Galaxy Digital Holdings Ltd. Q1 2023 Earnings Call
Good morning, and welcome to Galaxy Digital's first quarter 'twenty Q3 earnings call. Today's call is being recorded if you require operator assistance. Please press Star then zero at this time I would like to turn the conference over to ulcer Ballard head of Investor Relations. Please go ahead.
Good morning, and welcome to Galaxy's first quarter earnings call before we begin. Please note that our remarks today may include forward looking statements.
Actual results may differ materially from those indicated or implied by our forward looking statements as a result of various factors, including those identified in our filings with the Canadian Securities regulatory authority on SEDAR and available on our website or in future filings, we make with other securities regulators.
We're 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 or its affiliates to buy or sell any securities including Galaxy Securities.
With that I'll turn it over to Mike Novogratz founder and CEO of Galaxy guys. Good morning, if you're not in New York, It's a beautiful.
Sunny morning here, unless it's nice to show up with a good first quarter earnings.
I'm going to let Chris Ferraro and Alex.
I spend most of their time, taking that victory lap and and really going into how each business is doing.
And we're going to get more of a high level view, which is gonna be more nuanced.
You know the good the bad and what were how I'm thinking about this whole business.
Listen I used at the beginning of year right I I said to the firm and I've said to you guys in the last conference call that 2023 would be a year, where we had to chase down loose balls, we would need to be scrappy, where we would need to hustle our way.
Uh huh.
Two two a decent year, while the entire time, we were building and building for what we think is a really exciting future and that that view hasn't changed it a bit.
There had been some good developments in crypto right. The claim was the single best performing asset on a risk adjusted basis in the world in the first quarter.
65, 70% up.
That came from a lot of different reasons the market had been too pessimistic a perception that the fed was getting close to the end of the hiking cycle a banking crisis in the United States are all reinforcing why people cared about crypto and so that's the good and I think you're going to continue to see.
Macro developments around hard assets like bitcoin be a positive.
And so when I think about my confidence in the future of bitcoin and the future of of Crypto would he hasnt waned.
I think about stable coins last year's seven trillion dollars.
Of settlements unstable claims that's bigger than visa and Mastercard.
We don't use a lot of stable claims here in the United States, but travel abroad. When you look at places that are Unbanked stable claims are a very important part of their ecosystems.
And we do think both in Europe with the recent regulation.
And at one point in the United States stable claims are going to be more and more important.
Think about it in a really simple way if you get to a point, where you have a stable claim that pays interest and you give everyone. Just a crypto wallet you really have solved the unbanked crises right and everybody has banking.
And that's a future that's so intuitive it's going to happen is it going to happen next week no.
But we're building to that future and so when I keep thinking about this business and what I keep trying to drive our firm two is what's the world going to look like in 'twenty 'twenty four 'twenty five 'twenty six.
And you know.
When I think of that I'm really optimistic when I look at the short term, we still have a regulatory headache in the United States I don't see that breaking anytime soon.
And that.
We still have a hangover as well from a lack of trust started the the denting of trust that F T accident and other bad actors in the space created and so.
Allocator adoption is slower than we'd like.
We're not seeing the big institutions come in writing big checks into crypto, they're all still doing their homework, they're all still following it but that is Florida I expect it to continue to be slower but.
But.
What I would call infrastructure adoption is picking up right. Chris is going to talk about the partnership we just launched with Dws teed up yes, it's a trillion dollar asset manager in Europe , They're C. E O is really geared up.
So they can crypto part of their offering and for US that's wildly exciting.
And so in some ways. It's this tale of two cities. It's it's great news on a medium term basis.
But it's going to be tough sledding in the short run what does that mean for us it means coming to work early stay in light hustling and mostly I think our earnings this year are going to be driven by our trading business.
All of our businesses are are doing well and building, but in a year.
Where we are mostly investing in our you know our.
Galaxy Prime offering that's not going to show revenue to up to two two till the end of this year at the beginning of next year and so it's gonna be the trading business that most likely carries us this year.
You know, we've just brought in a new group of our traders in Hong Kong. We're really excited about that we do think this is a global business and our intention is to continue to grow outside of the U S. At a much quicker pace than we were growing in the United States. Some of that most of that is regulatory but a lot of it's also opt.
<unk> right the Asian markets.
Take the crypto, there's quick adoption, there and now we're seeing more and more in the mid east in Europe .
So.
Well I frame it together.
Like I said, where we're driving ourselves.
Two of 'twenty 'twenty, four 'twenty twenty-five build and we're investing for that future. We have been good enough lucky enough to have a balance sheet that allows us to invest a.
When I look at Galaxy's head count.
We have more people today than we did a year from now a year a year ago, and that's you know with acquisitions like G. G K eight and Helios, a the mining operation down in Texas.
And so we're significantly bigger than we were where most crypto companies and most of our peers are a lot smaller we certainly tightened our belt and cut costs and so we've got a bigger footprint with a very similar or even lower cash burn our Cas expense.
That's being funded by you know positive operations and good trading we still have a one 1.6 billion.
In a dollar's worth of partners' equity and so and a good liquidity position and so we feel like.
You know what we can grow.
With with our own balance sheet and with our own profits.
<unk>.
And you know that's that's pretty much out of this this is gonna be I wish I could come and Bang Bang the table and say, there's this giant tailwind that's going to lift all crypto boats I think.
You know, we're pretty sober in our outlook are in.
In the short run.
But we're pretty optimistic in the long run with that I'm going to I'm going to turn it to Chris to talk about the first quarter I said, he's got the the fun job because we really feel like we had a great first quarter and the firm all worked hard and the results show for that.
Thanks, Mike and I and I apologize in advance I'm, a little under the weather so everyone bear with me I'm today.
As Mike noted in his remarks, we're relentlessly focused on our three strategic priorities to drive growth in the business building and watching Galaxy, one scaling the asset management business and integrating and scaling our recent acquisitions and we're really excited to share that we made substantial progress in executing on these priorities in Q1.
On the last earnings call, we provided an update on the development of Galaxy, one and the steps we are taking to establish the product as a leading institutional grade digital asset services platform.
We're excited to share that in the first quarter, we made strong progress towards our M. P. P watch we've.
We've completed over 30 demos with key target institutional customers and feedback has been overwhelmingly positive with the majority of these prospective clients requesting documentation to onboard.
We continued to add new jurisdictions and can now operate galaxy one in 35 states in the U S and eight key international countries and are actively pursuing additional regulatory licenses as needed and we are developing our automated margin trading offering which will supplement our already sizeable and active trade financing business that we do today, which we intend to launch in a measured way.
Over time with a keen focus on risk management and proper controls.
As we build and prepare for the launch of Galaxy, one client onboarding and our existing trading business continues to trend positively with more than 30, new counterparties, having onboard to the desk in the first quarter.
More broadly in our global markets business on the back of a record year for our investment banking team, we advised Pantera, leading blockchain asset management firm on the sale of its stake in European digital asset exchange Bitstamp to ripple labs in Q1.
Executing on a deal of this complexity post F T X reinforces our position as a leading investment bank for digital assets with unparalleled sector knowledge and execution acumen.
And the investment banking teams pipeline remains strong with a dozen active mandates being pursued right now by the team.
We're excited to continue to update you on the progress here in this business.
Galaxy asset management in terms of our asset management business, we've had a very active start to the year consistent with galaxies business re segmentation. We've also simplified our asset management architecture to Orient around three key strategies passive active adventure.
As we noted on the last earnings call within our passive sleeve. We are keenly focused on leveraging our regional partnership model to expand our product reach.
In line with this commitment we recently announced the partnership with Dws to develop digital asset management exchange traded products in Europe .
Yeah.
Dws is nearly a one trillion dollar asset manager the third largest ETF provider in Europe and is more than 60 years of investment management expertise. Our partnership represents the coming together of two leaders in our respective sectors and is a significant step forward in the institutionalization of digital asset markets.
Galaxy asset management now has a presence in the top five crypto exchange traded product markets globally through partnerships with leading trusted regional asset managers that include dws in Europe .
Global asset management in Canada, and Itaipu in Brazil.
Don't forget we also have a partnership with Invesco and the U S. The largest non crypto ETF market in the world, but continue to wait on regulatory approval of such an investment vehicle.
Within our active sleep, our liquid Alpha fund is coming up on its one year track record and has generated more than 550 basis points of alpha net of fees for our onshore class of investors relative to bitcoin from inception through April of this year.
And we are continuing to explore new liquid active risk managed strategies, both quantitative and fundamental as we look to build out our actively managed product suite.
Finally on the venture side, we successfully completed the migration of our venture investing team into our asset manager, which includes 343 million of previously reported balance sheet and investments that are now captured as a U M.
Our unified venture platform now consists of our interactive venture franchise, our venture fund of funds business and these newly migrated crypto venture investments, which collectively now represent 1.4 billion in venture assets under management.
Galaxy Central positioning in the digital asset ecosystem provides an unparalleled sourcing funnel at a differentiated ability to underwrite individual portfolio companies and correctly priced portfolios.
Our team has made more than 300 direct venture investments and 35 venture fund commitments over the past five plus years no other investment manager in the world with expertise in crypto has this access expertise and vantage point.
Yeah.
Finally, our digital infrastructure solutions group, our third operating business is continuing to gain momentum following our acquisitions of Helios N. G. K, let's start with money. We've already reached approximately three X a hash of hatchery under management across our proprietary mining and hosting footprint doubling where we were at the end of Q4 and putting US ahead of schedule in achieving our.
We'll have four exit hashed by the end of the year.
Our current halfway under management represents roughly 1% of the total bitcoin network hash rate, even with the continued rise of hatch rate over the same timeframe.
As a reminder, our proprietary mining operations represent approximately 30% of our hatchery under management in our hosted mining business represents the other 70%.
At Helios, our flagship mining site, we have been focused on retrofitting and stabilizing the asset laying the groundwork to allow us to achieve our long term plans to scale the facility well beyond its current capabilities.
We executed the first quarter with precision and feel really good about our operational upgrades leading into the summer months.
Our team is now focused on expanding the existing datacenter to roughly 220 megawatts of operating mining capacity, which will require an investment of approximately $20 million to $25 million and which we expect to achieve by early next year.
I'm also very excited to share that just last week, we received approval from ERCOT and the wind electricity coordinating council work to scale up to 800 megawatts at the Helio site over the coming years, which is over which is approximately four X our current electricity access.
We are in the very early stages of planning this expansion, including evaluating various financing options.
With respect to our smaller mining facility in Diebold, Texas half of that site is currently energize and operating and we are on track to bring the full 16 megawatts online by the end of the second quarter.
We continue to actively manage our power cost exposure and since our previous earnings have increased our hedge position keeping our effective cost of power extremely competitive and our marginal cost of mine low.
In addition to mining we're also operating in providing other services at the blockchain infrastructure. There. This includes running validate or nodes for purpose state consensus mechanisms and providing self custodial technology solutions via G. K.
We're excited to announce that since the close of the <unk> acquisition in February of this year <unk> has won four new clients already to reach 11 total clients, including Galaxy and has also seen a significant increase in the pipeline of potential enterprise clients G.
<unk> technology will accelerate galaxies product innovation and development, including the ongoing build out of our galaxy one offering.
There's a huge opportunity for galaxy to build and invest in technology that powers, the digital asset ecosystem and I'm incredibly bullish on the long term growth of our digital infrastructure solutions business I'll now turn the call over to Alex to cover financial results and then we'll jump into questions.
Thank you Chris good morning.
We had a strong quarter Galaxy reported net income of $134 million in this quarter compared to a net loss of $288 million for the prior quarter.
On a comparative basis, the preliminary first quarter results, we provided on our last call based on the information through March 24th for the full quarter before taxes and noncash equity compensation, we earned $163 million.
Compared to our estimate of $150 million.
Most of the beat was driven by strong last week of the first quarter.
Correspondingly our equity was $1 6 billion at the end of this quarter, an increase of 158 million from year end.
We ended the quarter, we stood a liquidity of 810 and $14 million consisting of 400 million in cash and equivalents 209 million of non algorithmically stable coins predominantly U S. D C.
Issued by Circle, and 210 5 million of net digital assets, excluding stable coins.
On income, but our combined cash and stable coin balances were down by $214 million.
From year end, primarily due to a larger amount of outstanding fully collateralized Fiat loans to our customers GK eight acquisition and investments.
And this quarter, we continued to navigate discombobulate Shin and commercial banking without issues.
Now I would like to highlight changes made to our reporting segments.
To better reflect developments in our business from organic initiatives and from acquisitions, we adjusted our financial reporting into three complementary operating businesses.
Alex the global markets Galaxy asset management, and Galaxy digital infrastructure solutions.
Galaxy Global markets.
It was a little bit of background music consists of trading and investment banking, which were standalone businesses prior to this quarter.
Galaxy asset management consists of passive active and venture investment strategies and now include select venture investments that were historically reported as principal investments gallon.
Galaxy digital infrastructure solutions consists of our proprietary and toasted bitcoin mining services, the newly acquired G. K, eight technology and self custody capabilities and valid data services.
These segments have been reported in our financials, starting with the first quarter for additional detail on re segmentation. Please see management's discussion and analysis for this quarter now back to the operator for questions. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if.
If you're using a speaker phone 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.
Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from.
Deepak Kaushal with BMO capital markets. Please go ahead.
Oh, Hi, good morning, everyone. Thanks for taking my question.
Mike Chris Alex just just a question on the dws opportunity in Europe .
You know what with might be getting ratified do you have a full regulatory green light in Europe to launch it maybe you can just discuss some of the milestones.
We should expect in terms of the partnership.
How it should progress before.
Yeah, Hey, when it starts to ramp up.
Yep.
Hey, Deepak How's it going.
Thanks for the question short answer is yes, we have full regulatory greenlight to proceed the.
Where we're gonna be launching the product throughout Europe .
And in the markets that represents over 70% of basically all exchange traded products.
<unk>.
Ex U S in the world.
We're gonna launching in geographies that are actually already have a fairly rich offering of different forms of structures of crypto ETP products.
In the market today, and so unlike the U S, where we're where we're waiting for an.
And a definite time period for some approval to actually launch the product that they're there. There's there's there's a small but already approved and fairly robust marketplace. We just intend to do it better and bigger together with AWS.
In terms of product roadmap yeah. So you know we've we've we've we we think that the partnership together with them that was the first step in parallel we've been we've been you know along with that comes with a base product suite that we think addresses needs in the market that in the various markets in Europe that aren't being addressed yet today.
We intend to launch those products towards the back end of the year because in first where we're both working with dws to lineup global service providers to support the products and and set up the platform to be actually be able to launch them and so you'll you'll likely see as we get into the back half of the year.
Announcements from us some marketing globally about it and ultimately the launch of the products towards the back half of the year.
Okay, and then if I could ask a follow up I understand dws partnership in Europe . Its exclusive so so you won't be doing anything else with anyone else in Europe .
But how do you think about organic growth versus inorganic opportunities is this purely market.
Market share gain.
Obviously in an expanding market or other opportunities for for consolidation.
In the U T P space and dishwashers.
Yeah.
I'll I'll I'll take a quick crack at it first I I think it it isn't exclusive partnership in the region for those products. We have we've had the privilege of being in a seat where we were able to look at all the different opportunities out there globally in terms of potential platforms coming up for <unk>.
So potential investments.
Going this route where we.
Are actually partnering with a global institution, helping develop and launch the product manage it and and ultimately Oh and our partner share of the economics on a go forward basis is is what we felt was by far the highest returning and strategy for us rather than.
Then inorganically going out and buying existing products.
Also because of some of the existing products in the market. You know, we we don't feel like our setup and structure to scale the right way for the future as as global adoption really starts to hit pace. So they are out there. We don't have we didn't we don't currently have any plans to do anything large inorganic on the on the global E. T P.
Front, we think the right strategy is organically build and partner with with our institutions, who have brand that can help us on the distribution front, particularly internationally.
Okay. Thanks for that I'll leave it at that.
Good luck.
The next question comes from Chase White with Compass point research and trading please.
Please go ahead.
Thanks, Good morning, guys any color that you guys can provide on the P. P. A a that you guys have at Hilli is and what's kind of the power strategy is for for that facility.
Okay.
Sure.
Probably probably not specifically on the exact terms of the PPA, but in general our the reason why we were so attracted to the Helio site was it's it's location in ERCOT West.
And our view of of that power market over the long term and it and where prices will be on average over the long term with the goal of being able to access a consistently low cost power, which which is sort of the cornerstone of operating a good bitcoin mining operation. We we had to date generally.
Aim to to hedge out the vast majority of our <unk>.
Electricity needs with fixed price contracts that actually has been a a big benefit to the site, which the site was unable to access before us our stewardship with it and so our balance sheet has allowed us to actually do that which we then created value on day, one for the U S site, which are currently where it wasn't it wasn't unlocking prior to that and so yeah. So we're.
We're gonna take it we're gonna take it bit by bit and we're we're we're watching the electricity markets and but the goal for US is to really have a low stable input cost of electricity. So that we can operate the business as efficiently as possible and we're going to we're going to aim to continue to do that pretty consistently.
Got it and one more if I may I'm you know since your last earnings update.
Has there been any change in the banking landscape for you guys. I mean have you had any trouble with existing relationships or entering into new relationships with U S. Banks, just curious kind of how things have evolved there.
Yeah.
I would say there they're there hasnt been there hasn't been any any negative evolution since a lot of that those are the last time, we talked we have.
<unk> worked pretty hard in expanding our own banking relationships and being met with some success, but it's also on the flip side, it's not a floodgate of of our open banking relationships at the biggest banks in the world, So nothing negative nothing adverse, but but but pretty measured in terms of access.
The sector and so you know where we're leaning into again like we talked about last time. The fact that we do have those relationships, we are able to expand our relationships with our existing banks and add new banks to supplement it and so where we're leaning in fact that we are we are in effect one of the trusted nodes now in the crypto sector through which <unk>.
There are companies can come in and become a client and access our relationships and our banking rails effectively.
Got it helpful. Thank you.
Yep.
The next question comes from Andrew Bond with Rosenblatt Securities. Please go ahead.
Hey, good morning, So as you build out galaxy, one and work with institutional clients on the beta are what are these clients demanding in terms of the essential services and have you seen a shift in terms of what clients are looking for with regard to risk management.
Portfolio engineering tool similar to what they might use and tried by given recent events.
Andrew Thank you Matt I appreciate the question Yeah. So you know the the that there is a heightened focused on on all things counterparty and risk management and flexibility focused in crypto.
R. R. M. B P launch is meant to be meant to be pretty simple functionality, but addressing like institutionally built needs for clients and so it's meant to be trading access custody and reporting we think those are the basic fundamental building blocks of institutions accessing digital markets.
To your question you know what what one piece of that the custody piece clients are are asking more and more for multi custodial access which is a differentiator for us because unlike some of our other competitors. We don't we don't in house owner in exchange, we don't in house today own our own our own cost.
Odeon.
We're so with competitors their options are pretty motto line in and a singularly focused in terms of that counterparty Hum. Our plan is to offer multi custodial model, we're going to launch galaxy one to start with three different external custodians the theory being that clients can come in and they can.
Choose to allocate their assets between any one of those custodians. They can choose to either have omnibus accounts, where they can where they will eventually be able to add leverage to it or they can choose segregated accounts, where they can pick their custodian and for us the key for the build out is going to be when the when clients.
Come in and demand that we provide them accessibility to their custodian, where that meets where there's enough demand and a new large custodian, who we haven't onboard yet we're going to focus to plug that in and then the net that now becomes a another large custodian that every client of galaxy, one can that access and so I would say diversification of custody is a key one.
Certainly reporting in terms of trade reporting did I get my good did I get the right fills where do I get filled relative to the market are important and we're focused on that we think that's an important transparency tool that is generally not available in the market today. So things like that is what we're focused on.
Providing institutional clients.
Thanks, Chris and just the G. K acquisition has that enabled you guys to build faster and more efficiently given the team a tech you acquired them and you're caught out the recent client wins and a really strong pipeline. There. So is there any primary driver of that recent kind of uptick.
Yeah, I mean, it's it's really recent and so so we just we just closed in February and we're able to properly get on with with integration and and then actually plugging in their services and so we're we're a little over two months into that today, where we're fully integrated now as a firm which is the fastest we've done I think with any one of our tuck in.
Great.
We've got big hopes for G. Kit, we think there there's a there's a huge untapped market that is growing by the day in terms of.
Global.
Institutions, who are going to provide digital asset custody services to their clients on a global basis and in particular, because these are digital bearer assets. We think there's going to be many more of the of those of those customers globally than we would've seen in traditional finance Ngk's technology is.
He has built quite specifically for that client segment and so we really think we're on the we're where we've done this transaction at the right time on the front end of a global adoption trend that is going to be the embedded in bedding key material management technology into big global institutions. So we're really excited about.
That also.
Taking their key to their technology and plug it into inside of Galaxy, where we historically have used external vendors now we can use an internal vendor, which is a cost saving but also actually moves are our roadmap forward in particular now we're focused on using that to to access our defined markets.
And do it in a in a quick risk manage a regulated way, which is which is quite interesting, but we're on the front end of that because you know we're we're two months into into having integrated the company.
Great. Thanks, Chris Yep.
Yep.
The next question comes from Michael Legg with benchmark.
Please go ahead.
Thanks, Good morning could you talk give us a little more clarity on the direction, you're seeing regulation in D C.
What type of focus are you seeing there.
Any more color you can give us on what's going on there and then also how does it.
It relates to you've got your portfolio and the other investments with 800 million of liquidity can you just kind of talk a little bit of a pipe or whether they add on investments new investments and what you're seeing in your pipeline going forward. Thanks.
Yeah, maybe I'll take regulation and let Chris take a venture stuff what's in the regulatory landscape in the U S is not great.
I don't think anything will get done in Congress as session like Theres. Some small chance stable plainville would go through but you know when you look at the politics of the White House is.
Kind of putting the kibosh on anything and so I think we're going to continue to see the regulators are the S. E. T. S D C.
Regulate with with lawsuits.
And so the courts move slowly.
It's been.
What three years since the ripple law suit and we still don't have a judgment that will probably be the first judgment.
But I think this is gonna be a slow process probably until the election.
The good news is nothing bad is going to come out legislatively right. There is a pretty fierce.
Public and pro crypto side.
That is going to continue to I think hold the SEC chair to task.
With hearings.
And I don't think any bill bill on the negative side gets done and so it's a little bit of a stasis. That's one reason quite frankly that we are moving more of our operations offshore and certainly looking at the opportunity set I mean, it's it's sad and almost ironic that Europe , which was always seen as the.
The slow poke of innovation is is certainly a step ahead of the U S with with their framework they set up.
Hong Kong is becoming crypto friendly or crypto friendly or I should say and.
And then in places like Abu Dhabi, and Dubai are really pushing the envelope to create a robust you know crypto regulatory infrastructure.
And I think youre going to see.
[noise] businesses migrate there, which as you know frustrating as a as a red white and blue Patriot, but that's kind of a reality.
[laughter].
Yeah.
And then on the.
Mike on your question about about capital allocation and venture investing in and what we're seeing there.
Thank you Yeah, I mean, I think you nailed it you nailed it.
On what the dynamic there is the you know if you look at actually by the numbers we are.
This is Bob this is both in our <unk>.
Our previously balance sheet focused venture investing now in the asset manager, but in our in galaxies capital, making investment venture investments as well as our interactive franchise overall the pace of new investing has has fallen off quite dramatically here.
And that's not just in the in the first quarter that extended back to them too.
The fourth quarter of 2022.
We have been focused on.
Portfolio management work understanding, which companies who already had product market fit had traction who we think have the best founders have good businesses.
But but at some point, they're going to need capital and the capital markets in general and in Crypto, then more broadly adventure and more broadly in illiquid investing generally have have locked up quite good right and so for us rather than than blindly deploying more capital into new things.
We are spending all of our time assessing our current portfolio of assessing needs and planning for where we're going to back up the best companies. If if we get there and if they need it. The good thing was I think earlier in.
Uh huh.
Previous quarters are in late last year, we took a look at our portfolio on average across our portfolio, we had over three years of runway.
In terms of Ah at the portfolio company level. The expected needs you know, it's only been a couple of months since then that hasn't dramatically changed and so we built the portfolio to begin with with a heightened focus on those companies run ways I think that's going to pay off for us the flu.
Lip side of that is when you think about the offense where have we where have we been thinking about offense. We've been thinking about offense are primarily in the secondary market, which which is which is looking at the market where you've got a set up where you have a lot of asset owners not a lot of asset buyers asset owners, who who who would prefer to.
It'd be liquid rather than illiquid, and so who are willing to sell good assets at great prices and good structures and so on the offensive side, where we are spending our time is thinking about where can we be opportunistic and increase exposure for investors in our asset management business in great businesses at great prices and so.
We're really thinking about it like barbell from that perspective.
Okay. Thanks, guys appreciate it.
The next question comes from Bill Anastasia <unk> with Stifel.
Please go ahead.
Hi, Good morning, everyone. Thank you for taking my question just one here Oh, we've recently seen a significant demand for block space with the introduction of.
Of these ordinal BRC twenty's that have led to a substantial increase in transaction fees and of course, an increase in house prices in early may.
You know, but it's also causes a significant amount of debate in the community on whether you know the blockchain should be used to settle was there a J pegs I'm, hoping to hear more from your team on your thoughts on the matter and.
It's a long term implications to the network and in mining operators. Thank you.
I need Alex Thorne, our head of research on this one to get into the picky in detail.
Listen I think.
In the long run you're going to see level two solutions like lightning in bitcoin process most of those transactions.
It's intuitive sense.
People have a longer and don't want to pay high fees for small transactions and so that transition will happen. It will happen pretty quickly. It's the same thing we've seen on.
The theory of network with all its level two is inside chains.
And I think if you want to think about it conceptually right. The most important trends actions are going to get.
Hashed on them, most secure probably most expensive blockchain.
And as the need for a security decreases because of price.
General, sometimes price and privacy, you'll see them on.
Faster and and and cheaper James you know cheaper changed probably.
Just as like an intuitive way to think about it.
Most people didn't see the big claim blockchain as.
A blockchain that.
Fast things would be built on top of them because of the way. It was structured it's meant to be expensive because that's where the security comes from right. If it was cheap to run the bitcoin network people wouldn't feel comfortable putting you know the half a trillion dollars of value that's in there and so in some ways. This was a surprise it develop.
Those are kind of dealing with this as we go that you would have you know these two use cases pop up so quickly this year, where most of it because most of that mindset had been you know being built on a theory.
This is just a transition period.
But we will we will we will get Alex to put out a a more focused note on that because I think it's a great question.
Thanks, Mike really appreciate that color that's all I have.
The next question comes from Devin Ryan with JMP Securities. Please go ahead.
Hi, This is actually Michael Falco on for Devin Good morning, I'm, just one for me on the investment banking business thinking about the macro environment. There it's been a challenging backdrop backdrop for fundraising in M&A just broadly speaking let alone in the digital asset space. You know that being said you did mentioned an active pipeline with I think it doesn't mandates. So I was hoping you could.
<unk> a bit more color on the level of town on the level and tone of client dialogues that you're having and how that has evolved and then maybe you know have there been any notable shifts in activity or focus from recent quarters and how are you thinking about the outlook from here.
Sure.
Yeah. So you know the the.
So 2022 you know just just to level set was was a record year really for our investment banking business and nine deals we generate three X revenue from the prior year our.
Q1 has.
Being at the same pace in terms of.
Q1, we closed one deal the pipeline leads us to believe that 2023 is going to is going to have a similarly paced year, probably even better in terms of number of mandates we're working on and things we actually get to the finish line on the color I'll give you on it though is capital raising is very difficult and so from a client perspective.
Most mandates look like a mixed bag of either capital raising or M&A or or are on the sell side to sell and it and it sort of depends on where the demand is on the investing side as to whether or not a client ultimately is going to be able to go with their their own.
Or look to have a strategic tie up and so from our perspective, having the team that has the ability to have connectivity to investors, but can also flip pretty quickly to thinking about corporate structure and strategic transactions and adding strategic value to the client outside of just just raising money at.
Paramount for us to be successful this year and so.
So that's really what the pipeline looks like and what I think the business is going to be this year, which really plays to to a firm like ours strength given given the diversity of skill sets.
The team has here.
Great I appreciate the color that's all for me.
The next question comes from Rich Repetto with Piper Sandler. Please go ahead.
Yeah, Good morning, Michael and team congrats on the profitability side.
Mike I have a follow up question on the regulatory comments. He made earlier from a previous to the earlier question, but I'm going to just read a sentence that Brian Armstrong from Coinbase had in its sheer who.
Hold the letter you said substantive bipartisan legislation is already taking shape and we believe we could see real action before the end of Q2, so that was a pretty sharp contrast.
To your comments earlier and just trying to see have you heard of that and he wouldn't address any details of that on his call, but have you heard about any really strong bipartisan movement certainly didn't sound like you know premier.
Earlier comments.
There was and Brian's very well plugged it in D C. As well there was optimism that the stable claim bill could make it through.
Probably before Brian's call and since then I don't know when it's called was but but that early optimism was kinda squelched.
When the White House, you know through their channels called some key dams and said hey back down.
And isn't the Democratic Party right now doesn't feel they've got.
A lot of Mojo on their side when it comes to crypto because there they are painted with sandbags and freight I mean.
So there's a Christmas card of say I'm sitting on Joe bite us laugh.
[laughter].
I mean, I'm I'm I'm half teasing, but politics are politics and this is just political right. It is frustrating as heck because most Democrats had realized previous to F. T X that there should be a bar piracy bipartisan issue and it's an issue that voters care about and so why piss off voters and so.
The Denver, all onsite on crypto and then they just felt foolish and felt burned and it's not just the politicians right. The regulators were so tight with MTX and salmon in particular that you know as the unofficial spokesman for our unofficial unofficial shelf annoyed at spokesman for our industry. He really set this industry.
And it just takes time to heal.
I have met with lots of politicians in the last six.
Six weeks.
And the advice from the wisest of them was it's just going to take some time for the stick to.
To wear off and for the wounds to heal and so it's frustrating attack as a guy who was running our you know 424 person business in the U S.
But that's just where we're the politics are right now and that hope and it was hoped right the.
Ah.
It looked like you know that it could get done just gets snuffed with one phone call and so I think where I would put it at less than a 15% chance that that bill gets through and it's stable and those not going through and it's a shame because the United States needs a stable plainville for lots of reasons a national strategic interests.
China's coming.
Already with their their stable point and in Europe has got a plan and that'll be mid 2024, but if you think about like the history of <unk>.
People and in countries that don't have stable regimes, you know they've always had dollar bills and their pillowcase right. They're more hundred dollar bills in circulation overseas than there are one dollar bills that have been printed right. The U S. Dollar has been the saving mechanism for so many people around the world and as we move into a digital age.
If it's not a digital dollar it's gonna be a digital renminbi or a digital Europe and China's sees this really clearly and it's shocking actually how how the U S. As you know schwake swinging and missing here.
And my sense. It goes right to my follow up.
No your red White and Blue ex military Guy like how close do you think are we are proceeding sort of leadership in this you know asset class permanently like a week, we don't act and you get a ripple case doesn't have some impact within the net by yearend you'd like how far behind.
And you even mentioned it you know you're looking at alternatives offshore as well.
Listen I think youre going to see more innovation move off shore and more trading move offshore in the long run the United States is still the dominant economy of the world.
The economy and its wildly important that the U S gets it right I do think we will get it right in time it might it might take a couple more years it might take a new FCC chair.
And you know someone who comes with a different attitude of like let's let's get to yes as opposed to get to know us.
And I think it will set us back, but I don't think.
You know the it will be a permanent setback.
Just have a ton of faith in the innovation culture in the United States you look still at so many of these ecosystems are there they're sprouting from are the.
Same area, where lots of tech companies had.
Some will move off shore in some of our people are moving offshore are but I think once the U S.
Regulatory regime, just gets people clarity you'll see this industry are accelerating quickly you know one of the promising things at times scary things for a company like ours is quietly lots of asset managers lots of investors lots of the banking industry are working on their own.
Uh huh.
You know future in blockchain right. There is a firm belief in the <unk> of assets you know, we haven't seen it in a big way yet, but it is coming it's almost an inevitability.
It's more efficient.
It allows for better distribution and so you know there there are stealth operations at the big banks, where they have more people.
Working on blockchain.
Blockchain, then than we do as a blockchain company and so it gives me lots of.
Confidence that things like GK eight are going to be.
Really valuable assets, because you can think about as we talk and i's assets around the world every single financial institution is going to need some of their own Pasadena, and so you know Gee can't becomes a SaaS business for selling this this service too.
Hundreds.
All of our financial organizations.
Organizations and so it's the same thing with Nf tease you know people.
People got crazy with the NFC speculation and then said all of it was just a fad.
It couldn't be further from a fad right every major brand is going to use <unk> as an advertising mechanism as a community building mechanism has a weighted follow what their customers do it will become the new cooking in lots of ways, and so and where those things get stored.
And so the infrastructure needed as we move into a digital age and a web three digital age is is being built and it's being built quietly.
A lot of our portfolio companies should benefit from that.
Again I can't tell you if this all shows up in the next you know year.
Year or four years, I think its probably longer than a year and a shorter than four years.
I've got lots of confidence that you.
You know the.
Yeah.
There's a plumbing of of crypto is being built and you'll see mortgages on the blockchain explode, you'll see why because they're more efficient and cheaper and.
And so that's coming it's just not coming as fast as we all like it to be.
Thank you.
The next question comes from Joseph upbeat with Canaccord. Please go ahead.
Hi, everyone. Good morning, Thanks for taking my questions just I'm, just kind of circling back to the banking turmoil here that we've seen over the last few months.
Coin, obviously being more than resilient and I'm kind of heading up and speculation that it's kind of you know in a certain way a safe haven relative to banking turmoil just wondering what you've seen on the institutional side, if there's been more interest in digital assets.
Mirrored mirrors this.
This strength in bitcoin as a quick follow up.
Yeah, I you know.
What we saw was first of all the crypto community getting reenergized.
This has been kind of exactly why bitcoin was created.
And so that gave a big jolts are people that were already.
Already crypto fans, we saw macro hedge funds and other you know trading you know institutional clients buy bitcoin as a.
And the same reason they were buying gold if you think about Gold's Houston portfolio Bitcoin as a as a digital version and a better version of that it's you know as.
As I sat on a risk adjusted basis, it's been the best investment in the world really over three years over two years over over a year to date and so it's a great diversified portfolios and you're seeing that more and more we didn't see the insurance companies pension funds endowments.
Re op.
Again like I said those guys are in some ways on a holding period not all of them, but as a as a bulk.
So listen I think the banking crises.
Probably.
Has it really gives the cleanup a positive tailwind in that.
The echo of this crises will be most regional banks have to raise capital and one of the ways. You raised capital is you don't lend as much and so loan growth will slow.
Probably.
Slow dramatically.
At most regional banks regional banks, we're growing.
Loans at 15, 16%. That's in contrast to money center banks, which are growing.
Loans at 2% to 3% last year and so.
Youre going to see small businesses.
Capital starved youre going to see a credit crunch it doesn't happen overnight.
But that's really why the fed has paused why the fed will probably be cutting rates are you know third quarter in the third quarter and that will give.
Bitcoin a tailwind.
So this banking crisis should should should be the gift that keeps on giving.
Great. Thanks for that Mike and then just secondly over in your infrastructure side.
Galaxy being a financial services provider here.
The broader digital asked that space. It feels like should have some competitive advantages on the hosting side, you know being able to land a miner.
A host of having are there other capabilities such as custody and the like I'm just I don't know.
High level, it's still early there I know, but you have a feel for you know if if you think I'm you know hosting versus self mining.
Is maybe kind of the lead horse over there on the infrastructure side or maybe maybe I'm totally wrong with that but any thoughts you've got thanks.
What.
It's a great question and Chris and I are fighting over who is going to answer I'm going to let Chris answer it because he spent more time with the mining hat on that idea.
Sure.
In the in the infrastructure solutions group My mining today is is the largest piece of the investment as a result, it's going to it's the largest income producer.
For us and and and likely will be although I I hope that you hated side really outperforms them, but.
But we on the mining side, where we're thinking about the strategy as a mixed strategy.
We we believe the mining sector bitcoin mining sector. In particular has there there's a dearth of well capitalized smart good operators, who have built good infrastructure that can last volatile markets, both crypto market power markets et cetera.
We thought Helios was was a real gem of of of an operation that we could take in stabilized quickly with a relatively low investment and then expand on.
And we think there's there's there's a really interesting strategy for us as a company focusing on the hosting element where.
We own the dirt in the iron and steel and and operated.
Operator operated sort of best in class and we can turn around and offer that to folks who own asics and but don't have an ability to actually to actually run those asics are consistently with access to low power with uptime.
And to your point I mean, as you sort of lead the witness on it why that's really interesting for Galaxy is not only can we provide that based service for.
People, who own and companies who own Asics then once we've done that we can also more easily provide them financing solutions liquidity solutions hedging solutions not just on the power side, where we're managing it for them, but also on the ultimate price side with regards to like the bitcoin they produce.
So it's a real it really has the potential to be a real flywheel business for us to reach across the rest of the company.
In the markets business in the asset management business. Once once we've got clients, there who have their assets with us and so we just think we're the right company who's well positioned in that we have the right asset to build off of that up.
Okay.
Great Thanks for that color.
The next question comes from Jamie Friedman with Susquehanna. Please go ahead.
Yeah.
Hi.
I was.
So Alex in terms of your prepared remarks, you were talking about the linearity of the quarter and I don't want to put words in your mouth, but it sounds like you'll be real active in the last week I was hoping you could elaborate on that and then in that same context, if you could possibly.
And unpack it a little bit in terms of which of the segments.
It was that experience that kind of linearity I'm curious as to.
The capacity of the company and when you see these bursts.
Yep Yep sure. Thank you so in the last quarter in the last week Bitcoin and the theory in both moved up about 3% to 4%.
So most of that was reflected in our global market segments.
Right, that's a positional gains on our long in general we run along digital assets portfolio and obviously it benefits from prices going up.
Yeah.
Okay and then in terms of how you think about the you know managing.
Headroom or capacity or throughput like in terms of.
You know I'm sure there's a lot of quiet days.
But when the big days come so how do you.
Think about managing them for for for all seasons.
Let me take that yeah listen so.
The way you should think about our trading business in some ways is we have this customer facing franchise with traders around the country.
Around the globe both derivative traders.
Electronic OTC traders.
And voice OTC traders that both.
Take risk and facilitate customer business and that business should be correlated to both volume and volatility right higher volumes and higher volatility we should do better.
And.
Days like our weekends like the.
The Silicon Valley you know.
Crises weekend, where silver gate was was under stress we had our most are profitable weekend you know trading days, we did the most volume we showed up in and where the liquidity provider for lots of our clients.
So over a really scary period, so very profitable.
Weak in some ways you wouldn't wish that on all your friends, but from your business perspective, it's it's a wonderful place to be and so what I worry about in that business is if volumes and volatility just kind of keep shrinking that that's hard to make money in.
The second half of our.
Trading revenues in it.
One point, maybe we will we will get them split or our balance sheet and and kind of I'll call. It the macro piece of how Galaxy operates as Alex said, we tend to be long a big pointed a theory of it it's kind of core.
Core belief systems listen if I knew the market is going to go down 70% factually I would probably sell a lot more than I have.
And try to buy it back cheaper but.
In that business.
We are.
You know indexed long and we trade around the position both with with options five reducing our overall beta at times and using gene can hedges interest rates equities and currencies.
To try to mute the mute the volatility of that portfolio.
And so you could almost separate the two again that business also does better with with a volatility in volume I E. Because those things usually tend to tend to be in up markets.
But.
Our franchise business should be able to make money in a down market pretty consistently where our proprietary business is probably going to be much more indexed to the market going up.
Got it thank you for the color.
Okay.
The next question comes from Kevin D D with H C. Wainwright. Please go ahead.
Thank you gentlemen for including me and everyone behind the scenes, but I know it works real hard there are three things quickly, Mike and Chris you'd begin fit them in one dws and galaxy.
Curious to know are.
Your.
Your business development strategy and how you feel you can differentiate against some big competitors. There second just on the Pantera relationship. Congratulations on that maybe you can give us some color on the competition you see and how you'd feel galaxy is better positioned to win more business there.
And then third.
Any thoughts on bitcoin pricing and network cash going into the having and beyond late next year.
Yeah.
Yes sure.
So.
Let's see if I can remember them all in a favorite of reversal or ash.
Yeah. So so.
Sorry.
First of all remember that.
The the dws side. So so dws is is the third largest asset manager in a in Europe and so they have a and a trillion dollars of assets under management. They have a a broad distribution reach so from it from a business development standpoint.
Dws has expertise in market in and and you know the content. Obviously has has its own euro regime, but also idiosyncratic specific country markets and so they bring that expertise that they bring the reach from a distribution perspective galaxy on the business development side.
Brings I think you know the best research desk in the space. The best the best team that can actually create the product from a from a vendor support perspective from our knowledge on should we should we have this asset in the in the index should we not have this asset can we support the Dodgers can we not all of the digital asset.
And crypto specific knowledge necessary to like create a good product that institutions are gonna want is where galaxy brings to that and so when you put those two things together, we think that.
From a competitive standpoint, there's really no one company or paired paired relationship out there that can both have the reach the in region expertise and then the asset specific expertise that we break so that we're but we're excited about the prospects there for sure.
On the AR on the bitcoin pricing hatch rate yeah. So like.
Obviously, we we cant control price and I'm not as good a predictor of prices might go so I won't even try.
But.
And we control our own hatch rate, but we don't control necessarily the growth in hatch rate. What's interesting is if you look at the actual sheer dollars required from today's hash rate over 300, plus extra hash to to to see the same kind of hash rate expansion that we.
Have seen from 150 to 300 plus.
Would take an enormous amount of capital not only an enormous amount of capital it would take an enormous amount of support from from.
Energy producers to to support that load coming in so when you look at like the technicals behind you know one part of the equation, which is hash rate growth.
We find it we find it quite compelling them to own our own a big piece today of existing hatch rate and don't see the prospect for cash rate to realistically continue to outpace the growth that it has historically.
The flip side of that now bitcoin pricing right that that's a macro call. We have a very strong thesis on that we don't have to get into that necessarily other other than.
As you see Fiat currencies printed and Fiat that the nominations grow at the sovereign level. So two you should see bitcoin price increase as simple as that would be our thesis.
And they're having is gonna be a really interesting event certainly for the space because on a on a number of coins produce certainly you know one day, you're going to you're going to have economics that X in the next day, you're gonna have 0.5 acts in terms of what you can.
What is actually produced by the network cool things that have happened and this was alluded to on the call before.
That really weren't in the plan for example were networked fees showing up being less than 10% of the block award now on days spiking to over 35% of the block reward like that that that event happening. We think is a small window into different fuel.
<unk>, where where you can you could actually wake up and have the having have a much less a much muted impact than we would otherwise expect.
Let alone the fact that from our perspective, we're focused on making sure that our site has access to low cost energy. So the world Mcgough, because that was part of the curve so that when when the in the worst case scenario when the having comes and other miners are turning off we're actually capturing that market share and so there's a lot of elements that go into it but.
But but the best we can do is is make sure that we bought that we own the right asset and we're well positioned to be to be one of the best operators in the space and the rest should flow from there.
And the third question I actually forgot [laughter] really with Pantera the opportunity you have there and who you might see compete for future business.
Yeah.
So you know the.
<unk>.
We've we've known the Pentair group for a long time, we spent a lot of time with them over.
Over the years, both as investors funds, we facilitated liquidity for them for their investments on the trading side of it was great to be able to represent represent them and work with them on a on a strategic sale transaction of one of their portfolio companies. We we we hope there's a lot more businesses do the cause pentair has a lot of portfolio companies.
So for us to be in a position I think is a good it's a good first step and Theres a lot more to do there competitively you know the what what are the the good and the bad for US has been the largest banks and institutions stepping back from the crypto market means there's a lot less competition on the investment banking.
Side, four four big banking groups, who have bigger resources, unless who otherwise would be competing for mandates or just no longer there and so we will we expect to see competition in the banking business, we will likely see it like we see it from the more boutique shops, hum, but those boutique shops have their expertise in.
In generalized transaction, so generally raising capital generally advising on an M&A and different corporate transactions, where we bring to the table is different in that we have that skill set but also the specifics required to make good decisions for measure teams.
Specific to our space and so I think pentair it gives us giving us that vote of confidence as a is something the market shouldn't shouldn't played out and it's an important one.
So.
Thanks, Chris I agree that's why I raised a question. Thank you so much gentlemen for the color and staying on to address my my curiosity appreciated.
Got it.
This concludes our question and answer session I would like to turn the conference back over to Michael Novogratz founder and CEO for any closing remarks.
Hey, I just want to thank everyone for their interest and stay on this call. We are committed to building a.
Our World Class, you know crypto and blockchain company, we're gonna come to work everyday early and stay late.
I do think this is gonna be a challenging year.
But like I said you know we're we're we're not focused just on 2023, our real focus is 2025, a building for what the future will be and I've lost no no faith in the fact that blockchain technology bitcoin as an asset and the entire suite of things LIFO.
<unk> is going to be a major part of the financial landscape of the world.
In the future and so.
We're prepared to to ride out what looks to be tougher times and tried it to try to take market share when our competitors, who are less well capitalized or fallen into OE side.
So we'll be back next quarter, hopefully with good news.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Okay.
Okay.
Okay.
Uh huh.
Yeah.
Hum.
Hum.
Uh huh.