Mike Novogratz, founder and CEO of Galaxy Digital Holdings, describes the company’s services and products, why it’s launching a credit offering, and why he pivoted from his original intention to launch a crypto hedge fund and then pivoted again from working with ICOs to serving institutional players. He talks about why, if he had the chance to go public again, he wouldn’t do it, why Galaxy’s stock fell so precipitously one day that trading was halted, and why he thinks the SEC has made it clear the ICO markets are closed. He also talks about why, on the way to democratizing finance, the crypto markets need to “take a step back” and start with institutions, why decentralization is important, and why he thinks the launch of Bakkt is the most important news in the crypto space this year. Plus, Mike surmises as to how consumers will start using crypto, but believes it won’t replace fiat in the Western world.
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Episode links:
Galaxy Digital: https://www.galaxydigital.io
Galaxy Digital’s losses so far this year: https://www.bloomberg.com/news/articles/2018-11-28/novogratz-s-crypto-trading-desk-lost-136-million-in-nine-months https://www.bloomberg.com/news/articles/2018-07-26/novogratz-s-galaxy-digital-sees-134-million-loss-on-crypto-drop
Unchained episode about security tokens: http://unchainedpodcast.co/harbor-and-trusttoken-on-why-they-dont-mind-being-unsexy-ep77
Unchained interview with Philip Rosedale of High Fidelity: http://unchainedpodcast.co/why-its-so-hard-to-keep-stablecoins-stable
Unconfirmed episode with Tom Jessop of Fidelity Digital Assets: http://unconfirmed.libsyn.com/fidelity-digital-asset-services-tom-jessop-on-why-its-serving-institutional-clients-first-ep043
Unchained podcast with Arthur Hayes of Bitmex: http://unchainedpodcast.co/arthur-hayes-of-bitmex-on-why-countries-will-turn-to-digital-cash-ep63
Transcript:
Laura Shin:
Hi, everyone. Laura here. A quick note before we dive into today’s show. The one hundredth episode of Unchained is coming up. I know, hard to believe. Side note for those of you keeping score at home, included in the count were special recordings from conferences.
For the one hundredth episode I want to hear from you. Send me a voicemail or an audio recording telling us your name, where you’re from, and anything else you’d like to say related to the show, whether it’s what you’ve learned from Unchained, your favorite moment or guest, how you listen, or whatever else you’d like to say. Then, finish it off with a prediction about what will happen in the crypto space in 2019.
You can easily record a message on the voice memos app of your smartphone or using an app on your computer. If you do that, email your file to laurashinpodcast@gmail.com with the subject line 100. Again, that email address is laurashinpodcast@gmail.com and use the subject line 100, or you can call and leave me a voice message at 917-675-4882. That’s a U.S. number, so my international fans should use country code one. Again, that number is 917-675-4882.
As a reminder, tell us your name, where you’re from, and whatever you’d like to say about the show and then round it out with a crypto prediction for 2019. The deadline for these submissions is Thursday, December 20. I look forward to having you guys take over the show.
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin. If you’ve been enjoying Unchained, hop on iTunes to give us a top rating or review that helps other listeners find the show.
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My guest today is Mike Novogratz. Founder and CEO of Galaxy Digital Holdings. Welcome, Mike.
Mike Novogratz:
Hey, Laura. How are you?
Laura Shin:
You’ve described Galaxy Digital as a merchant bank for digital assets and blockchain technology. What does that mean?
Mike Novogratz:
Well, when we started it, it came out of my family office. My family office had made a lot of investments in the space and I was, you know, a natural born speculator and decided that there was a big opportunity. We had built a brand to try to be what I’ll call a credentializer in the space and so a merchant bank invests its own money and we have an investment banking group which is trying to raise capital and give advice to companies in and around the space.
We decided to build an OTC trading business that does both voice trading on electronic market making and arbitrage, and an asset management business where we raise money from outside investors to invest in the space and so, you know, I talked about trying to build the Goldman Sachs of crypto. It’s not the exact same thing. Goldman’s is an investment bank.
You know a merchant bank means you’re using your own capital to invest in projects that you raise money for as well and in a space as early as ours, it’s hard to see you being a banker if you’re not going to invest as well.
Laura Shin:
And why don’t we, then, talk more in depth about Galaxy’s main products and services? Why don’t you walk through all four of them?
Mike Novogratz:
Sure.
Laura Shin:
And why you chose to focus in those areas.
Mike Novogratz:
So, you know, the kind of reason to exist as a merchant bank is to be a banker, is to reach out to the bigger players in the space and players outside of the space and provide advice, and that advice is how to think about accessing capital markets. You know, last year it was all ICOs. This year, I think, you’re going to see security coin offerings. You’re going to see normal, just straightforward capital raises, private capital raises. You’re going to see IPOs and so to try to be part of that process. It’s also merger advice. I think you’ll see a consolidation in some parts of the industry, especially with this massive sell off.
Our best business and the business that’s, I think, the most fun is direct investing, right. We have a venture business, both early and late stage venture. We run a fund for the EOS blockchain where we invest in projects that use EOS as part of their ecosystem. We give credit. You know we’ve made credit investments and we’re going to raise a credit fund. We buy equities in companies in and around the space and so that business has done real well this year, which is interesting. In a crummy year, the privates were actually up on the year.
Our coin investing and our kind of core holdings and our ICO coins have not done well this year. You know, I think the average ICO is down 95 percent and you know the broad market’s down close to 90 percent. We actually did quite well for the first half of the way down. I said this at a conference call, the funny math of a market down 84 percent is its down 60 percent and then another 60 percent, and so you could literally have been genius for the first down 60 percent and lost nothing and then, you know, lose a lot in the last 60.
You know, commodity traders get that because commodities are the only things that move as dramatically as crypto has, but in general, you know, we have three businesses. This asset management business, the trading business, and the investment banking business, and then we have, like, a book. So, think of it like a hedge fund, which is half venture and half coins.
Now, it’s a lot less than half coins, because the coins have gone down and the venture stuff and the credit stuff haven’t, and on that business, you know, as of our last, you know, earnings, you know we were less than 30 percent with the market down a heck of a lot more and so while it feels terrible because when we first went public our stock traded at 2.3 times book. Now, our book has gone down, and our multiple has gone way down, or our stock trades below book, which doesn’t make so much sense to me other than we’re in a ill-liquid markets and people are scared about crypto, but we feel pretty good here.
I wish I hadn’t lost as much money. You could’ve hedged better and hedged longer, but we have a vibrant diversified book and we have these three businesses, banking…you know, the trading business, again I talked about we just brought a guy named Ian Taylor from Goldman Sachs. He’s going to be great and we’re putting together a team and I think there’s going to be big opportunities.
There’s going to be big opportunities in, you know, security coins and that really is going to be looking at the private placement market. The private placement market, globally, is a couple trillion dollars, three trillion dollars. I mean it’s a huge market and tokenizing it, and some of the things are going to feel really mundane.
Tokenizing a triple net lease portfolio. What does that mean? It means sourcing this portfolio and finding a buyer and then a year and one day later, tokenizing it. What’s the token worth? It’s a call on liquidity. It’s a call on that at one point we’re going to tokenize lots of assets and so some of the early movers are doing it, even if it’s the same price they would’ve just done a private placement at, and I think that’s going to be not nearly as sexy as the utility token world, but it’s going to be a big business.
You know, the trading business was interesting. I thought that was going to be a business that was our leading business this year and it was harder to stand up than I had hoped, for a bunch of reasons. It’s a bear market and people are less aggressive in bear markets. Getting the regulatory framework right took us longer. Getting the technology built internally to really be able to move coins around as adeptly as we want to took a while, and onboarding clients took a while, but right now we literally have a graph.
We do more trades every day than the day before and for the last two and a half months our businesses is starting to take off and so, hopefully, you know when the markets do come back, and markets always come back, we’ll be well-poised to turn that into a profitable business, and then asset management is managing other people’s money.
We raised about 450 million dollars this year. That was a big fund from EOS, from Block One, to manage money in their space. We have an index product with Bloomberg called the Galaxy Bloomberg Crypto Index. That’s been more challenging, raising an index fund in a bear market from institutions is not easy.
The bright news is we’re starting to see interest, calls from a lot of these. We’ve probably spoken to over 400 institutions and so you’re fertilizing the ground for when the time they decide it’s time to come into the space, hopefully they remember you. You’ve helped teach them and guide them. I don’t expect that to be a huge surge in the short run, but I think you’re going to see some nibbling at least and then I would guess by March or April, once the Fidelity platform and the Bakkt Platform has started to, you know, feel some vibrancy, you’re going to see that business and that index pick up.
Where in that same asset management, we’re raising a credit fund right now. We think credit’s an interesting…first of all, there’s lots of equity that came into the crypto space and not so much credit. A lot of reasons. People don’t understand how to give credit. You know we’ve got a team that had a credit background and a crypto background and so I see this as lending money to companies that are well collateralized at, you know, low double-digit returns and if they were not crypto companies they’d be borrowing money at LIBOR plus 500, not LIBOR plus 1100, and so it feels to me like a 600 basis point arbitrage by being involved in the crypto space.
We’ll see if that plays out. We’ve started conversations with a lot of people. We hope to close a fund in the first quarter, so that’s exciting, and so that’s it. Three businesses that hopefully will make money next year or break even, and then a book that hopefully grows.
Laura Shin:
Yeah, let’s talk about more. Let’s talk more about that new direction with the credit. That’s interesting to me. Why do you feel like there’s a demand for that and who do you see as potentially being clients?
Mike Novogratz:
Well, so on the demand side, there’s plenty, right. So, all the mining companies want to borrow money and they have collateral to put up with the coins they have, the equipment they have, the company franchise value, if there is any, and lots of other companies in and around the space. So, wealthy individuals have wanted to borrow money against their crypto holdings. Now their crypto holdings are a lot smaller than they used to be and some of the bigger companies have wanted to borrow, and so there’s almost unlimited demand.
Whereas, who are the investors going to be. I actually think the investors are going to be traditional credit investors and that’s who we’re really talking to, that see this as a diversified credit bed, and it’s a way of getting into crypto without having to own the coins, because it’s fiat lending, and so, you know, we’re talking to big institutional credit investors.
Laura Shin:
Oh, that’s interesting.
Mike Novogratz:
We hope. You know, listen, like I said, early conversations look great. You never know until you actually close and print the ticket, but we’re hoping to have a first quarter close.
Laura Shin:
Right. Well, I wonder if, in that world, they’re seeing their traditional investments kind of drying up because I think that area’s very saturated.
Mike Novogratz:
Well, what’s making it a little more difficult is credit spreads are widening in traditional. Like if you’d done this three months ago it would’ve felt a bit of an easier lift because credit spreads were tight. You’re starting to see…you know, the whole world’s getting nervous, right. Stocks are down again, last week, this week, next week. You know, where we feel like we’re in a bear market in equities and a bear market in credit.
Global growth is slowing and so the fiat world is feeling less secure and so that makes raising money for anything new more difficult. More difficult in credit. More difficult just in crypto, right. People, when they’re making money, are more willing to take new risk and when they’re losing money, they’re like well, I’ll wait.
Laura Shin:
Right.
Mike Novogratz:
So, not an easy environment, but not one without some good vibration.
Laura Shin:
Yeah. I just want to make a comment about what you were saying about the security token stuff, because I did one episode on security tokens and the title was something like why Harbor and Trust Token, who were the two that I featured, don’t care if they’re not sexy, or something like that because, like, exactly. I agree with you that it’s something that will happen. It just makes a lot of sense, but is it going to be super exciting and sexy? Probably not. However, if you talk to Josh Stein, which I’m sure you’ve done, like he’s, like, incredibly excited about it and his enthusiasm just radiates from him.
All right, so on your way to the Galaxy of Today, you’ve had a few pivots. First you were going to start as a hedge fund and then you decided on this merchant thing, so why that pivot?
Mike Novogratz:
You know, I got really nervous at the end of last year that markets were way, way too frothy and hedge-fund investors…you know, everyone investor in this space expects some kind of bias, I think, towards the long side. That’s why they were coming into crypto and I was bearish, and so the markets were moving so fast it just didn’t feel like it was going to be a smart idea to raise capital for people in a hedge fund and it’s not that easy to get short.
We, actually, were able to get short at times, a decent size, but this is not a…you know it’s not a spectacularly liquid market on the short side. It begs the question, why do we raise public capital. You know, I actually went in raising public capital for two reasons. One, the Canadian capital markets were open, and I’d seen what happened in the Canada space, that they were forward looking markets, that they would fund new projects. It’s the only market in the world where you can take a startup company and raise venture capital on a public exchange, which we did on the Canadian Venture market.
I thought I could hedge, and we did hedge the first, you know, 50, 60 percent, down relatively well. We’d come out unscathed in lots of ways. We didn’t do as well on the second 60 percent, but with hindsight you know you always underestimate how painful bear markets can be, and so listen, if I had anticipated down 95 percent market and no liquidity in the Canadian capital markets, I probably wouldn’t have gone public.
Laura Shin:
Oh, wow.
Mike Novogratz:
You know, it’s been a…only because we now have a public stock that trades with very little liquidity, trades at a discount to book, and that creates almost like an anxiety meter for investors and for employees that doesn’t need to be there, right. We’re well capitalized. We’ve got plenty of money. You know our book was 390 million dollars last reporting. We’ve got asset management revenue and so, like, I tell my employees there’s no reason to feel anxiety.
Let’s just put our heads down and go about building a business. I am constructive on the security token market. I am constructive on Bitcoin as a store of value. I’m constructive that Web 3.0 is going to get built. Not as fast as everyone wants, but there is great technology and I actually think you’ll see some of the real first projects in virtual world space in gaming and virtual space. We invest in a company, High Fidelity. I think it’s going to be awesome.
Laura Shin:
Yeah, Philip was on my show.
Mike Novogratz:
He’s awesome.
Laura Shin:
He’s great, yeah.
Mike Novogratz:
Yeah.
Laura Shin:
But I wanted to ask about the stock situation because I saw that there was that one day when it just dropped precipitously, and they stopped trading. What happened?
Mike Novogratz:
You know, we’re on the Canadian venture market and there’s not a lot of liquidity. There’s a buyer strike for crypto up there right now and so that day it dropped, literally, on 200 thousand dollars’ worth of volume, and so it doesn’t take a lot to move it up or down. There are very funny rules…not funny rules. There are rules up in the Canadian markets about what a company can do to buy their own stock, what an individual can do to buy their own stock, that are not as…it makes it more difficult for, say, me to come in and just buy all my own stock, because I already own more than 25 percent of the company, and so we’re studying them.
We had, you know, a senior employee started buying stock, you know, to kind of…you know, listen, I can’t promote our stock one way or the other because we’re a U.S. company that’s listed in Canada, but I would say that, for us, what we need to do is build a good company and tell a good story, and when liquidity comes back to the market we want to be the stock that people are willing to then buy. I can’t control the price, you know, when there’s not a lot of buyers and not a lot of sellers.
Laura Shin:
But it sounds like you’re almost…I don’t know. It almost sounded like you were saying that you were rethinking that decision?
Mike Novogratz:
You know, life doesn’t allow you to rethink decisions in some ways, right. We did it. We’re living with it. If I knew what I knew now, you know, maybe I would’ve made a different decision, but I didn’t know it then, you know.
Laura Shin:
Right.
Mike Novogratz:
And so, it’s a little bit like being married.
Laura Shin:
Oh, boy. Okay, let’s go back to crypto. So, later, I was talking about pivots. I asked you about pivots. You had a second pivot, which was initially you were doing kind of more the blockchain consulting and ICO advisory work, and now you’re pivoting more toward institutional. So, why that pivot?
Mike Novogratz:
Well, listen, the regulators made it really clear that the ICO markets are closed, certainly in the U.S. and we live here in the U.S. and when you talk to the regulators, and I have, I don’t know if they’re closed forever, but a regulator’s job is to protect the little guy and the little guy got manhandled the second half of last year. It just did, and the regulators didn’t do a great job protecting them and the little guy lost a whole lot of money, and I think the rules are pretty clear.
If you’re going to sell tokens to customers, they need to be registered. You know, they need to…they either have…be a qualified buyer, or a QIB, or you know there are different levels of net worth and investment assets for different levels of clearance, but distributing to retail’s not going to happen, certainly in the U.S.
There’s some hacks you can distribute to. Cypress if you’ve KYCd properly, but my read of regulators globally is they don’t want retail distribution of untried, new securities, period and so for a while this is going to be a more regulated market. It’s ironic in that crypto started as this people’s revolution democratizing finance.
We’re taking a step back. The whole market’s going to take a step back and I actually do believe, you know, platforms like the ones you were talking about that at times will reach retail distribution, or broader distribution electronically, will have their day. I just don’t think for the next couple years and so focusing on institution, focusing on being able to sell tokenized product to people that are legally allowed to buy it, seemed to be a smarter idea.
Laura Shin:
Yeah, I actually…so, I wanted this. This is perfect for where I wanted to go next, but we’re going to talk about what you were saying about taking that step back and all that because I wanted to hear about how you even, like, got into bitcoin and why you, kind of, initially thought there was something to it.
Mike Novogratz:
You know, I initially got in because a buddy called me up. Really, it should’ve been my partner Pete Briger at Fortress was a friend of Wences Casares and he said, I met Wences. This guy’s so charismatic and he’s telling me I’ve got to buy Bitcoin. Have you ever heard of bitcoin? And I hadn’t, and so googled it. I’d been a currency trader my whole life or a big portion of my life, and a speculator and so it took me about 15 minutes of internet searching to say hey, this is going to work, for really simple reasons. Just purely speculative.
Laura Shin:
Wait, that was your immediate reaction, that it was going to work?
Mike Novogratz:
Yes.
Laura Shin:
You were one of the few sources that didn’t say that you immediately dismissed it.
Mike Novogratz:
No, as a speculative, I was like I was like, you know, I didn’t know if it was going to work for real, but it was going to be a great speculative asset because this was 2012 and so we were in the middle of the European financial crisis. We had, had the major financial crisis `08-`09 and now it’s the second financial crisis. Europe’s blowing up. You’ve got quantitative easing going all over the place.
You’ve got people worried that fiat’s going to get debased, you know, that we’re going to have hyperinflation, and how wrong they were, but at that point that was a big worry, and so there were this group of people that were very worried about the financial system and then you had another group of libertarians and anarchists, and live off the grid people, and cipher punks, and they had all these constituencies and the Chinese had started buying, and the Chinese love gambling.
They love gambling like nothing I’ve ever seen, and I was like…and the technology sounded really cool. Like, here’s this new cool technology and so it was great. Great speculative bubbles happened around stories that you can get your arms around and it was a great story to get your arms around. It was an FU to the system. Like, we don’t trust JP Morgan. We don’t trust the Fed. We don’t trust Bank of England, and so let’s do this new thing we can trust and so I literally met with my partner and then we debated. Should we do this at Fortress, or not do it at Fortress and we ended up calling Dan Morehead who had been a classmate of mine in college, and a good friend.
Laura Shin:
At Pantera?
Mike Novogratz:
At Pantera, and Pantera had been a macro hedge fund that had gone silent and so he was sitting on the sidelines trying to figure out what he was going to do next in his life, and I was like Dan, have you heard of Bitcoin? He’s like no. I was like do some homework on it and call me back in a couple weeks.
Two weeks later he called me back. He said, this is going to change the whole world and so he gets a lot of credit in that he was so bullish that after his two weeks of study we partnered up, Fortress and Pantera, and me, Pete, and Dan, and Dan put a lot of money into it, which kind of shamed Pete and I into putting more of our money into it, and so, like, we made a lot of money.
Partly because, you know, we probably would’ve put X in, and Dan put about three times what we were thinking in, so we matched him and so that’s how I got into it originally and you know we had decided, at Fortress, not to be public about it. You know Fortress was a real asset manager. We had 50, 60 billion of assets under management and thought the publicity might not be what we needed and…
Laura Shin:
Wait, and you said you had put Fortress’s money in?
Mike Novogratz:
No, we put our own money into it at that point.
Laura Shin:
Oh, got it, okay.
Mike Novogratz:
We later put Fortress’s money into it in a small amount.
Laura Shin:
Oh, okay.
Mike Novogratz:
And I, you know, shot my mouth off at some conference, not knowing the press was there, when I was asked about frontier currencies. I was like oh, forget frontier currencies. If you want a frontier currency, you’ve got to buy Bitcoin, and I gave the six reasons to buy bitcoin and the next day I was on the cover of the FT. The only time I was on the cover of the FT.
Fortress’ Novogratz says bitcoin going to a thousand, and it was at 200 at the time, and it did go to a thousand so I at least felt smart about that, but that made me a bitcoin guy, and every time I went on TV to talk macro, they’d ask me about bitcoin and I got invited to speak at places and so I kind of became an accidental spokesman, which is a little terrifying because it took about 15 times of, like, reading through to try to actually understand how the damn thing worked.
Laura Shin:
Yes.
Mike Novogratz:
But I finally got it.
Laura Shin:
Yeah, well and okay, so I keep…I love what you said before about how we’re taking the step back, because it is where I want to go next, but so why did you think, or why do you think decentralization is so important?
Mike Novogratz:
You know, listen, I don’t think we’re going to decentralize the whole world. I really don’t. I think there are parts of the world where decentralization makes sense, where peer to peer, you know, relationship makes a lot of sense. My biggest reason is privacy.
You know, we have a world where 10 years ago we didn’t have to worry about it so much because we didn’t have AI. What AI has done in the last two, three years, is staggering and what it’s going to do in the next 10 years is staggering, and so I think about DNA all the time.
You know, I did 23andMe. I licked the stick. I gave, you know, sent it in and found out where my ancestors came from and now my DNA is on somebody’s database with my name on it and everything else, and if you look at how much hacking is going on, on the internet, that doesn’t make you feel so good. They’ve already sold that DNA to some research companies. I got nothing for that other than my, you know, results. Even that, 10 years ago, didn’t make that much of a difference because what you knew about DNA.
We looked at a company a couple months ago where they take embryos from test tubes, you know, from invitro fertilization and they now can run the DNA of the embryo against a database of 500 thousand genomes with full data on those genomes. It comes from the UK health department, you know, health services, so it’s a real database. With 98 percent accuracy, he can now predict the height of that embryo within a centimeter. The IQ within 10 points. Forget eye color and all the simple stuff, height and IQ.
That didn’t exist five years ago, just like China, who now has all your spending data, if you live in China, that goes all through a clearinghouse. They can run AI on that spending data and give you a social responsibility score. You couldn’t have done it 10 years ago. If I had all your spending data it would take me a month just to go figure out what kind of contacts you buy, but they can do it instantly now and so having some firewall between our personal data and these big silos that can use it for a good or bad reason, to me is wildly senseless.
What gets me the most excited about putting so much of my energy into this space…I might be wrong. It might be too late. Like, we might’ve lost the privacy war. I certainly think in China they have, and it makes the Chinese involvement in blockchain so confusing. Like, you’ve got Xi Jinping, who wants to be an emperor, who’s already said I’m going to have multiple terms if I decide to and he’s got this apparatus, which feels really totalitarian, yet the local governments keep investing in blockchain stuff.
Laura Shin:
Well, but maybe they want to control those blockchains. Maybe to them it is a better database.
Mike Novogratz:
Yeah, I mean that certainly could be it.
Laura Shin:
Yeah.
Mike Novogratz:
But the core purpose of the blockchain was not to have to trust some siloed, you know, individual, government, group of data, and so we’ll see. I mean it’s a fascinating experiment. I do think, I mean even Uber, which is an amazing company, right. Uber, multiple times, got fined by the government for illegally using the data they collect.
Laura Shin:
Oh, yeah. It was really chilling, finding out what they were doing with it.
Mike Novogratz:
Yeah, and so, you know, I kind of enjoy my privacy and I think society’s better off having privacy. I mean, listen, we have a president like Trump. Like, I mean, whoever would’ve thought in rational America you’d have had Donald Trump as president? He’s got access to everything and so you just never know who’s going to be in charge and so giving the people in charge that much power isn’t so good.
Laura Shin:
So, you probably can figure out where I’m going with this because you were here. I mean you were so passionately talking about the need for this, for decentralization and privacy, and yet Galaxy is focusing on these institutional clients that sort of further that model of, you know, the central gatekeeper. So, why are you serving this group?
Mike Novogratz:
Listen, so if you want to rebuild the architecture, right, if you want Web 3.0, you’re not going to do it on the 200 billion of market cap that exists today, or less than that, right? It’s a multi trillion-dollar capital markets project to rebuild the architecture of the world and that money is in institutional hands, and so you need Fidelity. You need Black Rock, at one point, to shift capital into these projects, and so I don’t think it’s going to be this overnight, snap, we have a new world.
I think you’re going to see a gradual shifting of projects. Currently, I don’t think crypto as a currency is going to be first level stuff, because governments don’t want it to be. Governments want to control their own currency, but I don’t think governments care if a decentralized Uber can disrupt the ridesharing business, or if medical records are far better kept and with privacy and efficiency on some tokenized database, or if tradeable, you know, digital items…if me and you, like, I used to trade baseball cards or trading game parts, or any other digital good, or tickets get put onto the blockchain, and so there’s so much to happen within the rules that already exist and I think confidence comes from that working, right.
Right now, we don’t have a workable blockchain with workable projects that have great user interface and user experience. Like that, hopefully, we get some of that in 2019 and then by 2020 we actually start.
I’m really focused on WAX, you know, because you’ve got one of the world’s best CEOs there. He’s a tough son of a gun. He is sharp as hell, Ed William Quigley. They are going to drop their WAX blockchain, you know, sometime in the first quarter or end of the first quarter.
They are already doing tons of transactions on their test net. They’re real transactions. People buying and selling, you know, low priced skins. It’s a huge business. They’re early adapters and so we’ll have one of the first blockchains. A guy who understands user experience, where real transactions are going to happen at in scale, and I’m focused on it because I want to see how the tokens trade, right.
This whole utility token model of staking. We haven’t seen it really played out for real. All of last year’s price movement was speculative. It was we’re all a version of Bitcoin, right. We’re all somehow store of value. You can’t have…there’s 118 elements on the periodic table. Only one is store of value. The rest have to have a use, right. You don’t buy aluminum for store of value.
Laura Shin:
Right.
Mike Novogratz:
You buy it to fucking make shit with and so I actually think bitcoin can be like gold and just be valuable because it is. I think everything else needs a use case and it’s one of the reasons I think Bitcoin’s outperformed everything and even in these use cases, they have to have built a use case, but then rational people have to understand what drives token price, not just it’s the next bitcoin.
Laura Shin:
Right.
Mike Novogratz:
Litecoin is the next bitcoin.
Laura Shin:
Right.
Mike Novogratz:
Or that VEO is the next ether.
Laura Shin:
Right.
Mike Novogratz:
Or and so we’re in this process. It’s a painful process for people that owned a lot of ether and any of the other coins. What’s promising is there’s still really vibrant communities. If you were at the DevCon in Prague, people left, you know, shockingly bullish and excited, and when I talked to my friend Joe Lubin at ConsenSys, he’s as bullish on the _____ 32:36.
I mean he’s frustrated at the price of ether and they’re doing some of their own restructuring, but when you talk to him about what’s happening underneath as bullish as he’s been, we’re seeing other projects that are really cool. It’s just going to take a while for blockchains to be fast enough and for projects to get use case on, and then for people to start trusting it.
Why I’m investing a lot in what I’ll call the digital world space, the virtual world, if it’s second, you know, if it’s High Fidelity or we made a big gaming investment in Mythical Games, WAX, is that most of those transfers of value, and if you think about blockchain as secured value transfer, are small notional amount dollars. Not all, but most, and so you’re probably more willing to trust trading OPSkins across a platform that might or might not be as decentralized as you want. It might not be as secure as you want, than you are higher value items, and so it’s a perfect place in a lot of ways for this thing to start.
Laura Shin:
Yeah. Yeah, I’ve been asked where I think it’s going to take off and gaming is one area just because those people are already used to digital assets, you know.
Mike Novogratz:
Yeah.
Laura Shin:
And they’re used to pouring money into so-called virtual goods. So, in that regard, I think it’s like a ripe community. So, we’re going to take a pause to hear from our fabulous sponsors.
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I’m speaking with Mike Novogratz of Galaxy Digital. You’re no stranger to both success and failure. As far as I can tell, your two biggest experiences of failure happened for very different reasons. Let’s start with your history at Goldman Sachs. Can you tell the story what happened there and what lessons you learned, and how that experience affects how you plan to run Galaxy?
Mike Novogratz:
Sure. Listen, I had a great career at Goldman Sachs, and it’s a really neat firm to work at in that it’s kind of a cult and they do an amazing job of hiring the best and the brightest and convincing them that, like, life at Goldman is really what it’s all about, and so when you leave there’s something. There’s like a transition period where you’re like wow, there are actually other firms that are also pretty cool, but the cool part is there’s a level of excellence that everyone strives to.
Listen, my exit at Goldman Sachs wasn’t gracious and it was personal. You know, personal stuff and a lot of that was learning to deal with stress, being disconnected from stress, moving at a million miles an hour and then blowing off steam and thinking that was normal, and so it started a process, for me, which is still ongoing of kind of sorting who you are and you know I get to talk at colleges every once in a while.
I’m always like hey, in my life there’s only two missions for people. A, everyone on this planet is screwed up to some degree, right. You know you’re all…you all feel like you’re not enough somewhere deep down and it’s all your parent’s fault no matter how good and how hard they try.
Laura Shin:
Hope your parents aren’t listening.
Mike Novogratz:
And your job is to sort your shit out, is to understand who you are, and to kind of let go of that and realize your parents did the best they can and that’s not their fault anymore. It’s on you and that process can be therapy. It can be ayahuasca for some people, or psilocybin. It can be long walks. It can be meditation. There’s tons of modalities. It can be a Tony Robbins seminar.
What I’ve committed myself to and I’m almost always there is at least a week a year to invest in yourself, just yourself. Not your kids. Not your family. Not your team. Not your company, yourself. Who is Laura Shin? Figure yourself out and then it allows you to be much more helpful, to walk each other home and so for me Goldman Sachs, you know, the embarrassment of being the rising star and then just being gone was painful. The gift was it started that process of how did that happen, of sorting myself out.
You know, then when I left Fortress, it was different reasons. Performance, frustration, lots of different reasons, but you had this…and even when in 2008 when Fortress really, you know, we went public in `07. We had this amazing year. We were these rich guys and full of the headiness of, you know, being on the Forbes List and you know that was weird for a middle-class kid and then it was we screwed up `08 for lots of reasons and went from rock stars to roadies.
While I stayed at Fortress, I had actually…it was the same…dig down and figure out what the hell’s…you know, I thought I’d solved a lot of those issues and it was those same issues of feeling fraudulent. How did I screw this up and how do you get through that, and it’s the same way. You get through it by understanding who you are and where those triggers are coming from and so when I left Fortress, luckily it was a lot quicker transition.
Literally, I went off to India and I was like well, why am I _____ 39:30. This is what happens often when you leave somewhere poorly. You just keep playing that story over in your head. If I’d only sold that Ethereum at 1100. My god, my life would be so…if I only sold it. Well, you didn’t, and it was your decision not to and suffering about it doesn’t help you. It doesn’t help your kids. It doesn’t. There’s nothing productive and so if you can sit there and look and quiet yourself and realize all this suffering is just self-centric ego. It’s just it’s so selfish if you think about it. People are like you can’t say that. He’s suffering. I was like he’s full of himself, right. It’s this self-centric thought.
I had friends in India that literally just sat me down. I was ready to leave. No, you’re not ready. Stay another week and at one point I had, like, looked and I was like yeah, they’re dead right, and it was very liberating. So, I came back. I was like what’s next and the one thing that I’ve always been lucky, very lucky. I had invested in a movie. The movie won Sundance and it was _____ 40:23.
Even if I didn’t make that much money on the movie winning Sundance, and I had a really small…other than writing a check, I did nothing else for the movie. I was the check writer, but I bet on the right horse and it was a win, and getting one win when you’re down, oh you’re shoulders puff up a little bit. Your chest puffs up. You start walking with a swagger and it kind of changes things and so I always tell people just get a small win and you’ll get another win, but that was my both exits.
Laura Shin:
Well, what I wanted to ask you about the Fortress experience was I wonder if there are lessons from that, that you might apply to the way that you manage this space as the crypto markets develop. Like what do you feel you might’ve learned from, you know, working at Fortress in the financial crisis and the bets you made versus how you think that, that went?
Mike Novogratz:
Yeah, so one of the things that was really important at Fortress in `08, Wes Edens who was my partner who’s quite an entrepreneur, would say you know what? In the worst environment, you’ve got to be really careful the decisions you make because if we fell off of the boat and we were in freezing water, and the boat’s moving, if you swim this way we might all get back in the boat, but if we swim at the wrong angle we all might drowned and so you’ve got to be really present and conscious of the decisions you’re making in crises and you’ve got to survive.
Like, survival is key. The life gets better. You know, `08, the heart of `08, it felt like it’s the end of the world. It wasn’t the end of the world. It was the end of a crisis, and those who survived it came back, they learned from the _____ 41:56. They came back. Markets came back. Businesses came back.
The same thing here in crypto. It’s setup your business, capitalize it so you can survive the nuclear winter that we’re in. It’s not going to last forever. It won’t. This is not tulips. Bitcoin is real. Web 3.,0 is going to get built. There will be decentralized systems. There will be a security coin market and Chinese people will always still love to gamble.
Like, those are some truisms that I know are true. Timing, who knows. You know, I have my own bets on timing, but and so you’ve got to make hard decisions sometimes to survive, but the big lesson from `08 and from Fortress’s scares, is survive. You know, Mark Winkelman who was one of the gurus of Goldman Sachs when I was there. They used to call him Kaiser Söze he was so tough. He was a Dutchman. He co-ran the division with Lloyd Blankfein and then with Jon Corzine.
Really a awesome businessman. I remember him saying, really, in a bull market even a weak pair of hands is worth something. In a bear market, fire them all. You know he said, you know, like in a bull market every person on the floor is contributing because it’s easy. In a bear market go down, get down to the guys that really are good and use that opportunity to sharpen the sword and to, you know, fire the people that weren’t great and to really recruit the people that are now gettable that are really great, and so I think that’s, you know, listen. We are in the heart of a bear market right now. An ugly one and so it’s prepare your company to come out of it. It’s not going to last forever.
Laura Shin:
So, earlier you kind of talked how the issues with regulators have maybe put a chill, I guess, on the ICO market and I have heard…I don’t remember where I got this. It might have been through an interview or something that you did where it kind of…you seemed to imply that you’ve been reaching out to regulators to help structure some of that role, so which regulators and what are we advocating?
Mike Novogratz:
You know, we have been working through different trade groups, you know, Laura. Originally, we weren’t talking to them because we were going through our own public, you know, listing but we spent a lot of time with Canadian regulators doing that. I’ve spoken to a few myself and our lawyers have. You know we’re an investor in Templum. They’re over with the regulators all the time.
I talked to Joe and so I think it’s pretty clear to me where they’re going, which is guy’s, smells like securities, feels like securities, act like big boys. You know what the rules…the rules are the same as the rules for other broker dealers and Bitcoin and Ethereum we’re going to say okay they’re not securities. That’s a win. A lot of these other protocols that feel decentralized, they’re going to end up doing the same. This is my gut. They’re going to do the same thing with.
There’s probably a process where that year that they allowed the ICO market to go on with before the rules were clear, most things got launched probably looked and smelled like a security, even if they’re not securities anymore and I think over time you’ll see some people pay fines and get the okay, you should’ve known better, here’s your fine. Now you’re a security, or now you’re a utility token and so we’re watching that space.
I don’t think the SEC has this mission to smush this industry. I think they want to go after things that look fraudulent and really egregious and they want to slap some hands of people who should’ve known better, but I think they want this industry to succeed.
Laura Shin:
I also read that the Financial Times reported that someone said your advisory business had been subpoenaed by U.S. regulators.
Mike Novogratz:
We were, well, let me…when I was a family office, we had been in contact with regulators not about ourselves, about other investments. A lot of the ICOs that got done…well, I shouldn’t say a lot. A few of the ICOs that got done got subpoenaed and anyone who had invested in those ICOs was asked to fill out forms as almost witness. So, I want to be really clear that, you know, we weren’t under investigation, but we’ve participated, at times, when asked to.
Laura Shin:
When I was looking at your website, at first I was surprised because I saw you had offices in both New York and New Jersey, but then I think I figured out why that is because you were telling this story about trying to buy ether and about how you were trying to buy it here in New York, but it was difficult because the BitLicense, I guess, required you to use a regulated exchange and so you ended up doing it in New Jersey. Is that why you have these two offices so close to each other?
Mike Novogratz:
While we were getting our regulatory framework set up, we didn’t want to take any risks of, like, doing something when we didn’t have an office, so we actually, yes, we set up…
Laura Shin:
Because of the BitLicense?
Mike Novogratz:
We’re still in the process of getting all of our licensing and…
Laura Shin:
So, what is your take on the BitLicense? I’m so curious since you had to do that.
Mike Novogratz:
I don’t think it makes sense relative to a national business and a global business, and in some ways the stuff should get regulated at a national level and so I think the BitLicense is probably more onerous than it needs to be.
Laura Shin:
And earlier you obviously described all of the different activities you’re doing, but one thing I wanted to ask was there’s this new trend of investors and networks doing generalized mining, or mining 2.0. Is that something that you’re thinking about doing? You know, like offering services on that network to seed activity?
Mike Novogratz:
We haven’t done it yet. We do have one small little group looking at it right now.
Laura Shin:
Okay. Earlier, when Bakkt was announced and you participated as an investor in that, you called it the most important news in crypto this year. Why?
Mike Novogratz:
You know, Jeff Sprecher, who’s the CEO of ICE, is one of the best CEOs in the world and if you look at the people that came in on that deal either as partners or as investors from Starbucks to Boston Consulting Group.
Boston Consulting Group is one of the largest consulting groups for retail. Think McDonald’s. Think Starbucks, and so to think about being able to walk into Starbucks and buy and sell Bitcoin, just the consciousness that it does for the Bitcoin community. That and when I think of that whole project it’s also going to give a…so, first of all, you’re going to have retail that are being able to participate and buy and sell, and he’s going to be a payment. Bakkt is going to be a payment system, right. The people that should be nervous about Bakkt are Mastercard and Visa, right.
Laura Shin:
And why do you think that when it hasn’t really taken off yet for, like, coin-based commerce or BitPay, rather?
Mike Novogratz:
You know, I think when you’re going to see it in Starbucks and you’re going to see it, I don’t know, with Microsoft and other places…
Laura Shin:
But I think Microsoft already allowed you to pay with Bitcoin.
Mike Novogratz:
What?
Laura Shin:
Microsoft already allowed people to pay with Bitcoin, previously.
Mike Novogratz:
Right. Again, I just still think there’s a consciousness that these guys are investing, or they want to partner. The second piece of it is the custody piece, though, and it’s a clearinghouse and a custody. I can’t tell you how many calls I would get from, during the boom, from retail, from second-level brokers, so not Goldman Sachs and Merrill Lynch, but the next level down.
They all wanted to participate buying and selling but they didn’t want to setup the custody and everything else, and so everyone wanted a clearinghouse and Bakkt’s going to have a clearinghouse, and so these one-day futures and then they’re going to have cold-storage custody, and so it’s going to make it much easier for lots of second-tier brokers to buy and sell coins.
Again, would it help if it was done last year when all this was…because I think if you had gotten people hooked into the game earlier, they’d have been more willing to participate later, but I think all of this architecture just allows institutions to slowly move into the space.
Laura Shin:
But yeah, I mean I guess what you were talking about, that consumer piece, I just wonder how that’s going to happen because right now when I use my credit card I get, like, points and I can use it to buy tickets and…
Mike Novogratz:
It might not just be Bitcoin. There might be Starbucks coin and Stablecoin, and at one point your digital asset wallet, right. You’re going to have your tickets to the U2 concert that are there that are, you know, blockchain-based tickets. You’re going to have…
Laura Shin:
Yeah, I would do that because buying secondary tickets is terrible and you don’t know if you’re going to be defrauded and stuff.
Mike Novogratz:
You’re going to be able to. Maybe it’s Starbucks points and they’re going to…you’re going to trade Starbucks coin and buy your Starbucks with Starbucks coin and he’s going to…and that exchange is going to sit in the middle.
Laura Shin:
Oh, I see what you’re saying.
Mike Novogratz:
So, he’s starting with Bitcoin. Back to starting with Bitcoin, but my guess is and I’m, you know, we own one percent or something and so I’m not going to drive that decision, but knowing how Jeff thinks, he’s not doing this to be a bitcoin exchange. It’s going to be whatever coins these guys want to trade. Whatever tokens these guys want to trade, he’ll be the liquidity provider and companies don’t want to take Bitcoin risk, or Ether risk, or Stablecoin risk, right.
So, they’re going to instantly transact with this exchange. What does that look like? It looks like a payment system and so instead of using Mastercard and paying the processing fee, he’s going to drive fees much lower. It’s literally like the trojan horse way to go after payments.
Laura Shin:
So, it’s sort of like getting the merchants hooked because it’ll be cheaper for them.
Mike Novogratz:
Yes.
Laura Shin:
And then the merchants will try to push the consumers to use it. Is that the thinking? Because I just feel like from the consumer perspective, like, there’s almost no reason why somebody in the U.S., at least, you know other geographies are maybe a different story, but at least in the U.S. there’s very little reason why somebody wouldn’t just use their credit card. Do you know what I’m saying?
Mike Novogratz:
Or use their Apple Pay, or something else.
Laura Shin:
Exactly, so that’s why I…
Mike Novogratz:
This is going to be a cheaper version of all that, in time.
Laura Shin:
Right, but it’s cheaper for the merchants.
Mike Novogratz:
Yes.
Laura Shin:
Right, so then that’s why I’m wondering how do you get the consumer to adopt it.
Mike Novogratz:
That’s a good question. I’m sure there’ll be advertising. I’m sure there’ll be something, right. I mean it’s not going to just happen, but I think there’s also when I asked about why Microsoft did it and they said listen, our users are young and they’re going to continue to remain young and young people…the crypto revolution is a young person’s revolution and so I think their sense is as that spirit grows they’ll have more users over time.
Laura Shin:
Yeah, well we’ll see.
Mike Novogratz:
So, none of these companies, unlike a lot of the crypto companies that had a 12 month or a 24-month horizon, Abby Johnson is not starting this crypto-business with a 12 or 24-month horizon, right.
Laura Shin:
Oh, yeah. No.
Mike Novogratz:
She sees hedge funds being tokenized and real estate being tokenized and where are you going to store it all? Where are you going to custody it? Oh, at her place, you know and so if that three trillion-dollar private placement market gets custody to some portion of it? I mean it gets tokenized, it needs to get custodied somewhere.
Laura Shin:
Right.
Mike Novogratz:
And so, I think both from payments and from custody, and from exchange, both those organizations are making long-term bets.
Laura Shin:
Yeah and I don’t want to make it sound like I don’t think things will go this direction. I do, it’s just that question of how because we’ve been through this before in 2014 where all these retailers signed up to take on Bitcoin, so I just…
Mike Novogratz:
Bitcoin is the wrong coin for retail because the whole idea of store of values, you’re hoping it goes up. Why should I be spending my Bitcoin on…
Laura Shin:
That’s interesting, but Bakkt is starting with Bitcoin.
Mike Novogratz:
It’s got the brand recognition. That’s why they’re starting with Bitcoin, but I think if you ask, and I don’t want to speak for Jeff Sprecher or anyone at Bakkt, but my guess is that if you asked those guys, they probably think there’s a Stablecoin in the future, or a loyalty coin that becomes the transaction mechanism.
Laura Shin:
Right, right.
Mike Novogratz:
So, I don’t…unless we have a dollar crisis, unless we have a financial crisis that makes `08 look small, where LIBOR blows up, where not the stock market going down. That’s not a financial crisis. A financial crisis is where we lose faith in the banks. Crypto is not going to replace fiat in the Western world. It just isn’t and so it can be the payment rails and it can create new social networks that disrupt existing ones. Like we talked about decentralized ridesharing or wherever, but we’re still going to think of our net worth in dollars.
Laura Shin:
Right.
Mike Novogratz:
What’s your house cost? What are you worth? You’re thinking dollars.
Laura Shin:
Right, right.
Mike Novogratz:
You don’t think in Bitcoin. We’re a long way from that transition and that transition’s only going to happen out of sheer crises, and I don’t see sheer crises, right. The banks are in really good shape. They learned from `08 so they have a heck of a lot less risk and a heck of a lot more capital, and so could we have a financial crisis? Of course, we could. Governments have borrowed up the hilt and we’ve got political instability everywhere and so there could be, but I think it’s a low probability.
Laura Shin:
Yeah. Well, keep talking in this realm because this was actually my next question for you. Because your hedge fund at Fortress was a macro hedge fund, so I’m just curious to know, like, what macro trends do you think could develop, or could affect the development of the crypto space in the coming years?
Mike Novogratz:
Yeah and so I think if we got a real devastating financial crisis, crypto would take off and you can kind of see that. You know, crypto picks up in Venezuela when Venezuela blows up or Zimbabwe when Zimbabwe blows up. I don’t, in general, think that’s happening and so because of it I think Stablecoins are going to become more and more useful.
Now, right now, Tether dominates the Stablecoin market and most of Tether is Asian and it’s, I’m guessing, used for people that don’t want to put their money back into crypto because they don’t want the authorities to see their money.
Laura Shin:
Right.
Mike Novogratz:
They don’t want to pay tax. They want some privacy with their crypto gains, but I do think there’ll be a market for what I’ll call catch me if you can Stablecoins and there’ll be a market for regulated Stablecoins, and I think you’ll see, probably in the regulated markets people use regulated Stablecoins in time, because it’s pretty convenient.
Laura Shin:
And what about other macro trends like, I don’t know. There’s a lot of stuff, I feel like, going on politically and not just in the U.S. but also even globally with China.
Mike Novogratz:
Listen, I think we’re in a trade war with China and it’s not just a trade war. It’s going to be a cold war and it’s going to be fought over technology transfer, and so I think it’s really bearish for tech.
Laura Shin:
Does that make it more bullish for crypto or bearish for crypto, too?
Mike Novogratz:
I actually don’t know yet. Right now, everything’s a little correlated because people just are nervous. In the long run it’s theoretically it should be bullish for crypto, but so here’s some statistics that are shocking. I just found out 25 percent of basically of all venture money has come from China. A rounds, B rounds, right but Chinese family offices and institutions have funded, in a lot of ways, part of this tech boom.
They made lots of money on it, right, if it’s the venture funds in Silicon Valley or the projects themselves. The Trump Administration doesn’t like that and so forget just the trade war. The next war coming is them fighting and why? China has really big ambitions to be the world’s superpower and you know they’re going to be a larger economy than the U.S. soon and I think there had been, you know, 30 years of administrations that bought into the fact that a strong China is actually good for the U.S., right. A healthy economy, more customers.
I remember when I was at Goldman Sachs we sat with Yuan Xie, who was one of the architects of the China Miracle. One of the giants. He was actually a physical giant and a mental giant, and we were talking about financial companies in WTO, the first round, and he was like oh no, we can’t compete against Goldman Sachs.
You guys are too good, you know, and it’ll take, you know, five years at least. Okay, it’s been 20 since, or 15 since, and they’re still not opening up their markets, but he said we’ll let Kodak in because we can, real quickly, see what they’re doing and do it better, and what was interesting was that we all agreed, right. Remember, China had a low per capita income. It was a rural to, you know, place that when I first went in `94 it was, you know, Shanghai didn’t look like Shanghai today, and so the mindset was it’s fair that China has a little extra room to catch up.
What happened was no one ever changed the rules and so because they kind of worked for everybody. They worked for the global elite because Chinese labor was cheap. They worked for China because they were booming, and it wasn’t until Trump really said wait a minute. These rules are no fair. It’s the, kind of, one thing that I think that Trump hit on something that’s bipartisan, that people say it’s no fair. China’s stealing our IP. It’s no fair that the rules are, you know, they’re a strong enough country now, they don’t deserve special rules.
Laura Shin:
Right.
Mike Novogratz:
Maybe they deserved special rules 20 years ago because they were a growing country, but now they’re a strong enough country and our middle class has gotten the crap beat out of it, and so there’s that process, and then there’s the process of going one step further where I think the Trump Administration’s at, which is let’s see if we can slow China down so they don’t become a superpower. How do we sabotage them, in essence, and so it wouldn’t shock me if H1B visas are almost impossible to get for Chinese.
Laura Shin:
Oh, boy.
Mike Novogratz:
Like, that, you know there’s 500 Chinese nationals educated at Harvard. Like, I think that’s a great thing. I’m not sure if anyone in the Trump Administration thinks that’s a great thing and so I could see this getting really ugly, and you know you saw the Huawei arrests, or executive.
Laura Shin:
Yeah, the CFO. Yeah.
Mike Novogratz:
Get arrested.
Laura Shin:
Was arrested.
Mike Novogratz:
That’s an aggressive, aggressive move.
Laura Shin:
Yeah, but just to take it back to crypto, like how do you think these things will affect the crypto market, or is it just like two unrelated, or?
Mike Novogratz:
No, I think it’s…listen, if China is consistent, they’re going to fight back, and they’ll want their own crypto market in some ways, right. It’s why when they were pushing NEO to be their version of Ethereum, at one point.
Laura Shin:
Yeah.
Mike Novogratz:
So, I haven’t given it enough thought. It’s negative tech, I know that. Does that mean it’s negative crypto or in a bizarre way does that become positive crypto? I think it’s probably negative. I don’t think crypto can exist outside of the regulatory framework. It can exist in a small scale and there will be privacy coins and there will be…you can make lots of money in what I call the catch me if you can network.
There’s some companies that are brilliant in doing it. Actually, some of the best companies in terms of profitability are outside of the regulated network, very catch me if you can. Bitfinex. BitMEX. Brilliant company, you know, BitMEX, but broader revolution you’re going to have to play within the regulatory sandbox.
Laura Shin:
Yeah, I saw Arthur recently. I told him I thought he was the happiest man in crypto.
Mike Novogratz:
He is the happiest man. He’s got the best business in crypto.
Laura Shin:
Yeah, yeah. I mean, he really is living it up.
Mike Novogratz:
Yeah.
Laura Shin:
Okay, so we’re almost out of time, but we’re soon heading into 2019. What predictions do you have for the upcoming year for crypto?
Mike Novogratz:
I’ve been yelled at for my last few predictions, so I should be careful. Listen, to be honest, I thought six thousand would hold because it held so long, and it didn’t feel like there were sellers and then we had this fork fiasco and I think that’s…
Laura Shin:
Wait, you’re talking about what exactly, the Bitcoin Cash?
Mike Novogratz:
The Bitcoin Cash fork.
Laura Shin:
Wait, the original fork or the…
Mike Novogratz:
No, the second one.
Laura Shin:
Oh, the recent one, yeah.
Mike Novogratz:
And I think that just exposed the immaturity still in the community that the moving around of hash power people said wait a minute. Can one guy actually impact the bitcoin hash rate and so I think, you know, Craig Wright and his gang did a lot of damage to the short-term credibility of the experiment, and that came at the same week where the SEC said, we’re going to find small fines on these two ICOs. Oh, by the way, if anyone wants to sue them, feel free, and that scared the shit out of people.
Laura Shin:
Right.
Mike Novogratz:
And so, people, I think, you know the fear quotient went up. We went through technical levels and then you started a liquidation, and the thing about a liquidation is you never know where they end. Like I look at the chart and think three thousand should hold and I think we’re in a three thousand, six thousand bitcoin range and then we will break up over maybe, I don’t know, the second half of the second quarter, or you know April or something.
Who knows, but it’s a hard…you know, it’s like picking tops and picking bottoms are hard. We are in a liquidation and it’s coming at a time when global markets are also in risk reduction, so the correlation is not the way you want it to be, but I don’t think the experiment is in crisis three thousand to six thousand. I don’t.
I think it’s painful for some people and there’s a lot of oh God, I wish I had, and if I’d only had sold, and you know maybe I’ve got to go back to work, and you know there’s a lot of genius traders that are no longer genius traders.
Laura Shin:
And wait, just to go back to what you were saying about how you thought that there might be a…what’s the word I’m looking for? A positive correlation between de-risking in both markets. A lot of people say like oh, if the traditional financial markets aren’t doing well then people will flee to things like crypto, but you don’t think so?
Mike Novogratz:
I don’t. I think, like I said, if the banks come under attack, I’d change my mind. Then, I think crypto would be a great safe haven, but right now there’s not enough correlation between, like, people with big portfolios don’t have big portfolios of crypto, big portfolios of stocks.
Laura Shin:
Right.
Mike Novogratz:
There are very few and so they’re kind of separate markets, but psychology is there’s no new risk takers, right. We were waiting here for institutions. It was like waiting for _____ 64:13. They’re going to come. The herd is coming. I mean, and people are…they’re going to throw eggs at me if I say it again. The herd is coming. It just takes longer than we all hoped and so as we were waiting here, anything that slows the herd’s risk-taking capacity down is not good.
Well, no one wants to take new risk when they’re getting the crap beat out of them in their old risk and so it just slows things down and that’s why the markets are trading more correlated than they necessarily, theoretically, should be.
Laura Shin:
And then so when I asked you about predictions, you kind of started with price predictions, but do you want to say anything else about how you think the space will develop or the technology?
Mike Novogratz:
I do. I think you’re going to see…listen, DFINITY, Hashgraph, Telegram, they haven’t even launched their blockchains yet and so there are great projects out there that are, you know, prelaunch. Oasis, Cosmos, you know a lot of cool projects. We’re working on a really cool protocol project I can’t talk about yet, and so I do think the computer science piece is going to move forward and I don’t think it gets there by the end of `19, but I do think you’re going to start seeing, like I said, watch the WAX blockchain.
EOS is going to, you know, have a lot of projects built on it so the kind of faster, more central, or less decentralized blockchains. I don’t want to get in an argument about what’s decentralization or not decentralization, but the blockchains that are built for speed, I think, are going to have an interesting 2019. I think you’re going to see the first surge of security coin offerings and by 2020 it’s a big market, and so it’s going to be, you know, we had the Regis Hotel, the St. Regis Hotel.
Laura Shin:
Right.
Mike Novogratz:
There’s one that…
Laura Shin:
Harvard’s doing it, yeah.
Mike Novogratz:
_____ 65:52 did here in New York, a 39-dollar building. By middle of next year, it’ll be like wait a minute, there is a security coin market and it’s pretty cool and I think Bitcoin will be more institutionalized. You’ll see institutions buying Bitcoin by the middle of the year as just part of their portfolio, and so I think those are three pretty cool things that should happen in 2019.
Laura Shin:
All right. Well, we’ll…
Mike Novogratz:
And then 2020, I think, we’re back to full Tarzan.
Laura Shin:
Well, we’ll have you back on the show and we’ll see how well your predictions held up.
Mike Novogratz:
Excellent.
Laura Shin:
So, where can people learn more about you and Galaxy?
Mike Novogratz:
We have a website, galaxydigital.io. I have been in 1512 articles this year, so I don’t think anybody needs to learn anything more about me.
Laura Shin:
Wow, you’re counting.
Mike Novogratz:
I just got that list from our PR person.
Laura Shin:
That’s amazing.
Mike Novogratz:
They counted. We have gotten a lot of publicity, mostly good, not all and a lot of profile, so I think sometimes I need less.
Laura Shin:
Yeah, well the New Yorker one was probably, by the way, my favorite. We spoke about this before, is that you called yourself the Forrest Gump of bitcoin, but I told you. I told my mom I was the Forrest Gump of bitcoin.
Mike Novogratz:
I know.
Laura Shin:
So, I guess the internet will see which one of us can claim that mantle, right. Well, thanks for coming on Unchained.
Mike Novogratz:
Laura, thanks so much. Take care.
Laura Shin:
Thanks so much for joining us today. To learn more about Mike and Galaxy check out the show notes inside your podcast player. New episodes of Unchained come out every Tuesday. If you haven’t already, write, review, and subscribe on Apple Podcasts. If you liked this episode share it with your friends on Facebook, Twitter, or LinkedIn. If you’re not yet subscribed to my other podcast, Unconfirmed, I highly recommend you check it out and subscribe now. Unchained is produced by me, Laura Shin, with help from Raelene Gullapalli, Fractal Recording, Jennie Josephson, Corin Faife, and Daniel Nuss. Thanks for listening.
