Novogratz: Galaxy Digital Will 'Suck' if Bitcoin Fails to Become an Institutional Asset

Galaxy Digital is working on a project that may lead to institutions adopting crypto as an asset class. And the firm needs it, Mike Novogratz says.

AccessTimeIconJun 18, 2020 at 4:21 p.m. UTC
Updated May 9, 2023 at 3:09 a.m. UTC

With Galaxy Digital now working on an educational course for financial advisers, founder Mike Novogratz told CoinDesk he hopes it will help finally kick-start the institutional use of bitcoin, and turn around the asset manager's fortunes.

Novogratz, a Wall Street veteran, loves a compelling narrative. "Bitcoin specifically is a story about adoption," he said a few minutes into our call. "And the next big group that's going to adopt bitcoin as a store of value, as a digital gold, are the financial advisers."

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  • Earlier this week, Galaxy Digital announced it had partnered with the educational arm of CAIS, a financial product platform that specializes in connecting institutional investors – financial advisers, hedge funds, private equity – to alternative investments and products.

    The tie-up will see Galaxy provide educational content about crypto to wealth managers and financial advisors. Although the course will offer material on the broader digital asset space, as well as on the emerging market infrastructure, it will revolve around bitcoin.

    It's a "really sweet partnership," Novogratz said. Galaxy can make bitcoin's investment case directly to the strata of society that controls most of the country's wealth. "CAIS is spectacularly situated to help us educate them and then connect with them to sell our products."

    Indeed, going back to the narrative, Novogratz has long believed institutional involvement was the natural next step for crypto. While it may have started out as a "retail-driven, people's revolution," he predicted institutions would always get involved as the asset class grew in size.

    Novogratz saw a gap. As a crypto merchant bank, Galaxy offers clients asset management and advisory services; it uses its own capital to trade and invest in the space. It would become the bridge, allowing traditional capital to flow into the nascent crypto space.

    While Galaxy got off to a flying start, such as a high-profile investment into, the bank's performance over the past two years has been anything but spectacular.

    My mom told me money doesn't grow on trees, and right now it's growing on trees.

    In fact, Galaxy has failed to turn a profit since its launch: it lost a whopping $272.7 million in its first full year of operation. It rode the market rebound in the summer of 2019, but still lost $97 million in Q4 2019. Losses stemming from the its trading arm have wiped out its other revenue streams. A pear-shaped investment into WAX, a gaming token, for example, lost the firm as much as $47 million

    In order to keep itself going, Galaxy has been forced to shrink its workforce by 15%. But it may not be out of the woods yet. The bank warned earlier this year that the coronavirus outbreak would likely contribute to a further hit to revenue.

    Novogratz is confident, however, that institutions can help turn his company's fortunes around. It has taken longer than expected, he admits, but says he has this "intuition" that there's "going to be a big [institutional] take up in the next six to 24 months."

    What makes him so sure? It's all about the narrative, he said.

    "We would not be having this conversation if, you know, [the U.S.] budget deficit was going from 4% to 2% and everything looked hunky-dory," he said. "In one week after the coronavirus crisis started, the [Federal Reserve] did more QE than it did in the entire 2008-2009 episode."

    "My mom told me money doesn't grow on trees, and right now it's growing on trees," he said.

    Novogratz belongs to the school of thought that sees bitcoin ultimately becoming the digital equivalent to gold: a store of value, uncorrelated to the traditional markets. As such, this darkening macro backdrop is "fantastic" for the story of bitcoin.

    The smart money is buying bitcoin as a macro hedge, Novogratz said. Paul Tudor Jones, he says, is a perfect example of a well-known figure from the traditional space, who has seen the narrative and has begun allocating bitcoin to his fund. And that could open the flood gates for other institutions.

    Indeed, it does feel like institutional investors are getting more interested in bitcoin. Last Month, Fidelity found that 80% of those surveyed found the asset class appealing. The likes of Coinbase, Gemini and BitGo are racing to launch prime brokerages for an institutional crowd.

    "The drumbeat from the financial advisory committee on wanting to learn more about bitcoin and blockchain has been increasing," said Matt Brown, founder and CEO of CAIS.

    Which brings us back to why Galaxy is getting involved in CAIS. Novogratz said most of the content they plan to use had already been developed over the past three years. It had been collecting dust till last week. When they had tried to publish it before, institutions simply weren't interested.

    Novogratz says now is the perfect opportunity to use his course to proselytize about bitcoin and drive home the narrative that bitcoin is the new gold. "This education piece is selling the story," getting institutional investors comfortable with the asset so they'll potentially encourage other institutions to do the same, he said.

    Crucially, it will also provide Galaxy with the opportunity to connect with thousands of financial advisors who, between them, control more than a trillion dollars in wealth.

    Looking back, Novogratz realizes Galaxy Digital, as a bridge for institutions into crypto, came too early. "Quite frankly," he said, "the consumer business was the easier play." Even now, businesses such as exchanges, wallets, and platform providers, which cater for a retail audience, are, in his mind, still performing best in crypto.

    But by talking to investors about the "bitcoin story," Novogratz wants to be a key part of a sea change. His partnership with CAIS, he said, could be the "first big leg of more traditional capital coming into the space."

    "It's taken longer to get there than I thought it would, but it feels like we're finally through the starting line and starting to gain some pace."

    But, CoinDesk asked, what happens if bitcoin doesn't become this great institutional asset? If, after educating financial firms about crypto for a whole year, few roll their sleeves up and get involved?

    "If very few hedge funds get into the space, then my company's going to suck," Novogratz said. Galaxy can keep investing in businesses and trading crypto, "but the real core of what we're trying to is build this connectivity to institutions. If they don't come, you know, we're a little shit out of luck."


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