Billionaire Michael Novogratz is having a rough year, and, while it might be difficult to summon much sympathy for someone so wealthy, it is a cautionary story. His plight and that of Galaxy Digital Holdings Ltd. (down more than $100 million this year) shines a light on where crypto is and the challenges for institutional investors attempting to wrangle a most chaotic asset.
Billionaire Investor Michael Novogratz’s Tough Year
Bitcoin’s price is plummeting. Galaxy Digital coughed up more than $130 million in 2018, and that was just in the first nine months. Last week’s conference call with investors and media probably wasn’t something billionaire investor Mike Novogratz was eager to engage. “It’s been a horrible bear market in tokens,” Novogratz admitted. “There’s plenty of reason to be depressed.”
The company wagered big on crypto’s top three, bitcoin core (BTC), ripple (XRP), and ether (ETH). Needless to write, they’ve not done well (though XRP has performed less bad enough to take the number two slot by market cap). The CEO’s famed digital asset trading division shed tens of millions, and it doesn’t seem to be abiding. Third quarter earnings are down more than $40 million.
Everyone is attempting to find a cause for the broader markets bloodletting, and Novogratz puts much of the burden on creeping government regulators. He explained, “Part of the sell-off is because, I think, the SEC got tough on a few fraudulent ICOs. And not just were tough on them — they mentioned personal investors can go for reparations in most cases. And people got very nervous.”
There’s Always Next Year
The man who reports insist holds ten percent of his wealth in coins such as ETH and BTC jumped head-on into the game after flirting for a few months. What he saw at the end of 2017 he did not like, and markets were shook when Novogratz at first hesitated. By the second week of the present year, however, he launched what some referred to as the Goldman Sachs of crypto, Galaxy Digital, betting his entire $400 million in crypto.
What’s more, the bank would be public, merging with Canada’s Bradmer Pharmaceuticals and First Coin Capital Corp, Galaxy would be listed on the country’s electronic trading platform, TSX Venture Exchange. He even congratulated himself on having balked initially, “I look pretty smart pressing the pause button right now,” he said fatefully almost ten months ago.
On the recent call, Novogratz was less boastful, “Listen, we’ve had an undeniable retail bubble. It was a frenzy that popped in December, January. We’re stuck in the in-between now. We are waiting for the institutional adoption.” To many in the ecosystem, he and Galaxy were institutional adoption.
Harder than He Thought
Humbled, he continued, “The bad news, in trading, is it was a business we thought would generate the most stable revenue this year, and we were just wrong. We also found that getting the right regulatory structure and getting the right technical systems in place was just harder than we thought.”
Indeed, the US Securities and Exchange Commission (SEC) has been aggressive when it comes to crypto, and initial coin offerings (15% of Galaxy’s business) were crushed. The SEC’s go-to position is something akin to all ICOs being securities by definition, and thus subject to their very expensive jurisdiction.
“As the rules get clearer with the SEC and other regulatory bodies around the world,” he told investors, “it’s easier, quite frankly, to build a business and it’s easier for institutions to feel comfortable participating. We are reaching out to regulators hoping to help structure some of the rules.”
Building versus Speculation
Crypto is a crow-eating space. Many hotshot investors thought themselves geniuses through 2017, only to be brought back to a cold reality this year. Novogratz appears to be somewhere in the middle, between rank speculator and longer term crypto ecosystem builder.
By Summer of 2018, Galaxy announced an index partnership with Bloomberg and their professional services division. The Bloomberg Galaxy Crypto Index (BGCI) launched with ten cryptos, weighted, according to a press release, “30% bitcoin and ether, 14.13% ripple, 10.63% bitcoin cash, 6.11% EOS, 3.77% litecoin, 1.67% dash, 1.66% monero, and 1% ethereum classic and zcash.” That’s infrastructure institutions can rely on to make better decisions, assuming they’re at all interested.
“I would bet by the second quarter, you’re going to start seeing real institutional buying,” he assured investors on the recent call. He’s resting his hopes now, it looks like, on Bakkt’s futures launch (itself pushed back into late January of next year) and Fidelity hedge fund management entering the cryptosphere (also January).
A Sober Hope
Even in this extended bear market, Galaxy continues to invest in funding rounds, keeping itself very much exposed to the crypto space, which is a sign of confidence. In recent public comments, Novogratz said what was probably on most everyone’s mind, telling the Financial Times, “2017 was just fun, it was almost stupid. This year has been challenging. It sucks to build a business in a bear market.”
“I fundamentally think you’re going to see big adaption in 2019, 2020,” he told his investors. “Lots of the items in the digital world, the e-gaming space, are low value items so I think people will be more comfortable participating in blockchain.”
Galaxy remains a company to watch as it relates to the crypto markets and enthusiasm, and it tends to follow, or lead, sentiment. That it went from big talk, congratulatory language, to more earthy tones, and is even now looking at “blockchain” investment is a cautionary tale for institutional investors, a ballad to use for deep reflection before jumping into a relatively new and very wildcat world.
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