everything is decentralized I don't think you'll ever get there, but what will trend that way and so.
Why I felt pretty strong coming into this call as 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 us add something unless it's a fill in it'll be stuff that we don't have.
Yeah got it and just wanted to squeeze one last quick one on regulation.
Because you did you seemed like you had a tilt that CFT C.
What it might be a little bit more.
User friendly I guess, because you make I think I think you referred to like their principal based sort of regulatory <unk>.
You know what.
What do you call it oversight and but I guess the question is you know when you look at US I think the FCC has certainly got to get some portion of it.
With took a position what share gains with things as you know.
Really securities.
So.
Maybe a little bit more on the balance between the CFT C and the FCC.
We know how aggressive I guess, Chad Ginza reserve as a regulator to what what is frustrated me is I saw a lot of.
Companies are collect those issue tokens in the token economics were created to kind of get a roundwood. This archaic.
Security definition that comes from whatever 1936.
Whenever the highway tests showed up and so it's not the way it really shouldn't work I think they'll get economics need 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 to inspect them and so there hasn't been any good back and forth dialogue of creating kind of a new.
A new regulatory framework for this new technology, which is not exactly the same as what it all security used to look like.
Why does the CFT sees appealing for something like Bitcoin and a theory, but it just takes those things off the plate.
Okay. We.
No now that they're not in the mix and you know.
Yes, the FCC is going to be involved somehow unless they create a new industry.
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 are 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 in lots of tokens out there.
And so and I think part of that is because the creators of tokens, where we're operating and trying to figure out how to operate in this is great space.
It sounds 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.
Fully fully understand that.
You very much.
Thank you I'll be the restaurants events to limit their questions to one per participant your.
Your next question from the line up Mark.
Palmer with B T. I G. Please go ahead.
Yes. Thank you. Good morning, we are seeing a lot of the crypto institutional treating focus on the derivative space, which it.
It has been huge in the rest of the world for a long time, it's really beginning to gain some traction.
So U S or at least it was prior to the the recent downturn.
Can you talk about galaxy's derivatives offering how you're shaping up to not only fit client needs, but also take into account the competitive environment and the regulatory state of play.
Sure. We think it's one of our our best businesses and one of our advantages and partly that's just the the team we have on the field and their knowledge of how to run a derivative book you don't want to think about.
Our loans to miners.
You know why we didn't suffer any losses in this big draw down it's because we went to most of them and said Hey, We think you should call her up your loans.
Flip sell calls and you know building infrastructure notes.
But building on their loan agreements and so that's the 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 them.
Puke out all they're there they're a third bitcoin we were happy because it made our loan book much safer.
And so I think that structured product absolutely actually selling.
<unk> Fi 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.
To crypto.
When people talk about crypto derivatives, mostly what they're talking about.
Are the futures that players like F T X and finance offer which are.
You know overnight or actually you know it.
Instant representations of our 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 you know that word derivative is a little tricky in the crypto crypto sphere are our derivative business looks more like a trade five derivative business.
In terms of its a big options book infrastructure construction products, and we think that's only going to grow.
Okay.
Thank you we have next question from the line of Owen Lau 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 talk about regulations and we appreciate your color, but what are the top priorities that the industry can do to regain some of the credit quality and then in terms of direct change.
My daughter's into private companies have you changed any of your philosophy that you with allo came more into certain projects that the industry should do more wow.
And also last on certain projects that you think the industry shouldn't go further thank you.
I think.
The big takeaway.
From the last quarter was that.
The on Shane why people get into crypto, but one of the.
The dominant reasons was transparency and so if you think of things that we are unchanged.
Unchain lending it was all transparent and so no one's bitching about compound or are they you know these online lending platforms.
No. 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 big client are there any of them or they're stable claims and next thing you know had there their money Levered up 30, or 40 times, you know times and invested in and other projects and they were taking lots of risk and so I think if there's one lesson, it's the industry needs more.
Transparency.
You could run those same businesses and actually you know put the portfolio on chain.
And so we're.
We're somewhere halfway in between in that we're a public company and we offer transparency quarterly we run a much more conservative shop, and so are we.
We but we are still a trademark company that deals in crypto.
And so I.
I think that.
Push to having certainly those retail facing clients a lot more transparent.
Right they needed to operate like they were regulated entities and they did it.
And so now they're either going to get regulated or they've 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 you know, we'll pull our skirt back in and and and you know show our show our balance sheet and then 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 pump 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.
They're still if there's a hot deal it's still trading at.
There's a couple of deals out there that surprising me you know.
The issue or getting terms that we don't think.
They should've looked like an old deal and so if there's a really hot deal. It feels like lessons weren't learned there not a lot of those and so really good teams and really good tech are still up.
Attracting money and everything else seems to be wait and see like.
I think there's a there's a come to Jesus moment coming where companies that raised at really high valuations.
Have enough cash, but their next round might be a down round and there's probably a big opportunity in you know.
Raising a convert fund are being in that restructuring is and so because people are just raise money. If you were lucky enough to have raised money you can wait and see but the private valuation game change is much slower than the public valuation gain and so there's still like like we marked our private book down a lot.
And but you know I'm not sure other people are marketing their books down or how companies are thinking about it and so I don't think you can expect that gap to close and three months I think that's a 15 month.
Wait and see thing.
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 why.
N monies raised at a high valuation and gets crammed down what it does to the other shareholders or quite frankly, the employee Stakes.
Got it thanks, Mike.
Thank you Chris 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.
Thank you David I think in your prepared remarks, you were mentioning.
And it says in the press release that you on boarded over 50 over 40, excuse me new Counterparties to the trading platform. So this one's about G D T.
I was just wondering.
Yeah Yeah.
How do we think about critical mass like.
You have 850 some odd.
Is you know boarding an incremental 40 important.
Hum how much concentration is there within the 850 that you have on the counterparty side. Thank you.
Yeah. So the the answer it's a good question. The answer is it depends on who they are.
The 40 that have been most recent.
Encouragingly they are some larger organizations.
Organizationally that have taken.
Time for us to get on boarded them you know.
The large crowd fly asset management groups do.
As you would expect an extra amount of diligence and they use the negotiations just take that much longer as people have to get comfortable with that 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 the school has allowed us to advance those on boarding 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 own boards as a percentage or in the tread for space relative to the asset management groups of which there are many who are kryptonite of and focused on crypto.
And so they are important.
And the second part of your question.
Much like in in Tread fly books, when you look at the Goldman Morgan JP Morgan distribution of businesses. The 80 20 rule applause here in the same way that a broadly does there.
Okay.
Got it thanks for the color I'll jump back in the queue.
One one last comment I'll make and I.
I qualified my numbers aren't going to be perfect.
But when I think about.
You know how do we become 400 people.
Uh huh.
Now I look at our our stock, sometimes and where its trading I was like geez. It last time, it was down or we had $700 million of book and in our our operating businesses, probably we're doing less than $15 million of revenue and we think they'll do.
$200 million this year.
You know, we we really.
Had a business plan in late 2019 for great for great operating businesses, but not a lot of juice flowing through the machine and so you know in the last two years. We've 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 our outweighs our 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.
Yeah.
It's it can frustrate me at times, because the way we set this company up.
It has both businesses under the same under the same roof, but I just want to keep that focus on.
Really it was kind of grinding.
Growth path to building sustainable.
You know profitable businesses on the institutional front.
Okay.
Thank you we have next question from the line of Kevin did they with H C. Wainwright. Please go ahead.
Good morning, Mike. Thanks for fitting me in a b M listen I'm, just kind of curious.
You see sort of you know.
The whole crypto space moved through this downturn.
Which businesses do you think.
Your eight operating businesses respond most favorably as the environment changes I mean, you talked about your derivatives business being pretty strong in <unk>.
And helping them manage your lenders and you're also talking about your mining business wanted to see more investment there.
What's what do you think is the best way for us to think about.
Galaxy rebound here.
Yeah I guess.
Mining is just going to happen because we had 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 and a half to two claims a day towards 10 claims a day over.
Okay.
Period of time, that's going to have more.
Cause I think.
General.
It's a big opportunity and it's.
Holiday mining, but it's a tough business a lot of money got invested.
And so hash rate continues to stay high people, 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 I mean by that is having access to low power is having teams that actually know how to keep your your chips online and actually having shelf space.
The business I think we have the most upside in is 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 and with you in the past and so if you look at our balance sheet.
Alright, and I talked about it start right, we've turned a $350 million into $1 billion nine or whatever whereas today.
No.
We're 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, our interactive fund our venture fund to fund business, our Alpha fun.
And I think you'll see that as a continuing theme.
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.
Our best investors on the balance sheet side and as we as we migrate more of that to the asset management business I think that should be a big growth opportunity.
Yeah.
Yeah.
Thanks, Mike.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and I'd like to turn the call back over to micro grids for closing remarks over to you Sir.
Hey, guys I Hope you got my enthusiasm for our team looks like I didn't tell you that like we're bullish and we are we are we've come out with a new brand. We're rolling out a complete new brand for Galaxy cool logo at a N a feel with our website and a brand that our marketing team had worked on for a long time in the next few weeks.
We've got our new office, a remodel a little bit and so we are.
We're in this for the long haul.
We're like I said, I I I will never be happy.
29% of my balance sheet in six months.
And as an investor.
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.
The next two to five years, a should be a.
Really interesting and bullish place to be.
Hope you got those messages and look forward to talking to you next quarter.
Okay.
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.
Yeah.
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