Q3 2023 Galaxy Digital Holdings Ltd Earnings Call
Good morning, and welcome to galaxies third quarter 'twenty twenty-three earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
At this time I would like to turn the conference over to Jonathan Gould, Our ski head of Investor Relations. Please go ahead.
Good morning, and welcome to galaxies third 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 Cedar and available on our web site or in future filings, we make with other securities regulators.
Forward looking statements speak only as of today and 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.
Yeah. Good morning, everyone you.
You know, it's funny that the last 40 days it seems like a whole different chapter.
The third quarter, I'm Gonna leave, Chris Ferrara, and Alex I'll feet to a truly go through the results and go business by business and you know, but a focus a little bit more on the outlook and the macro.
You know Theres, a new energy in the crypto space, it's primarily being driven by the anticipation of the Kashi T. F that we hope to see this year or very soon it could happen as early as next week.
And so the market is anticipating that it's getting geared up.
Often in these situations, it's a by the room or sell the fact kind of thing right people get really excited and and you know the announcement comes out and then you know you start trading ETF in early January and that could be the top of the market I actually think this is gonna be a little different this time.
We have been waiting for institutions, almost like that famed waiting for godot sitting on the subway station.
Waiting for the car to show and a lot you know dip their toes in.
This ETF is going to make it really easy to open the door for institutions coming into the crypto space.
You know when you marry that with the uncertainty in the world with the physical.
Crises quite frankly, that's going on in the U S and in the rest of the developed world are with the slowdown in China. It just makes for a really interesting time for institutions to put 123% of their of their assets into into bitcoin and other crypto currencies and so I kind of think.
This is gonna be the start not the finish will prices go straight up forever of course, not there'll be volatility around the announcement there'll be volatility around the actual implementation of an ETF, but I think six months 12 months down. The road you will have seen a lot of capital shift a small for portfolios a lot.
In aggregate you know shift into to our space. That's given the firm a new energy Oh listen it has been a hard 18 months of building and you know lower volumes are trying to keep you know for each employee to keeping their own morale up and so.
Really having you know the price go up 35%, but also the phones ringing more the opportunity is more of the bankers busy or makes it a lot more makes this interesting more fun to work in its not all roses, we still have regulatory frustration here in the U S. Specifically I've been in D C.
See I was deep in D. C yesterday I was in D C. Two weeks ago.
The breaking news is I think the leadership of both parties does see this is a bipartisan issue that will get done in time.
There are so obstructionists that have that have really held back any legislation and quite frankly right. Now there are other priorities right well, they're going to be shut down in a week, we've got a war both of the Ukrainian in Israel.
We've got elections coming in so I am not pollyanna ish I don't think anything gets done this side of the election, but.
There are plenty of smart guys in Washington, and plenty of good pieces of legislation already crafted.
That will propel this industry forward in the next 18 months.
So you know 18 months can seem like a long time in the big picture, it's not and so we've got.
You know at least the the.
The potential of regulatory clarity coming.
Got a fed that's going to.
Going to stop hiking rates and probably will be cutting rates by the first quarter next year like the economy is slowing the the the experiment of raising rates.
550 basis points in a straight line is it's actually going to work and it's going to slow the economy down finally.
And I think once that fed cuts, it's another tailwind for crypto so put it all together it just feels better you know our results are in the third quarter weren't great. You know the first month, we already made that up and then some and we're off to a good November.
And you know on top of that each of our businesses is starting to fire right. We're winning mandates and asset management are our mining facilities up and running and it has performed great our derivative business our lending business. Our trading business is doing great. We're recruiting new talent that too.
Two new traders that I'm wildly excited about a little pressure on you guys and so couldn't couldn't have oh.
A more different view than I did even three months ago, and so with that I'm going to turn it to Chris to get into the details of the quarter and the details of each business and then Alex to really get granular. Thank you.
Thanks, Mike.
Our third quarter results are a testament to galaxy's diversified and resilient business model as we continue to drive growth in each of our three operating businesses.
Let's start first with global markets.
Despite lower trading volumes across the industry galaxy's counterparty volumes increased 70% quarter over quarter confirmation that we're continuing to gain market share.
Despite the uptick in volumes or counterparty train rubber revenues decreased to $14 million in the quarter due to historically low volatility and a decline in revenue from derivatives. However in October we realize the benefits of our market positioning and the recent uptick in volatility and generated approximately $24 million in counterparty trading revenue representing over 70.
A percent growth in the first month of Q4 alone versus the entire prior quarter.
The lending side of our business continued to grow in the third quarter as well.
Loan originations were $117 million and our average loan book size increased by 9% quarter over quarter growing to 553 million notional as of September 30th.
Reinforcing our position as one of the largest collateral backed lending counterparties and the digital asset space.
Our debt to continue to onboard new counterparties, bringing the total count from 999 at the end of the second quarter to over 1020 at the end of September.
We believe the approval of a spot bitcoin Etfs in the U S will serve as a key catalyst for several of these counterparties, who onboard with galaxy, but are not yet trading with the desk and our preliminary October trading performance in counterparty engagement supports this thesis.
Over the past several quarters, we have been focused on developing a unified digital asset marketplace for institutions called Galaxy one.
We have 10 clients committed for from our initial beta user cohort of which a handful now have live access to use the platform.
We are continuing to build upon our current bader offerings of agency spot trading custody and reporting functionality in the platform and we'll be introducing new features including margin lending API connectivity and derivatives in the coming quarters.
Turning to investment banking, while the backdrop for deal execution broadly remains challenged our investment banking team did successfully closed two transactions in the third quarter. The team served as an advisor to game of craft on its latest investment round and also acted as the exclusive financial advisor to securitize on its acquisition of Unwrap invest.
We expect to realize the revenue associated with both of these deals at a later date.
Additionally, as we noted on our last earnings call. The team was also selected to represent Prime Trust, a financial technology company, providing trust and custody services to the digital asset industry.
In Nevada, receivership ongoing critical restructuring mandate.
Our investment banking pipeline remains strong with 24 mandates representing $2 2 billion in potential deal value being pursued by the team currently.
Moving to our asset management business, we ended the third quarter with $3 9 billion of assets under management up 58% quarter over quarter.
The increase in AUM was driven by net inflows into our active strategies are result of Galaxy asset management being selected to manage certain assets with an F. T X as liquid digital asset portfolio in September.
Over the past several months our asset management team has been working closely with the F. T X the state to develop a comprehensive plan to appropriately manage its digital asset holdings for creditors.
T X oversaw an extremely diligent diligence process to determine the best partnering investment advisor for the mandate and for Galaxy asset management being selected as a testament to the team's credibility with respect to risk and volatility management.
While I can't comment specifics under mandate, what I can say is that galaxy asset management is committed to managing these assets at any sales required by the mandate in a responsible manner that protects and maximizes value for creditors that helps the industry continue to rebuild trust and credibility.
No we expect the assets under management tied to the specific mandate with F. T X will decrease over time as we monetize the portfolio.
We also remain very focused on the U S E T S landscape and in the third quarter, we filed spot bitcoin and spot ether ETF applications with the SEC in partnership with Invesco.
Invesco has one of the largest asset managers in the world with approximately $1 five trillion dollars of assets, including over 500 billion in index based Etfs and other passive vehicles.
By combining galaxies knowledge and experience in managing digital asset Etfs with Invesco has experience in structuring and watching Etfs are partnership offers unparalleled experience in product creation operations crypto expertise distribution and education on both the asset class and the wrapper.
This is what it takes to win in such a competitive market and why I'm incredibly confident that we are well positioned to be the industry leader.
While the Sec's approval timeline for spot between ETF remains uncertain. Our unwavering belief is that the approval is now not a matter of if but when.
Yes.
Additionally, we remain focused on developing digital asset E T P's in Europe in partnership with the Dws group.
And we'll keep you updated as we firm up a launch date.
Galaxy asset management is one of the largest most diverse digital asset managers globally now with nearly $800 million in passive AUM 1.7 billion billion and activate U M 1.5 billion adventure radio M. Our balanced platform approach sets us up very well to capture institutional capital and what we believe is a multi hundred billion dollar fund management.
<unk> and digital assets in the future.
Turning to our digital infrastructure solutions business.
It was another strong quarter for the mining team our mining revenue, which includes our proprietary mining in our hosting operations was $14 3 million in the third quarter relative to hosting fees and purchase power costs net of curtailment credits of negative $2 2 million.
Resulting in over $16 million of direct combining profit margin.
We reached three nine X a hash of halfway under management across our proprietary mining and hosting footprint.
Our mining operations represented 1.8 X a hash of.
Of our Hasher inter management and resulted in the production of 309 bitcoin in the quarter.
And our hosted mining business accounted for the remaining 2.1 extra cash.
We are on track to reach our year end target of Forex Mahesh and now have line of sight to continue to grow our hatchery under management into the new year by over 25% to five extra cash by the end of Q1 with the vast majority of this increase attach rate coming from owned machines that were already previously purchased being brought online in our next expand.
And phase of Helios.
Our effective power management strategy and integrated site operations led to a negative cost of power for the quarter, resulting in a negative average marginal cost to mine.
Throughout 2023, we have chosen to hedge the majority of our power costs, which has proven to be a very successful strategy. This has led to an extremely low cost a big claim production in the summer months as we were able to curtail our mining operations during peak demand periods to generate curtailment credits.
Looking ahead to the fourth quarter, we expect to maintain our highly competitive but higher cost of bitcoin production compared to the third and second quarters, as we anticipate fewer opportunities to curtail and a higher network network hash rate.
Our core thesis developed during the acquisition of Helios without the infrastructure is strategically positioned in a dynamic power market, that's rapidly evolving as additional wind and solar generation interconnect into west Texas.
Coupled with ERCOT market structure, and our mining team's proven ability to develop and operate digital infrastructure at scale, we're extremely confident in our ability to navigate the bitcoin having expected in April 'twenty 'twenty, four while maintaining a healthy margin in our mining business.
Turning finally to GK eight across our infrastructure business, we've been encouraged by the growth of GK with the team expanding to a total of 16 clients in the quarter and maintaining a strong pipeline of potential large enterprise clients and we remain incredibly excited about the long term growth prospects and therefore enterprise value creation potential from this business given the.
Ms Tam that global asset Digitization broadly presents.
Yeah.
The investments we've made here at galaxy over the past five years are driving them went up in each of our operating businesses now, which we believe will generate further operating leverage is more institutional capital now begins to flow into the ecosystem.
I'll now turn the call over to Alex to cover financial results and then we'll jump right into questions. Thank you.
Thank you Chris good morning.
Third quarter, driven by lower digital assets values, and historically low trading volumes and volatility Galaxy reported a loss of $94 million.
This reversed in October.
Market conditions, including higher coin values and our market positioning at the start of the quarter resulted in approximately $124 million in income before tax for the first months of the quarter.
Our operating expenses, excluding noncash items were $200 million in the first nine months of this year reduced 14% from prior year.
This decrease was primarily driven by lower compensation and marketing expenses, partially offset by larger mining expenses as we significantly scaled our mining business this year.
Our equity capital was one and half billion at the end of the third quarter and $1 6 billion at the end of October.
Total liquid assets were $750 million at the end of this quarter.
From $700 million in the second quarter, consisting of $300 million to $95 million of cash cash equivalents and stable coins and 354 million of net digital assets.
For the four months period July through October Galaxy, repurchased one 2 million shares at an average price Canadian $4.69.
Now back to the operator for questions. Thank you.
We will now begin the question and answer session too.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question today is from Andrew Bond with Rosenblatt Securities. Please go ahead.
Hey, Thanks, good morning.
Just on the FDA mandate can you talk a little bit about the significance of avoiding that kind of a it's crypto business versus traditional tried five players and if this is leading to other new business opportunities and asset management and other segments and digitally F. Texas venture portfolio also spans over 400 investments and $4 billion could galaxy be involved in.
The unwind of some of these assets as well.
Yeah, I'll take that thank you and good to talk this morning.
Yeah look we're where the team work the team has been working on an.
The F T X of states doing doing diligence and scoping out what's what's in there and how we can be helpful really for over a year and so winning that mandate for US was really the culmination of of of a lot of hard work put in.
I like to say.
Around the firm here that that that this is this could be galaxies Blackrock moment post the financial crisis, when when Blackrock really took an opportunity to do a to do.
Rudy it's holding the indefinite the traditional financial space and become the the one to help clean up balance sheets that this this opportunity for us represents that opportunity in digital asset space I think it's a it's.
It's a testament to our team's credibility it's testament to what we've built here, how we operate how we understand risk and how we can help other companies sort of managed through difficult situations.
So yeah, you know the the initial mandate to to work with the state on their on their liquid assets is one a bolt of both hedging risk and also helping the state work out and monetize assets for the creditors overtime.
We know that there are other assets in the estate that we've already spent tons of time working on and understanding they're.
There there is the illiquid venture portfolio Theres also a portfolio of trust assets and other other.
Other assets in there that we know very well and I think having one this mandate and having worked closely with John Ray and the team now you know on a I don't know.
On a weekly basis and getting the creditors to know as to understand what were what what what we're about and what we can do like best positions us to be front a lot in those conversations.
Thanks, Chris and just to follow up on.
Capital allocation and share prices moved nicely over the last month, how are you guys thinking about allocation of capital in terms of share repurchases versus.
M&A or say buying bitcoin or other digital assets.
Yeah listen you know last quarter, our stock was trading at a significant significant discount to a N a V and.
We bought a small amount I wish we had gotten a lot more of that there was not a lot of sellers down at those low prices that were not not a lot of of.
Liquidity are you know now we're trading.
You know book, nor somewhat north north of book.
And we're probably be less less willing to in the short run spend our capital on an equity.
There's a new momentum we think there are people coming to buy our stock. We think our story is really good.
We're going to work real hard in the next quarter and getting out and telling our story.
I still think each of our each of our line businesses have have a good story themselves and our balance sheet is really strong.
We've caught this move really well our derivative desk was well positioned our proprietary desk with well positioned and so.
Yeah, we feel pretty strong right now and I don't think we'll be buying stock at the $7 range.
And we'll keep you posted on the rest of the capital plans.
Thanks, guys.
The next question is from Chase White with Compass point. Please go ahead.
Thanks for taking the question so or I was just wondering are the reports of our market makers pulling back from exchanges.
But we've been hearing out there I mean is this a real issue or do you think that these reports are exaggerated and if theyre pulling back what gets them back in the market or is this more of a permanent trend in your view.
Yeah. So thanks.
Thanks, and good morning.
The eye.
Liquidity has dropped across the market you know through through the third quarter. So so that is true and in one function of that is our market makers pulling back I think there. There you know what we saw in 2022 and 2023 was the result of improper counterparty credit analysis and market structure and so.
One one reason you know.
People in the industry got hurt from prices falling people in the industry, you got hurt from bankruptcies, and and and credit Implosions and so they therefore have pulled back generally.
It hasn't gotten to the point, where it's it's really hurt the industry in the last thing the negative way what everyone is focused on now on the go forward, though is how the market structure is going to evolve and and so market makers pulling back from exchanges is actually really a a step back and a retooling of market structure and everyone's talking about thing.
As like off exchange settlement.
To to really hold assets in separate segregated them bring first rig ring fenced.
Custody arrangements, while using that that asset and credit to then trade on exchanges and so I actually think it's a it's a temporary it was a temporary reset of of market structure.
And and is actually starting to reverse itself, yes, one thing I'd add to that is even with the kind of drop in liquidity our volumes at galaxy were up 70% quarter on quarter.
And much higher in this fourth quarter and so I think it's a testament to I just getting market share period, we just feel like it was a lot of our competitors are out of business and a lot a lot were wounded.
And so we didn't think this is our time to shine.
That's why we're gonna be leaning in.
Got it that's very helpful and in the mining business, how should we think about mining power cost out, but with all of them are out of the summer months is there kind of a level that you're hedged out in terms of power price that we should be thinking about any color there that'd be great. Thanks.
Yeah sure. So so yeah I mean, we went from for pretty much all of 2023 from the beginning with a strategy of putting on a long term hedge for the year. We thought it was we thought power price the power price curve early in the year was was very attractive and set us up for a for a year, where we wanted to have them.
Good visibility on profitability, we that ended up being a very smart decision.
Not just because the economics are locked in with great, but it set us up to be able to do.
To participate dynamically with the aircraft market and and really add additional unexpected profits.
To the year.
We're we're we're still hedged as a business as we go into 2024.
Our outlook on our strategy there is gonna be a little more dynamic there is a lot going on in 2024, obviously the the the price action of the of the commodity we have a view on and and has it impacted our strategy that having them coming in around mid year is also going to change the landscape for.
Our miners in terms of their their cost of production sort of definition really and so our expectation is is we are we are going to continue to put our balance sheet behind the business and and lock in attractive prices. When they are available we are going to more dynamically manage our.
Our our fixed versus variable exposure next year as we see how the market develops.
Got it that's helpful. Thanks.
The next question is from Michael Legg with benchmark. Please go ahead.
Thanks, Good morning, nice to see how things turn it around where the industry can you talk a little bit about what you're seeing from your investment in this space I mean, we have a new focus from a lot of investors are investing in AI. They're all 2021 was big in the crypto space for investment.
<unk> talked a little bit about what you're seeing in the PE guys, taking away from any enthusiasm in crypto and basketball.
Okay.
You know the there's not a ton.
Lot of talk that at one point crypto should be very helpful in AI and.
In terms of authenticating deep fakes being authenticating there were a few tokens that.
Adjacency to AI that jumped just on frenzy, and it kind of come back off.
Some of the miners have pivoted to be coming.
AI data data data centers and <unk>.
That has been a an interesting business.
If you if you had that if you had the contacts that.
The video and you had the chips.
Good on.
But in general we really haven't seen the convergence yet I think you will it wasn't a problem with AI for most companies is to be big in it to be good in it. It's a unbelievably a capital intense effort right inside my own gut feeling is you're going to have two or three giants that just like.
And cloud when the dominance of AI and so I think it's a it's a harder venture space then crypto was.
And you know, we're thinking a lot about how how crypto becomes a supplemental to it.
But we haven't really seen great.
Great great angles it yet.
Yeah, I think I think to that a little bit the wheat, we early on maybe maybe nine months a year ago. We saw a very very quick I would say sort of divergence of capital like to a I outside of crypto from problem Tech export investors, both investors that that that's kind of come and gone Ah I I don't it's not a.
A factor it's Andrew when we think about people allocating capital in the conversations we're having where some themes where money is is.
Floating around and actually going in inside the crypto space I think I'll give you which is part of your question.
From a from a strategic perspective from companies looking at what they should be doing with their balance sheets.
The consolidation is a big theme and so you know what whether its custody exchanges.
Things of that nature of wallets.
Security surveillance monitoring really that people are looking for who are the standouts, who have gotten some scale and we're going to win and that they're looking to either buy those companies are putting money behind us companies for them to then consolidate the smaller players and so I think we're going to see that trend happening.
For the next.
Foreseeable future.
In terms of like deep Tech investing you know theres a lot of focus on layer twos, and they're two scaling and and roll ups and so art venture team has spent the bulk of their 2023, having developed a thesis on on on roll ups of where we should be investing and where value of accrual is going to happen sort of unchanged across the stack.
And so there's a lot of new developments happening there which are exciting.
Pretty early and so I think that's where the the early money has moved too and then I mentioned before market structure wise.
People are looking for exchanges historically that were unregulated to move into regulated venues and for bifurcation of market structure between exchanges dealers venues dealers and custody and so youre looking at lots of different technologies that are looking to stitch, those two or three together off exchange settlement and clearing things like that.
And that's where our that's where a lot of people are focused though if you want to kind of get my.
Our rolling view of how this is going to play out.
2020 for Liberty is going to be a year of institutional adoption, primarily at first through the big one ETF, which will be followed by a theory T F and as institutions get more comfortable as the government gives its seal of approval that you know pick Windsor is a thing you're going to see.
The rest of our.
Allocators, starting to look at things outside of that and so money will flow into the space I think it will probably get take until 2025 until all of this investment in <unk> and wallets really start to show up right stable claims are growing every single day certainly more so abroad in here.
The biggest I think security issue for the United States is getting our stable coin right.
We're going to continue to be dollar dominant we better have a.
A dollar back stable coin that reflects our values and and and and is taken up around the world I literally think that becomes kind of the 2025 chapter when we see all of those investments start playing out and it needs to write for crypto to really fulfill its its destiny, we do need token is Asia and we need.
<unk>.
Projects built on block chains that are scalable and fast and and that's all happening you know we got way ahead of ourselves in 'twenty 'twenty 2021, and thought the world was going to be built overnight and it just takes time and so.
<unk>.
Like I said this this etfs, giving us all breathing space.
Putting life in the system that brings in capital that allows the rest of the stuff that flourish, but I think if you looked at the crypto longterm planet. It's on it's on it's on target.
Okay, Great and second question around the having event when you look at the marginal miners out there when the return profiles change does that give you an opportunity and how are you looking at from a possible growth perspective in mining.
Yeah. So you know I think.
So factually when when they're having hits you know that that all else being equal four for every mine are out there that that should effectively double the marginal cost of mind for everybody.
And so you know where are you on where you are on the cost curve matters as you're pointing out.
We've been laser focused on how we entered this space with what asset to make sure that we are as far down the left side of the cost curve and well positioned to manage that as possible I give it give us a check for that very confident in the asset that we that we purchased and what we've done with it.
We built our positioning there in terms of offensive this hum.
I would say that that those opportunities, it's pretty hard to move a fixed asset. If you are if you're in a bad location for energy and so it's.
It's less likely that that fixed infrastructure from a distress perspective is going to sort of magically become interesting. If it's if it's an economic.
But that being said talent and more movable infrastructure like Asics et cetera for distressed companies I think are going to be a focus for us in terms of being opportunistic and being offensive. So that's how I think about like.
When we think about that.
Okay, great. Thanks, and then just the last question, Mike I know, it's your favorite subject, but you put them off the top of the press release. This time. So wanted to understand if you ask most thing.
Bring it to the front of the press release says any.
Indication of your thoughts can you just talk about that.
You know theres not a lot we can say D.
The SEC has not approved anybody in a long time, we are continuing to be in dialogue with them are you now.
When we file a public.
We're waiting for our comments back and.
A long time, a lot longer than it did when I was at fortress.
And so that's you know it's frustrating, but that's just where we are.
It's it's been 90 days since our last filing yeah, let's say to I I have not given up on the U S. A.
We're in New York based company and while were building abroad, and I think we'll continue to build our international offices out our U S capital markets is by far the deepest.
And best capital markets, and you know it feels on American that Theres, only one broker dealer clean base I'm jealous.
I guess the tap the U S capital markets I look at where the miners trade and the and the liquidity that they are given on a daily basis.
And you know it gets me angry that we're that we're not through the gauntlet of the FCC approval process yet.
I do think it's worth it.
And it's been costly and it's been frustrating.
I do hope there is theres some light at the end of the tunnel.
This FCC administration won't be there forever.
If we don't get through this time, you know post election, I think no matter, who wins you probably get some some new bodies in the sense. So we're going to we're going to keep our nose to the grindstone.
Alright, thanks, guys congrats on the quarter.
Yeah.
The next question is from him. Please excuse any mispronunciation built happened that the sow with Stifel. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my questions good to see Q4 shaping up better here.
Mike just wanted to get your thoughts on the digital asset space post potential bitcoin spot E. T F approval.
Well, we see capital flow towards the theory on space on believe satisfy Etfs could be approved there as well and.
Can you comment on the potential hurdles with respect to when it's your own spot E. T F or you know should.
Will it be a relatively smooth process to get that one over the finish line. After a bitcoin spot Etfs is approved.
Yeah, I think there's a big difference I do think there'll be a spot ETF approved.
I'm not sure it will be as.
Ah well received is the big clean ETF for very simple reason that you know a theory.
Model of validating is staking model and Theres, a staking yield.
And unless they can figure out an ETF that actually passes through the staking rewards.
It will be a kind of a subpar product from just owning a theory.
With someone like us and have a good state.
And so that.
That that you know technical differences as kind of a big difference when you're looking at.
456, 7% yield depending on where you get you get east aching.
But I do think there'll be one approved in time are the.
At the same way you would have a futures ETF, it's gonna be broadly the same argument.
That the bitcoin ETF is getting approved through <unk>.
And so I do think big.
Bitcoin is way outperformed the rest of crypto this year Youll see some rotation into theory, I'm and you've already seen some into the other alts. So lana it's been on a tear.
And so you know the rest of crypto is getting you know much needed capital and enthusiasm injected listen I think in the long run.
<unk>.
Yeah.
These utilities are going to need to really serve a purpose and be used didn't have stuff built on them to sustain long term value, but in the shorter run the broad enthusiasm around their story is enough and you know we've got speculative money coming back into the space.
And there's still not a lot of leverage in the space I mean, we've seen futures in the U S. You know get as high as they've been on the bitcoin side, but if you look at broad leverage across the space.
We're trying to build up our our loan book, it's roughly just shy of 600 million Ah you know back in 2021, there were much bigger loan books, all around the street and so as confidence builds capital comes in leverage will pick up in and prices should go higher that should drive the development of the space.
I appreciate that color and then just shifting gears to the infrastructure side of things.
You've seen the recent announcement of a bit main as 'twenty, one next generation miners.
And really attractive promotional pricing I'm curious to hear your teams.
And thinking through potentially expanding the fleet.
And purchasing some hardware.
Just given the also.
Also the uptick in mining economics recently.
Hey, Bill Yeah, we have I think the the you know our position right now is.
We are.
A data center infrastructure business first and.
And a a.
Self minor second you know roughly roughly a little under half of our capacity say are our machines. The other more than half of the capacity our external external client machines.
The the <unk>.
That mix will kind of bounce around but that is our target mixing so for ourselves.
Vesting in new Asics and building capacity is on the horizon. We're looking at it I think when we step back and we look at our uses of capital we have a we have a fairly sizable investment.
In terms of our total capital base committed to our mining assets you get a lot of that is a holding owning the data center that they the datacenter and owning the infrastructure.
Then it is just purely in the Asics and so I think we will we will look opportunistically to to swap into better machines, particularly depending on pricing at dawn pricing if the capital markets open up for us.
As they look like they are going to then I do think that you could see a future where where we are looking to use the capital markets to fund growth in the business, but we're sort of sitting and watching right now kind of depends on how the market develops.
Okay. Thank you very much that's all for me keep up the hard work.
The next question is from Patrick Moly with Piper Sandler. Please go ahead.
Yeah. Good morning, Thanks for taking my question, maybe just elaborating on the comments you just made about the capital markets open. It up for you guys. I was hoping you could give an update maybe on where the pipeline in investment banking system.
And Mike maybe how you see that playing out over the next 12.
12 to 18 months thanks.
Thanks.
Sure I'll hit all had our investment banking division of pipeline than they might talk more broadly about about the markets I think the the.
The last the last year has been challenging across the street forget crypto and our sector in terms of the banking business and that is that is purely a function of valuation resets right like when when interest rate regime change in valuation regimes change.
The only people looking to raise money or people, who have to and so so markets lock up capital markets activity locks up M&A activity slows down because it's much more difficult to get.
People do agree on what the relative values are and so that that's happened pretty much across the board in markets in particular, it's been particularly acute in the crypto markets and so so it's been a challenge to to find investors to help our clients to put money into them, it's been a chat.
So get to agreement on on relative valuations for M&A, but we've done so like we've had successes we have we have deals that we helped them get closed.
And so you know now I do think if if you're talking about a future where the fed has paused and maybe even reverse youre talking potentially about about evaluation resumed shift again, the opposite way, which is positive which would be positive for the capital market. So we're we're encouraged.
We're encouraged with crypto prices, having bottomed to sort of come the other way like all those things are the right ingredients for the recipe that should lead to a more vibrant market, which is what our our banking businesses are waiting for I also think we we can't underestimate the psychological impact that you know once this ETF gets approved.
The SEC improving this ETF Blackrock I mean, Larry Fink is it's one of the most influential.
Then in this entire industry.
Higher asset management industry, and the entire financial markets, you know him being a and endorsed or a big coin.
Frees up the.
Some of the internal indigestion at at Big institutions to say, Hey, now, maybe it's safe to to to get into the water and so companies that you couldn't sell.
At 50 cents on the dollar you might be able to sell it at par.
Because the outlook looks so different.
From an institutional perspective, this is a giant watershed moment.
Of adoption you know the big clean story has been there for 13 years and it's been a story that governments are properly yet.
And that at one point they have to debase their currencies they have to inflate their way out of the debt that they they they print.
And you just sell see that everywhere, we're spending 25% of.
GDP on our federal government budget deficit and that story is picking up and so like the macro narrative forbid claim at the same time you are you seeing institutional.
Adoption really makes for a powerful combination and so my bet is even for our company.
When we finally decided we want to raise capital it will be far easier.
With this new mindset of crimp Dolby and it's really it's it's been focused on bitcoin, we need it as an industry to move to the rest of <unk>.
The ecosystem you know I think stable claims, there's a tremendous amount of energy around.
Token as Asian, and Wallets are everybody is working hard to build the wallet of the future I think people really understand where the the architectures going its not being used yet but as that stuff starts filling in I think you're going to see a lot of demand from institutions.
To get a foothold in this space.
I guess I put everybody to sleep for that answer.
Uh huh.
Oh, I'm, sorry, I had a follow up.
I'm sorry.
I just on I guess, the asset management business I was hoping to maybe get your thoughts on where you think demand sits today for active strategies, we could see a lot of money come in through.
These passive vehicles, but just wondering maybe where you think we sit today in terms of their demand for active management in crypto.
Yeah listen I think one of the issues.
<unk>.
With active was that.
Got a lot of the active strategies in 'twenty 2020 in 2020, one where really biased long.
And very few of the fund managers are.
Had roses around their neck at the end of 2022.
And so.
Really you know performance was not great not for all of them, but for the bulk.
And I think people step back for a second I do think we will see active Ah <unk>.
Start up again.
First quarter, we're already talking to allocators and they are looking at making allocations in the first quarter.
So as the space gets re legitimized as this as the bad actors I mean, I think Sam Backman free being found guilty uncertain counts was actually a really important day for crypto because it symbolically as kind of sweeping out the bad chapter and starting in the new chapter and I do think it takes allocators of little more than.
That it takes family offices.
And hedge.
Hedge fund guys to jump in but I think by the first quarter youre going to see people.
To allocate the active again and.
Where we're really looking really hard at at how we make sure that we show up in that space with with product that people like.
That fits the demand and.
We'll keep you posted on that.
Alright, thank you.
The next question is from Owen Lau with Oppenheimer. Please go ahead.
Hey, good morning. Thank you for taking my questions. So I wanted to go back to the point about the adoption.
Trading corner quality increased 3% sequentially, but the active trading conepati decreased 2%.
And can you. Please talk about the dynamics here on what you see on October one.
Number two they just sit on the lawn and garden Wakeboarding awkward soon we'll see what these counterparties all like getting more opportunistic about spot on bill.
Come and go and how do we see that trend continue thank you.
Yeah.
Hey, Alan how are you. Thank you for joining the call today.
The yeah.
Yeah, I think youre right. So like when when we see active counterparties sort of flatlining, but we see volumes up a lot for us.
That means that we are shifting over time, which we think is natural.
Particularly given how the industry, we're shifting over time too.
Larger higher volume more active traders.
And clients than we've had historically and so I think theres, a theres a theres a natural amount of sort of.
Underneath it all attrition of smaller smaller clients.
Who you know have underperform or going out of business larger clients coming in new capital bases have a new thesis and are going to trade more and more and so that that's great for our business.
The I don't think the trading activity is a femoral I think that that's important like we we we did see you know really industry lows in terms of volatility and activity in Q3.
And the snapback for industry lows.
Outside of US like we said sort of us gaining 70% our volume quarter over quarter versus the industry down probably 20% on average if you look at it on exchange volumes at competitors. It is a big deal I think that's a testament to like to do what we've built in what we offer.
And then and then the continued resilience of activity not just with US then but with the whole industry in anticipation of the ETF I think we we think it's the last thing as a lasting trend and so I would take away as you know we think it's not a femoral and we think that the counterparties, who are now onboarding and training or <unk>.
Bigger much more sophisticated have new capital bases, and so we're going to be a lot more resilient.
Got it and then can you give us an update.
Okay on your international expansion strategy and the competition from firms in all the countries I mean do you still see.
The U S.
A leading force for blocking or days, a well spread debt capital in projects or a mortgage or I should say all building up the Nordic countries.
Yeah. So the.
The the.
Do we see the U S. As is going to be a continued force in blockchain and cryptocurrency going forward like we hope so right.
We have we today, we have about 25% of our employees know that that reside outside of the U S that that that will likely continue to trend up meaning what will likely.
As we add employees I think the the there'll be a higher percentage of employees added outside the U S and in the U S that is a function of regulatory structures being set up ex U S.
International jurisdictions that are going to allow us to really grow the business in a regulated license way with big institutional clients globally, and so that that's the main driver we do see capital forming.
Like we said on the last call outside of the U S and like I said when that happens that that tends to be sticky and so I do think you know our performance, meaning the U S.
Over the last three years.
We'll have hurt the U S is market share for a while.
We do still remain pretty bullish the U S are long term and we think it'll sort itself out, but but you know we've got a little bit of a hole to dig out in terms of market share for first time.
If you.
Take out China for a second as its own entity.
The U S is larger than the 10 largest tenant next largest economies combined and so it's hard.
For our U S based company.
To think about crypto universe.
Without the U S and so we're doing whatever we can hear now we are advocating in D. C for saying a crypto legislation. We are watching this clean base case with very beady eyes.
Cuz you know they could.
Could potentially win this case sooner than people think and that changes the whole landscape.
And so I do think.
Listen we need legislation here in the U S. I do think we will get it I said that early on and I think the U S will be a important part of the crypto universe.
Because it kind of has to be.
But listen it's it's it's it's not to say it hasnt been frustrating as Chris said we.
We as a country in the U S have certainly given up some ground I don't think you know it's long term unsustainable.
On Surmountable.
Anyway. Thanks.
Alright, Thanks, a lot.
The next question is from Kevin Dede with H C. Wainwright. Please go ahead.
Good morning, Gents, Thanks for having me on Chris you touched on investment banking.
And our pipeline looks flattish sequentially, but the values doubled so he could you speak to that.
Yeah the the.
You know our our team is about the same size.
And our.
So our coverage is about the same as it could be the.
<unk>.
There there is at least one large engagement.
That's in the pipeline.
Now, which wasn't in before which which from a dollar perspective portends. It takes the pipeline up a lot and so theres. Some theres there. There's one large engagement that that really changes a quarter or it is like the specific answer.
Okay.
Just to give some color for Q3, our pipeline, it's about 60% M&A, 40% capital markets.
Right right right Okay.
Mike just a quick one for you I know you've spent some time in D C. But yesterday there was a bill that surface that.
Looks to squash tether and I was wondering if people are talking about that down there.
And what the impact could be I, I know, you're big unstable coins I agree with you 100%.
It looks like circles sort of muddling along.
What's your take on what happens.
It wasn't talked about when I was down there yesterday I didn't see the bill Yeah, I haven't looked at it listen tether is growing a weekly.
Becoming the dominant stable coin I'm sure you know.
Jeremy It circle.
We'd like to change that.
<unk>.
There's a lot of fear uncertainty and doubt around crypto offshore.
You know this is a complicated industry.
And.
It was set up with this idea that it wanted to provide access to people that didn't have access right remember crypto came from and.
So I think.
[noise] tethers got their job to do.
Convincing.
Convincing.
You know people to trust it they do it they they seem to be wildly well capitalized at this point theyre, making investments I think tethers, probably making over $1 billion a quarter and so it's it's it's it's without a doubt probably the most profitable crypto business.
They run with a small team they've got huge margins are they're smart guys and so I think they are probably doing everything they can to stay within the the good graces of of their counterparties.
Here in the U S right.
Howard Lutnick and his group do a lot of the the buying.
Sure.
And holding a tether security that's off the U S Securities together.
He's a very smart Guy I don't think Howard it's going to be.
Cell phone.
I think this is a political thing.
If I was the U S I would pass.
Stable quite legislation and make it really clear I think it's really really important that we have a a strong dollar back stable coin I'd rather have it be in the U S, but not in the U S. Just as a as a patriot.
But you know tether is the is the preferred stable coin of the world right now period.
Yeah, No I clearly I see that I was just.
Given the conversations you had I thought you could shed some light on.
How you see it moving forward in.
Ah yes.
That hurts political certainly there's certainly a fear in D C of things that arent.
Now in their control.
And so with the politicians and you know you've seen the same thing with around Binance I've said this publicly the single best thing that would happen to crypto. After this ETF is that finance settles with with.
Our our regulators and pays a fine and it gets a clean bill of health and it goes on it and it runs a more.
Our regulated platform and they are you know you know Abu Dhabi, Dubai, there, they're there, they're making that transition.
Again.
Does that happen or not I think it probably happens in time I wish it happened yesterday.
Cuz.
That brings that leverage the system that brings and confidence to the system, but our politicians are certainly more nervous about things overseas and they are about the stuff here that they are they have control over.
Chris You mentioned four extra hash target and Helios.
Year end and five next year does that mean and given your earlier comments does that mean, you already own those machines and is there enough room in that current building to support that has target.
Or are you going to have to build something else.
That's right so.
Yes, so we basically hit Forex of hash.
Already in the third quarter I think it was only like $3 99, six or something.
And and we have been we have been making a relatively small investment to expand the existing building, which all.
<unk> phase one.
Out to its full capacity when we acquired the asset.
Roughly roughly a quarter of the total capacity, which was sort of available capacity in the building was unbuilt.
After we stabilize the asset we got everything plugged in then we went out on the exercise of further developing that last that last quarter.
In terms of in terms of.
Space in the building and so where we're finishing that up.
We're going to fill that space with machines, we already own. So those are so from a capex perspective, you shouldn't see additional Asa capex at all to get go from four to five on our side. We also have some some additional limited space that we are working with a pipeline of clients to add new hosting clients as well nowhere near as large as as and extra hash.
In terms of our capacity so we're going to use that space to fill up any remaining idle machines that we've already purchased that we own.
That's a that's a Q1 2024 event not not five X passes for Q1 not for the whole year.
Okay. I guess, we'll look forward to speaking to you about it on our year end report. Thank you very much gentlemen, appreciate you having me on.
The last question today is from Spenser <unk> with Susquehanna. Please go ahead.
Hey, guys. Thanks for taking my question, Michael If I could just ask at a high level are there any interesting developments where applications within the payments space that you're excited about.
Chris.
I mean.
What's what's complicated with payments.
Is that in the U S.
Things like Apple pay work really really well.
And so we don't have a payments crises in the U S.
Our our payments need in the U S. We.
We do when it comes to remittances and so if you're.
Now what are the many many many immigrants and growing number of them that want to send money back to Venezuela or whatnot, it's wildly expensive and so like that's why he drives me crazy that the that the left has been kind of.
More obstructions to encrypt out.
But that's that broadly is is you know.
Sending stable claims over a.
The single largest payment network in the world all of a sudden it looks like its tether overdrawn.
In terms of script out that's used all over the world outside of the U S. Why do they use trying he made it really cheap and really easily.
You know easy to access.
And so I don't.
I think there is anything.
And that's that kind of technologically cutting edge, that's going to change things were stable claims have the next potential real giant leg is when we also start going you know internet of things when you're when.
When you are.
Putting an engine.
Efficiency.
With the smart contract itself it runs over 90%, it's giving you know micro payments to to the are.
We're taking micro payments.
From the user and if its running poorly it's sending them back and forth like once you have a regulated stable coins that big industry.
Trust I think you'll see an explosion of new use cases, but in general payments certainly from a U S perspective.
There hasn't been anything that's changing the way we operate and so this is much more of a developed market a developing market and and remittances game now that is growing.
But there's nothing that we've invested in specific.
The other thing I'd point to is I mean, this is it's always been like Paypal and Paypal stable quite I think is a potentially a pretty big deal and you know and they very quickly came under the.
Came out of the purview of a U S or the SEC very fast and so we're monitoring that because that'll help tell us what direction. The U S regulators sort of want to go with an entity like Paypal, which is I think it's a big deal and it was pretty different and the banks are lobbying like crazy to have the tech companies put under their thumb.
All right if if we're getting regulated they need to get regulated too and so one of the things that you know when you're in these disruptive industries.
You think of all.
All should go with efficiency in their incumbent players that have a lot to say about that.
While we don't have blockchain based ticketing, yet ticketmaster doesn't really want it.
Period.
So.
That doesn't mean the revolution dies it just means it's.
You got to come back with different angles, and you got to keep pushing.
Okay.
Great. That's all for me Thanks for sneaking me in.
This concludes our question and answer session I would like to turn the conference back over to Mike Novogratz for any closing remarks.
Guys. Thanks, a ton for the questions.
I Hope my energy starting the conference call. It was positive I feel that way.
We're going to Miss you for a while because you know full year.
Full year and <unk> 31, and then it's a longer a reporting time, because its the full year audit and so.
Maybe we will get back in touch.
You can watch it on CNBC and you can watch our you know watch our predictions we feel good I hope that next time, we talk to you. There's a lot more really interesting things to to.
Bring to light.
And.
Have a great Thanksgiving take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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