Q4 2022 Galaxy Digital Holdings Ltd Earnings Call
Speaker 1: Music Music
Speaker 1: The that that C.
Speaker 2: Good morning and welcome to Galaxy Digital's fourth quarter 2022 earnings call. Today's call is being recorded. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. At this time, I would like to turn the conference over to Elsa Ballard.
Speaker 2: head of investor relations. You may begin.
Speaker 3: Good morning and welcome to Galaxy Digital's fourth quarter earnings call. Before we begin, please note that our remarks today may include forward-looking statements.
Speaker 3: Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors, including those identified in our filings with the Canadian Securities Regulatory Authority on CDAR and available on our website or in future filings we make with other securities regulators.
Speaker 3: 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.
Speaker 4: With that, I'll turn it over to Mike Novogratz, founder and CEO of Galaxy. Good morning, everyone. Last time we did this was November 9th. It was two days after the FDX debacle. And so, man, it seems like a year, so it hasn't been that long.
Speaker 4: I thought about my remarks today and at one point I thought about calling them the tale of two cities because it feels like overseas crypto is really doing really wonderfully and domestically there seems to be a regulatory onslaught. But I changed my pitch to the good, the bad and the ugly.
Speaker 4: There's a Clint Eastwood movie for you youngsters. Listen, there is a ton to talk about today. I'm going to try to focus on high level stuff, why I'm excited right now, what I see going forward, why I'm excited about galaxy's opportunities.
Speaker 4: how I'm framing the world. And then I'm gonna have Chris Ferraro kind of really take you through our businesses and our strategic opportunities. And then Alex Ioffe to really bring you through the numbers.
Speaker 4: Let's start with the good. I don't want to bury the lead. This is crypto's moment. Crypto was in lots of ways created for this point. Satoshi Nakamoto way back in 2009.
Speaker 4: worried about the breakdown of the legacy financial system.
Speaker 4: He worried about populism, infecting our politics, and a constant printing of fiat currencies in a debasement of money, and created Bitcoin. Bitcoin really is the first decentralized asset in the world.
Speaker 4: store of value or money which then really gave birth to this whole industry of a decentralized revolution.
Speaker 4: And so there is nothing like a banking crisis in the United States where one day Silicon Valley Bank is healthy and three days later it's out of business, where Signature Bank is a key part of the infrastructure for lawyers in America.
Speaker 4: for crypto, for real estate in New York, and a week later it's out of business. To remind you that our system is fragile. We have been on a debt...
Speaker 4: gorging, literally gorging ourselves with cheap money for years, really, you know, post 08 certainly, and have built up a debt to GDP in this country that might be unsustainable. I always say I go to bed and I say a hello Mary hoping.
Speaker 4: that the stewards of our country and our economy can land the plane, can actually
Speaker 4: maneuver our economy into something that's sustainable without a real disaster but that challenge is real and a challenge gets worse and worse and so things like this banking crisis are a great reminder and it gives Bitcoin and Bitcoin's community unbelievable results
Speaker 4: under it on a risk adjusted basis. That's volatility adjusted, sharp ratio adjusted. Bitcoin and Ethereum have been the two best performing assets in the world this year. They've been the two best performing assets in the world over the last two years. They've been the two best performing assets in the world over the last three years.
Speaker 4: So whatever Jamie Dimon wants to say, whatever the Biden administration wants to say, they're just wrong. And the world knows that, right? Crypto started as a retail phenomena. It started as the little people's revolution and it continues to be.
Speaker 4: We got in this business wanting to connect institutions to this market, to this new phenomena, to these new technologies and continue to see a really interesting lane for Galaxy. We're as resilient, I think, as the crypto community.
Speaker 4: And so you can take shots at us, you can knock us down, but we're gonna be here, we're gonna be coming to work every day, and we're gonna continue to try to build these bridges. today,
Speaker 4: And so, like when I say good, it's good in price action, it's good in spirit, it's good in narrative, and it's good, quite frankly, overseas, we see unbelievable adoption, right? If it's the Mideast, if it's Hong Kong's new regulatory regime, we see lots of exciting things happening in Europe .
Speaker 4: And so lots of progress being made. You know, what's the bad? In some ways.
Speaker 4: The regulatory regime in the United States is very tough.
Speaker 4: My own narrative on it is it was making lots of progress until FDX. And then the Democrats felt foolish that they were so close to Sam Bankman free from the SEC to the CFTC to the Biden administration. And have used this to make more progress in the Senate than they have in the Senate.
Speaker 4: One example of horrific fraud and being snookered by a guy in Bermuda shorts to just say the whole thing is bad. Katie Hahn wrote a great editorial in the Wall Street Journal yesterday. People should read it.
Speaker 4: She was really articulate about you don't want to throw the baby out with the bathwater, but we see that consistently. And so if it's
Speaker 4: The government trying to pressure banks not to be in crypto Regulatory enforcement after regulatory enforcement, you know, the SEC seems to be issuing Wells letters weekly And you know, there's going to be a huge backlog of legislative judicial proceedings
Speaker 4: But that's not good for innovation, it's not good for America's chance to lead this industry. It's pushing people offshore. And so we're fighting back. We've got a guy in DC today trying to educate. I've been on the phone plenty with both...
Speaker 4: Republican and Democratic congressmen and senators trying to make the case that
Speaker 4: the Biden administration's really attack on crypto was shortsighted.
Speaker 4: Really, a tack on crypto is short sighted. Again, what's good about...
Speaker 4: This is despite all that Despite what you would think are insurmountable odds crypto prices are higher Activities moving up and you know we see a pretty promising future
Speaker 4: Listen, we have three main focuses this year in each of our businesses. We've broken our businesses up and by next reporting cycle, we're going to resegment our earnings so you can see them more clearly into the markets business, the asset management in the run.
Speaker 4: and the infrastructure business. In markets, we are frantically trying to finish and launch our Galaxy Prime, our G1 offering. We think it's gonna be best in class. Chris Brora's gonna talk about that. In asset management, we're trying to, and I think will be successful, raising active.
Speaker 4: as opposed to passive asset management, active money to manage for other accounts, higher fees, plays into our strength of being able to navigate these markets. On the infrastructure side, right at the end of the year, we spent a whole bunch of money buying.
Speaker 4: Helios, a big data center, a mining operation in Texas. That is coming online as fast as we hoped it would. You're going to see our mining revenue and our hosting revenue picked right up. I think that will be a positive EBITDA business for us this year.
Speaker 4: and are really excited about it. So things feel good on the Galaxy level. So the good, the bad, the ugly. What's ugly? Well, and I feel for you, our stock price has been ugly. I said last earnings call, I cared a lot about the stock price.
Speaker 4: And, you know, it's lower, not higher. And it's lower with Bitcoin, higher and it's lower with our company doing better. I looked, as of Friday, best estimate for, you know, Partners Equity, our book, was roughly $36.60 Canada.
Speaker 4: with the stock trading close to 4 Canada.
Speaker 4: The way I look at things is we have an operating business that I think will make money or at least break even this year and if not should come close. And again, I said by next reporting we're going to break that out in a more clear way for people to see it. And we've got a book that certainly feels like it's bottomed.
Speaker 4: Alex will take you through.
Speaker 4: the markdowns in 2022 in our private portfolio losses, the FDX loss and everything else that hit partners equity. We've cut costs.
Speaker 4: We took the bonus pool way down last year. We continue to understand that we need to grow, but at the same time be very prudent with how we spend our money.
Speaker 4: And so the way I look at it is if the book is bottomed and is heading up, and our operating business is
Speaker 4: should at least break even or come close to it, our stock is just at the wrong price. We had bought stock last year, the Canadian rules, the stock is just at the wrong price.
Speaker 4: rules, limit how much you can buy per year. We can't start buying our own stock again until May 15th, but hear me loud and clear, if our stock is still anywhere close to here, we will file with the Canadians to be able to...
Speaker 4: to use some of our capital to buy back stock. And so with that, I want to close and pass to Chris to kind of come into the detail of Galaxy itself. I would tell you, I'm proud of our team. This has been a trying five months. It was, you know, a...
All hands on deck.
event just two weeks ago, weekends ago, and I think our team handled it wonderfully.
We've got diverse bank and brokerage accounts. We were ahead of the game on lots of ways. I think we're coming out stronger than we were with our peers and lots of our competitors, either out of this business or weakened.
I'm optimistic and bullish and with that I'm going to pass it to Chris.
Thanks Mike. I'll now cover some of the more detailed updates for the three strategic priorities that Mike mentioned earlier.
First, we have Galaxy One. On the last earnings call, we highlighted that we began the build of Galaxy One, our unified technology-first platform for institutional clients to engage with digital assets.
Our first product release will be PRIME, integrating custody, trading, lending, and derivatives for institutional participants through a unified tech and regulatory compliant platform.
We've dedicated a significant team across all areas of the organization focused on the build-out, the majority of which are in our product and engineering teams.
Some specifics on what differentiates our Galaxy One offering are a licensed, regulatory-compliant, institutional-only platform with a focus on robust risk management and reporting.
a multi-custodial model that will include a number of different qualified custodial integrations.
A hybrid liquidity model that leverages our best-in-class principal liquidity, powered by our in-house Smart Order Router, integration with our existing financing and derivative offerings in order to provide cross and portfolio margining, access to our in-house research, and a dedicated customer success group to provide white glove client coverage.
Given the events of 2022, not just in crypto, but throughout the broader financial system, we believe trust and transparency will be the quintessential factors for early success. We've recently launched a demo of the trading stack and have been giving sneak previews to prospective beta customers.
Initial feedback has been overwhelmingly positive and people have been asking for documentation to onboard.
We intend to release our beta to select customers in Q2, fast followed by margin and secured funding capability in the second half of the year.
We've also begun the groundwork of the future of Galaxy One beyond just Prime. We're aiming for it to be the single pane of glass for Galaxy customers to access existing and new products that Galaxy can offer.
This includes SaaS-based offerings integrating with GKE for out-of-the-box financial services infrastructure. These capabilities can give rise to future Galaxy offerings for global settlement, payments and commerce, and through a potential SaaS partnership to help elevate the entire ecosystem.
We can also expand into private markets and look at issuance, tokenization, and fund management. This is all still very early, but we intend to prove our product engineering capabilities step-by-step to meet the market as it evolves. The second priority in the asset management business is an acute focus on launching liquid, active, and alternative investment strategies in order to grow higher fee-paying AUM while leveraging a growing regional partnership model to expand our passive product reach..
One key initiative that is well underway at Galaxy today is the migration of all of our alternative venture investing teams into the asset manager, with the goal of creating a unified venture platform for institutional LPs to access our talent and our products.
And, as a result, soon you will see previously reported balance sheet investments reflected in the AUM of Galaxy Asset Management.
But that does not mean shareholders no longer receive the benefit of the venture investments on balance sheet. On the contrary, Galaxy will continue to own and manage our existing portfolio and is committed to seeding new funds we bring to market, ensuring shareholders retain exposure to venture investing through our stock.
However, what this will do is add larger investment buying power to the Galaxy platform, while at the same time generating incremental high margin management fee and carry interest operating revenue streams alongside our already scaled Galaxy Interactive Venture product.
In addition, we also intend to expand our actively managed liquid product suite to include a long-short fund, providing investors with lower vol, risk-managed exposure to liquid crypto assets, and expect to launch this fund in the second quarter. We've also added some exciting LPs this year as well.
Galaxy Interactive Fund II received a capital commitment from Texas teachers just this February . And also in the fourth quarter, we announced a strategic partnership with Itau Asset Management to develop a comprehensive suite of Brazilian listed physically backed digital asset ETFs and are actively exploring regional partnerships in both Europe and Asia.
Finally, the third party Mike mentioned is integrating and scaling our recent acquisitions in our digital infrastructure business.
In terms of our mining strategy, we are focused on significantly growing our capacity for both proprietary and hosted Bitcoin mining.
expecting a total targeted hashrate under management of over 4 exahash by the end of 2023, with an approximate 50-50 split between prop and hosted Bitcoin mining.
That's nearly 3x where we were at the end of 2022. This is all while mining Bitcoin well below its fair market value, growing reoccurring hosting fees, and focusing on our energy management strategy.
We'll get there by integrating the Helios site we acquired in December , which provides access to tax-efficient mining infrastructure and removes any material reliant on third-party hosting providers we've previously had.
We expect to energize approximately 200 megawatts of mining capacity at Helios alone by 2023 year-end, and with incremental investments, the facility has the potential to scale to north of 800 megawatts.
Another important element to this operation is how we manage power. While the previous owner was generally unable to enter into fixed price hedges, we do have this capability due to our credit worthiness and have already begun to implement this strategy.
As of today, we have also begun to energize our smaller organically built mining site in Dyball, Texas, with a plan to have over half of the site energized in the next three weeks with the full 16 megawatts of capacity scheduled to be available by the end of Q2. Finally, we remain committed to our goal to reach an 80 percent sustainable energy mix and are actively pursuing multiple long-term solutions to achieve this target.
Additionally, on February 21, 2023, we acquired the assets of GK8, a secure institutional digital self custody solution.
The transaction accelerates Galaxy's product innovation and development by adding a team of nearly 40 professionals, mostly in technology and R&D roles that include cryptographers and blockchain engineers.
The deal also expands Galaxy's international presence with the addition of an office in Tel Aviv, where just this week we have a team over there working with integration and product roadmap with Leunk Ac derivative people like Alex their job and the team is reversible
Galaxy will assume all GKEA clients, the majority of which are net new to the firm.
We believe the market opportunity for GKH custodial technology services is expanding rapidly, particularly as institutional demand in the asset class grows and as the need to safely and securely hold cryptographic key material has become a global focal point for regulators and market participants alike.
As such, our primary focus today is to let that talented team there do what they do best, build great cybersecurity tech, while we help to invest in GKE's sales footprint and existing product roadmap to begin capturing market share this year.
We also intend to utilize GK8's custody solution as an internal customer in the ongoing development of Galaxy One.
Now, looking ahead to 2023 and starting with our capital allocation priorities.
As Mike shared before, we are positioning our balance sheet in a conservative way with more cash held in US depository accounts and less balances on exchanges.
While you can look at our financial statements for results as of December 31, 2022, I'm more focused on the quarter-date preliminary results we published this morning. You'll see our preliminary 2023 year-to-date earnings estimate of approximately $150 million U.S. as of Friday, March 24, bringing our partners' capital back above $1.5 billion U.S. Out of liquidity, position remains intact even after recent dislocations.
Moreover, we remain focused on surviving downturn in crypto markets by continuing to manage costs with the goal of running our operating businesses at break even or better.
I was proud to see that in our cost control efforts in 2022, including, while our overall cash compensation rose 12% because headcount rose nearly 40% year over year, we were laser focused on variable compensation.
and subsequently reduced 2022 cash bonuses on average 63% per employee from 2021 levels, noting that cash bonus reductions disproportionately impacted the senior team.
We also focused on cutting non-personnel costs with professional fees down almost 50% year-over-year.
However, we do expect our audit and legal costs to remain elevated for the time being as a cost of doing business as a highly regulated public company in our industry and in the United States in this environment.
Turning to capital markets. We continue to remain focused on U.S. listing and are working diligently through the process, which has remained frustratingly slow.
We also purchased and canceled $55 million worth of the 3% convertible notes we issued in December 2021. We purchased those notes for approximately $30 million, including accrued interest.
We will also plan at this time on restarting a shared buyback program in May when we are allowed to by the TSX.
Before handing over to Alex, I just want to reiterate some of Mike's comments from earlier this month.
We've continued to operate business as usual while helping institutions navigate highly uncertain volatile market conditions 24 hours a day.
As we previously disclosed, Galaxy has no material exposure to SVB, nor do we banquet them.
Moreover, we continue to have no material impact from additional bank closures, including Signature and Silvergate. We have a diverse group of U.S. and global banking and brokerage relationships across our business lines as part of our vigorous risk management process, and we remain committed to helping clients navigate the ever-changing market environment and ensuring firm and client assets remain secure.
Most of our deposits are at a large US-based bank. All company and client assets are currently secure and accessible.
Moreover, in the midst of a banking meltdown, our trading desk saw one of its busiest days in terms of client activity and volume in its history with no interruptions.
This is even with the loss of the Cigna and SEND networks. Our desk continues to settle fiat 24-7 and we remain over allocated to stablecoins in order to ensure our ability to serve our clients.
We've seen many market cycles in both crypto and TradFi. While we continue to use that experience to successfully navigate short-term downturns, we remain committed to ensuring Galaxy is positioned for the inevitable adoption of digital assets.
With that, I'll turn the call over to Alex to briefly cover financial results.
Thank you. Good morning. Mike and Chris covered a lot of ground. I will stick to essentials. Market conditions for crypto were challenging last year with a number of adverse events during the year, ending with FTX market failing in the fourth quarter.
In light of that, our business performed well. We ended the year in strong balance sheet position.
was over half a billion in cash and 1.4 billion in equity capital.
We reported a loss of $1 billion for the year and $288 million for the fourth quarter.
These losses were primarily attributable to unrealized marks to market on our investment portfolio and on our long digital assets positions.
In the first quarter of this year, some of these marks reversed.
Overall, through last Friday, we estimate profit before tax of $150 million, which brought our equity well over $1.5 billion.
through last Friday, we estimate profit before tax of $150 million, which brought our equity well over $1.5 billion. A good start to the year.
As Chris mentioned, we navigated recent discombabulation in commercial banking without issues. At the end of last year, we held approximately $960 million in liquid assets, consisting of $540 million in cash.
130 million of net liquid digital assets and 280 million of stable coins.
Now, back to the operator to take your questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad.
If you are using a speakerphone, please pick up your handset before pressing the keys.
If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Please limit yourself to one question.
At this time, we will pause momentarily to assemble our roster.
Did you guys We're getting to share our feed.
comes from Andrew Bond with Rosenblatt Securities. Please go ahead. Hey thanks good morning. Just in light of the recent banking crisis with the most widely used banking off-ramps being shut down over recent weeks. Have you seen
And when you look at the impact of a tighter landing in the venture market, can you talk about the opportunity to win share across your businesses and perhaps make more strategic acquisitions where others are capital constrained? Yeah. Hey, Andrew, and welcome to join us here at Galaxy and covering us really appreciate it.
Yeah, so, you know, as I mentioned in the-in my prepared comments, the banking crisis actually provided a pretty good opportunity for us to prove, A, our resilience and the fact that we had multiple providers.
We actually operated as a pretty important liquidity center during all that for market participants. We saw some of our best volume days we've ever had in the history of the firm. And we also were here for portfolio companies. We spent all weekend with portfolio companies working on different...
potential alternative financing solutions for them, for our portfolio companies and companies that weren't in our portfolio, in the instance where those banks ultimately failed, which they didn't. And so ultimately it ended up not being a problem broadly. But I think the...
That event proved the resilience of the way we built the business, proved our own risk management. And those are the kinds of events where if we've done things right, we can actually act on the front foot and be offensive, which we did in a way that, as Mike articulated, we were all very proud and humbled at.
places in the market going forward who has those relationships that are going to, with major banks, that are going to be scarcer to find going forward. And so since we have those, we think it actually positions us quite well as to be an aggregator for the end client points in the industry going forward. Great, thank you.
The next question comes from Deepak Kesho with BMO Capital Markets.
The next question comes from Deepak Kesho with BMO Capital Markets. Please go ahead.
Oh, hi guys. Thanks for taking my questions. I got a lot of them, but I will try and limit it to one. Just big picture, you guys refiled your S4. What's left to be done between the back and forth with you and regulators before they consider effectiveness? Is there more on the to-do list or is it just wait and see how the FCC feels?
about your filing application. Any thoughts there? CPAC, maybe you should email Gary.Gensler at SEC.com. I'm teasing..gov, right. Listen, we are answering the questions they ask us.
we send our answers in and then we wait for their responses.
I am not optimistic that this happens quickly, just given the overall tone of the SEC and the Biden administration towards crypto. I think the people that we deal with at the SEC are answering our things earnestly and they're...
they take their time to try to dig into these questions. But it feels like not one crypto company has made it through that process this year or last year. And so to be optimistic might be a little foolhardy. With that said, you know, thank you for listening.
from the regulatory environment, we have lots of touch points with lots of regulators and we, as Chris mentioned, spent a whole lot of money and time answering questions and we will continue to do so. I mean, it's the lane we chose.
We chose this lane to be a regulated player trying to bridge this broadly unregulated crypto community with institutions. It's a damn painful lane. I do think there will be light at the end of the tunnel. I'm just not sure when. Yeah. In the dark we cleared roughly 70 questions.
On the last filing, we'll see what comes back from SEC this time. It's been about two months since we submitted.
last filing. We'll see what comes back from SEC this time. It's been about two months since we submitted. Thank you. Thank you.
The next question comes from Michael Legg with Benchmark. Please go ahead. Thanks and good morning. On the Galaxy One you mentioned that you're fully licensed regulatory compliant but you know in today's regulatory environment where we really don't know what's coming down the road except that the government's obviously all over the industry.
Can you talk how you navigate that regulatory environment when we really aren't set on what we have down the road and how you can assure your
clients of that. And then second, just on that, you mentioned margin in the second half. Can you talk a little bit about the leverage you'll allow and the collateral? Thanks. Sure. Thanks for joining us today. Yeah, so the answer on how we navigate a dynamic and changing regulatory environment is...
We try to ourselves be dynamic and to evolve as it changes. Today we already operate through FinCEN, a money services business, and we have over 30 state-level MTLs here in the U.S. and growing every day.
We have line of sight to getting all 49 except New York. We are also in flight in process with NYDFS for New York BitLicense and trust. And so from our layer in terms of building the platform through which clients are going to sort of come in the door and then sit one level above.
the actual custodial layer, we intend to be US state regulated in all aspects that we understand allow that business to operate. And that's not a new regulatory regime necessarily in broader financial services. We sort of fit under the same.
the same umbrella. One layer below, we also only work with sci-fi, more focus oriented and three layer pipelines.
companies that we believe are qualified custodians that have state-level trust charters here in the US today and obviously we're looking hopefully for the OCC and maybe for the federal side to come through and provide those charters for digital asset custodians as well and as that happens work those groups are going to be at the front of the line to plug into galaxy one
We're really meant to be a regulated transparent layer for clients to interact with who then have integrations to other best-in-class regulated participants. It's also important to note where we have the ability to operate that platform outside the US through regulatory licenses.
in I think seven different international jurisdictions today. And we're looking to extend that as we see demand show up for it. On the margin side, we haven't yet finalized exactly what the level of collateralization and the margin trigger levels are going to be, but you should think about it.
that as being a
white glove institutional platform, but having a lot of technology and a lot of prescriptive, automated rule sets around risk and margining and de-leveraging and moving on collateral and things like that. And so we're gonna operate that business.
with a lot of tech behind it, but in the same way that we've operated our lending in the past where I think objectively on the lending business we've done a pretty good job in terms of risk management understanding volatility when you're adding a small amount of leverage to these assets.
with a lot of tech behind it, but in the same way that we've operated our lending in the past, where I think objectively on the lending business, we've done a pretty good job in terms of risk management, understanding volatility when you're adding a small amount of leverage to these assets. Great, thank you.
The next question comes from Chase White with Compass Point Research and Trading. Please go ahead. Thanks. Good morning guys. So you guys have obviously grown counterparties and continue to do so in the trading business. I'm curious if you're seeing the average counterparty increase its activity in recent weeks given the move in crypto prices and kind of following up on that, would you expect in a normalized environment for newer counterparties to be...
bigger traders than earlier onboarded counterparties or is the kind of average trading volume per counterparty getting smaller on the margin.
You know, it's a good question and I don't have the exact numbers in front of me, but we can certainly get back to you with what they are. What I've seen anecdotally is that
You know, there are some trade-fi hedge funds that all had good 2023s, I'm sorry, 2022s, right? If you think of the multi-strats, you think of the macro funds that have all created a crypto sleeve or a crypto pod. And those guys are well capitalized. And so there are new participants.
or enhanced participants, right, from the kind of traditional hedge fund space, both here and in Europe that are participating. That weren't as big last year, and so those are bigger tickets. The crypto hedge fund universe really got kneecapped in the
2022 and so just started with a much smaller acid base.
And so while they've had I'm sure a decent first quarter it's not it's coming from
a smaller asset base, right? If you do the old math, someone who's down 80 percent and then makes 50, that 20 goes to 30 and they're still down, they're still down 70 percent from the high, right? When you have losses like people did last year, it takes a while to kind of rebuild that.
or asset base, right? If you do the old math, someone who's down 80% and then makes 50, that 20 goes to 30 and they're still down 70% from the high, right? When you have losses like people did last year, it takes a while to kind of rebuild that.
What's promising and what has driven crypto broadly this year is two things. One, all the selling that needed to get done got done. There was so much bad news. If you had to sell between tax law selling and just the nervousness of, oh my God, this thing could go to a thousand. People were in sheer panic.
You had seller's exhaustion. But you've had Asia reopen. China has post the Xi protests around COVID zero. China took the regulatory boot off the necks of their tech companies and that includes crypto. So you're seeing with Chinese traveling, you're seeing.
you know, more activity from Asia. And you're seeing retail who is just resilient. They believe in this space. And it's one of the things that drives me crazy with our politicians who try to be paternalistic and say, we need to protect them.
Retail, I said it again, Bitcoin and Ethereum have been the best risk adjusted investments over two years, three years, four years.
this year, year to date, and retail gets that. This has been their way of participating in financial markets, or one of their ways, and a lot of the...
the price appreciation is coming from retail. And so we see that not directly, because we don't do retail directly, but we do a lot of B to B to C, we see it through counterparties of ours.
But the market feels strong and when I look at it technically on on you know charts. We've had big weekly closes I'm surprised to hear myself say this given where my mindset was In late December , but it would not surprise me if we were substantially higher
three months, six months, nine months from now. Great, thanks. The next question comes from Bill Papenostassio with EFL. Please go ahead..
Hi, good morning everyone. Thanks for taking my questions. Just wanted to focus on the infrastructure side of the business. The company is now guiding towards a 4.0 exa hash hash rate under management by the end of the year and an increasing portion of that is expected to be derived.
Yep, so you have those numbers right in terms of what we're guided towards to the end of the year this year.
The strategy there in the mining business was really solidified at the end of last year when we made the strategic decision to jump in and purchase Helios. So point one on the strategy was vertically integrating ourselves in the business was really something we decided was to do something that was really good for us. So we decided to do something that was good for us and that was to do something that was good for us
was critically important if we were gonna stay in the business because controlling our own destiny from a counterparty perspective, being able to be the manager of power, the number one input cost in the mining business was something that we've just seen market participants whiff on over and over again over the last few years. That was not something that we were gonna do.
believe that asset is one, located in a really attractive.
regional area that has long-term positive power dynamics for us because as you point out as you think about the Bitcoin mining going forward as it relates to the having over time and competition coming in what really matters is having a very efficient low-cost operating site with redundancy that can always have up time.
That investment in ASICs is the investment today we're prepared to make in terms of allocating our own capital to the ASICs specifically. Getting those ASICs online now in our new data centers that we own is going to be the process in 2023. That's part of the, when we talk about the ramp up.
to ultimately being roughly 50-50 self-mind hosting. That's our own ASICs we've already owned sort of coming in and being energized. We like the idea of having a balanced mix of our own ASICs and having hosted clients. We think that that is a smart...
to balance capital investment in the space, to add in clients to the Galaxy platform overall. It plays into the story of having a virtuous cycle here at Galaxy where you can have a client who, for example, hosts...
a number of basics at your data center, but then also as a client of the market's business to manage its liquidity as they mine Bitcoin, to hedge exposure, forward production, et cetera. And so, um,
Yeah, our core tenants are vertically integrated, being a low-cost center, aggressively managed costs from a power management strategy, and then balance our own capital investment with having clients who have their machines that they've invested capital in come host with us and so we can have a balanced mix of capital light and capital intensive profitable streams going forward. That's the plan. Thank you.
Thank you, Chris. I appreciate the color. The next question comes from Rich Ropeto with Piper Sandler. Please go ahead. Good morning, Michael and team. Thanks for the assessment of regulation you did in the prepared remarks and contrasting what's going on.
in the US and overseas. And I guess with your title too, you offer some balance, some optimism. But I guess my question Michael is, when it comes to the regulatory environment here in the US, and you being a spokesman to the industry, it appears like we're at rock bottom. Maybe the best thing is that it is so bad.
And then I guess the other part of the question is, you know, you express some optimism, but, you know, where the institutional adoption, you know, do you think that they're getting, you know, seeing the same things about that you sort of outlined in your title, The Good, Bad and Ugly?
And then I guess the other part of the question is, you know, you expressed some optimism, but, you know, where the institutional adoption, you know, do you think that they're getting, you know, seeing the same things, the balance that you sort of outlined in your title, the good, bad and ugly? Yeah, it's a great question. So.
Well listen, we have checks and balances in our government and the Republicans on the House, they are certainly more pro-Bitcoin, pro-crypto than the Dems at this point. And there are lots of vocal spokespeople. Tom Emmer, if you follow him, he's the minority whip, I'm sorry, the majority whip right now. He's on the side of fairness for Americans, right, that if I want to store some of my hard-earned wealth in Bitcoin, it should be my right.
I do think you're going to see no legislation go through that really harms the industry. And then we've got the courts. We will watch these court cases very carefully. There are a bunch that will come up. You know, judges... We'll watch these courts go through that really harms the industry.
Generally, you've got half Republican, half Democrat appointed judges and most of them are independent thinkers and not that political. There's some political judges on the fringes, but broadly our judiciary is an independent acting body. And so while...
Certainly it feels like the Biden administration, and this feels like it comes from Elizabeth Warren, who's been very vocal, you know, on Twitter and in speeches about hating crypto. And, you know, SEC Chair Gensler is very close to Elizabeth Warren. And so you can kind of, you can kind of at least guesstimate where this comes from, has not been helpful.
you know, there's an election cycle coming up. And so I think it's a stalemate with constant little punches. I don't think you push the thing over the edge where it unravels. And partly because the American voter cares a lot about crypto.
and politicians get that. It was funny, before Sandbank and Free, all the Democrats were coming around. I was in DC, I did the rounds, we did a, we sponsored a black blockchain initiative at Howard University and, you know, Cory Booker was there and, you know, there's the Gilda brand.
They understand crypto, they get it, they like it, they want to make sure it's fair for everyone. And so, this is a moment in time, there was a vacuum created.
with the sandbag and freed. I mean, it was embarrassing for people, right? He was Biden's biggest donor. He was a huge donor of the Democratic Party. He was very close with the SEC and they fired their number two guy at the SEC because of it. He was close with the CFDC. And so in a lot of ways, the whole.
The whole, uh...
group got egg on their face you know all through this one guy and it just allowed this vacuum and I don't think that lasts forever as well as you know America's competitive at its core and to see this business going to Hong Kong and Abu Dhabi in Europe
at one point starts pissing people off. So, you know, the crypto industry, I remember, give you one metaphor, I was on TV randomly when they decided to try to push wrestling out of the Olympics. And I remember making this quippy line, I was like, maybe the stupidest thing I've ever heard is someone wanted to pick a fight with
400,000 wrestlers around the world. I feel a little bit the same thing, like picking a fight with this community that really believes in technology, that you've got over 250, 300 million people around the world, 50 million Americans that care desperately about crypto, that care about this new way of potentially orchestrating their finances in the financial system.
So picking a fight it seems foolhardy and I think that in the long run wins out.
Taking a fight, it seems foolhardy. I think that, in the long run, wins out. Thank you, Michael.
The next question comes from Owen Wau with Oppenheimer. Please go ahead. Good morning and thank you for taking my question. Just going back to the previous question, could you please talk about how these regulatory regime could potentially impact your priority this year?
You mentioned the profit in the first quarter, but can you also talk about any other potential opportunities for Galaxy Digital this year? Thank you. Yeah, listen, I mean the regulatory regime, while it makes it harder for us, it makes it harder for lots of people. And so Chris gave one good example of...
the profit in the first quarter, but can you also talk about any other potential opportunities for Galaxy Digital this year? Thank you. Yeah, listen, I mean the regulatory regime, while it makes it harder for us, it makes it harder for lots of people. And so Chris gave one good example of, you know, we have good banking relationships.
and some of our competitors did it. So that in the short run became a competitive, a short run competitive advantage. I think banking will be an issue for lots of people without big balance sheets, without reputation, without connectivity, it's just harder for people to get banked. And so us figuring out how we can fill that void. In the long run, what fuels any new industry is capital.
And so one of the real tricks is how do you bring capital into this space, right? If we're going to lend more capital, how are we going to get that capital to lend? I think the first step is going to be from this crypto community itself. And it's tapping the trillion dollars worth of crypto wealth out there. And doing that in very direct and smart ways.
And over time, capital looks for returns, right? With short term rates at 5%, you know, if it's growth equity or if it's crypto, there's just a higher bar to be able to pull in capital from people that are used to making that asset allocation decision. But I think, you know, I think, you know,
you hit an equilibrium and you start growing from that. And I think we kind of bottomed out. So that's the real trick. We think, you know, I mean Chris Ferraro came from a cap structure, credit background. We think we understand how capital moves and how you can structure things better than most of our peers in the crypto space. And so we think there's just going to be an advantage of being
thoughtful and having a lot of knowledge and history of how to operate in challenging markets. The only other thing I'll add is while it's hard to see right now where we're all sitting and where the market is sitting, we think that regulation ultimately long term is going to be our moat.
it's gonna be the thing that really catalyzes all of the headlines that you've seen about institutions coming into crypto, about 90 plus percent of custodians and custodial bank clients wanting to be in crypto. It's gonna...
Regulation coming into the fold in the US is going to catalyze the real wave of institutional capital's comfort level of operating in the space and We have built our business to to fit into whatever regulatory regime comes
Now, that takes, as I said, a lot of planning and then re-planning and then re-filing and re-licensing and that's fine, that's what we're prepared to do. Ultimately, we built the company with the mindset of that's gonna be our boat because as it comes, we're gonna be the company in the space that has followed the rules and that has built an institutional grade platform, a table of surf clients when it went.
I want them brought to justice. I want them put out of business. They've cost me money, they've cost our investors money, they've cost me unbelievable headaches. And so, I in some ways welcome the sweep of the bad actors. And I think that's a really important part of the conversation is that we're talking about the fact that
What I don't welcome is this idea that you're going to throw the baby out with the bathwater. I referenced Katie Hahn's editorial. Like this is a real technology that people care about. This is a real alternative to a way to save money in a world where it feels like the dollar will be debased or all fiat will be debased.
It's a real way of monetizing IP, NFT space and lots of others. Like this isn't Tulips in, this is a real technological breakthrough. When I think about AI, it shocks me that we're talking so much about crypto regulation and nothing about AI regulation. I mean, I think.
the government's got it completely upside down. And in lots of ways, one of the best use cases for crypto is gonna be identity around AI. Because pretty soon you're gonna get fake Mike Novogratz's hopefully with hair. Like the deep fake world is gonna be so much more prevalent and so how do you prove identity in a world like that? Crypto's gonna have, and blockchain's gonna have a huge role in that.
completely upside down. And in lots of ways, one of the best use cases for crypto is gonna be identity around AI. Because pretty soon you're gonna get fake Mike Novogratz's, hopefully with hair. You know, like the deep fake world is gonna be so much more prevalent. And so how do you prove identity in a world like that? Crypto's gonna have, and blockchain's gonna have a huge role in that. And so.
You know, it is dumb to think that we should cash this industry because Sam Beckman freed in the Bermuda shorts period Thanks a lot The next question comes from Joseph Buffy with Ken accord, please go ahead Hey everyone. Thanks for taking my question here this morning Just you know be interesting. We kind of have talked about it a little bit here and there during this call, but
Just, you know, what are, you know, if you look at the current environment, it could not be more interesting. You got rates still rising. You know, we've got this regulatory backdrop. We've got a lot of other asset classes not performing as well as ETH and Bitcoin. And so we've got kind of a, you know, we've got a lot of moving parts all over the place. What are institutional clients saying like right now in real time with Bitcoin where it is in its outperformance?
on one side, but on the other side we've got these overhangs on regulatory and this dynamic interest rate environment. Thanks a lot. Yeah, I think if you're talking like macro hedge funds, almost every macro hedge fund I know likes gold and likes Bitcoin.
It's a pretty straightforward bet. You've got geopolitics.
I mean, you literally had the president of Kenya standing in front of his country telling his countrymen to sell the dollar. That's unprecedented.
And you know this war between China and the US with Russia as a proxy is going to push the gold narrative and the digital version of that as Bitcoin.
And so I think from a macro investor perspective, it's very clear.
From a macro investor perspective, it's very clear. From a...
I work at the endowment or the pension, that game, everyone slowed down a little bit. And you've got a couple different buckets. If you invested late in the cycle, you have burned your hands and you feel dumb and you're...
and you're just watching. If you were just getting started, people aren't dipping their toes in more. I mean, Chris mentioned an investment from Texas Teachers in one of our funds. That's a very positive sign. But we're not seeing a stampede there by any stretch. The institutional base is still slow. What would change that? An ETF.
Right? And, you know, follow the news or follow the judicial news. You know, Grayscale had a pretty significant short term win in their fight with the SEC about, you know, approval of an ETF. Where?
the judge basically said, what are you guys talking about to the SEC? You approve the futures ETF and not a cash ETF? That just makes no common sense. And the SEC was like, uh, uh, uh. And so we'll follow that. Like you could legitimately see, you know, an ETF this year and that would be a huge game changer in terms of institutional adoption. Because the institutions want to participate, they just don't want to.
participate and look them. And so because, again, you know, so much, Sam Eggman-Fried, may he spend his days staring at his navel, so much was set back by that event. And it just takes time to heal.
Thanks Mike. And the last question today will come from Kevin Deedy with HC Wainwright. Please go ahead.
Thanks for taking me last minute here. Mike, when you look a little bit deeper, maybe a little more granularity on where you expect or what you've seen in the form of SEC pushback, I mean, what we've seen historically in the space is more push on, again, lending.
people have had is, you know, what constitutes a security and what doesn't constitute security. And we have the Halley test, which is a...
early century rule that doesn't seem to fit the crypto architecture nearly as well as one would like. And the SEC has been very reticent to say this is a security, this is not. Gensler at times says that they're all securities and then at times, you know, Bitcoin's not and Ethereum's not, but Ethereum might be. And so there's just been a lack of clarity.
And so for companies, and you can follow this live in the Coinbase, I think it's interesting that Brian Armstrong in Coinbase, it looks like plans to litigate this in the public forum, to say, hey, we've gone to the SEC and said, tell us what our security is, and they won't. And so there's this kind of Mexican standoff. And what we've been asking for all along is just clarity. Like, give us a regulatory framework and we can work with that.
And so, you know, Galaxy has a really detailed process of what we decide to participate in with our clients. And, you know, there's outside attorneys, there's a whole process that we go through it. We think we're doing the right thing. And, you know, we'll see. And so, it's a bizarre position to be in where you've been doing this.
since 2017-18, right? So it's not like this just happened. There are five, six years people have been going there and saying, well this is our process, what do you think? And not getting any clarity back from the SEC. And it's been disingenuous where they say, well just come and register, you can register online. It's actually not the case. There's lots of nuance about qualified custodians and not qualified custodians.
It's a space where I would have hoped our government and our regulators would have sat down, worked with the industry, understood it's a new industry and there's a lot of nuance to it, and to come up with rules, both for custody, for trading, for who regulates what. I mean, one of the issues is if these things aren't security the SEC has no standing. And so they're in this very bizarre position of what we're going to come up with. of.
playing poker in essence with do they have the right to regulate or not. They're not easy answers and politics doesn't do well with nuance and this has been politicized which is damn unfortunate because you need really smart people thinking about how do you take this new industry create a set of rules that allows.
legitimate players to forward this industry in the US and grow it and it just hasn't happened.
Thanks so much for the call, Mike. This concludes our question and answer session. I would like to turn the conference back over to Galaxy Digital CEO Michael Novogratz for any closing remarks.
Guys, I appreciate all your time this morning. I hope you catch some of our enthusiasm. Again, it's not all wine and roses over here. It is tough sledding, but we're optimistic. We have a 400 person workforce that.
shows up, you know, excited to work every day and is trying to forge ahead. I do think, like I said, this is a year we will surprisingly have macro tailwinds and big ones that I think allows us time to continue to build and by 2020
Hopefully, the regulatory regime is starting to shift, but more importantly from a Galaxy perspective, our tech build comes online, our mining comes online fully, and you start seeing the fruits of all our investments that we've been working really hard on.
I'll leave it at that. Thanks a ton and we'll be back. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. You may disconnect.