Compiled and edited by TechFlow
Moderator: Alex Thor, Head of Firmwide Research, Galaxy Digital
Guest: Mike Novogratz, Founder and CEO of Galaxy
Podcast source: Galaxy Brains
Where Crypto Goes Next with Mike Novogratz
Air Date: May 17, 2024
Summary of key points
In this episode of Galaxy Brains, Alex Thorn is joined by Galaxy Founder and CEO Mike Novogratz to discuss the latest developments in the crypto markets. Coming shortly after Galaxy’s Q1 earnings call, the conversation dives into the performance of different divisions within Galaxy, including record-breaking achievements in mining and asset management. Mike shares his thoughts on broader market dynamics, including the impact of ETF approvals and his predictions for Bitcoin’s trajectory in volatile market conditions. Alex and Mike bring a unique perspective to the intersection of finance, technology, and the regulatory landscape that will shape the future of digital assets.
overview
Alex said that the price of Bitcoin rebounded last week and the inflation data was lower than expected, and the market responded positively.
The interview touched on Galaxy's first quarter earnings, cryptocurrencies, Bitcoin adoption, and macroeconomics. It also touched on questions about Japan and some political topics.
Mike said Galaxy performed well in the first quarter and achieved $400 million in revenue in the first quarter. In particular, the mining business achieved its best quarter in history, and the asset management and trading businesses also performed well.
The growing importance of cryptocurrency in American politics is becoming impossible to ignore.
Mike said that although the price may not rise every month or every quarter, he is still confident that more institutions will participate in the cryptocurrency field in the next 12 to 24 months. He believes that the next movement in Bitcoin prices may be upward, especially as the Federal Reserve may cut interest rates as the election approaches.
Mike believes that the cryptocurrency space is a narrative-driven industry that requires use cases and proof-of-concepts to drive development. Institutional investor confidence in the cryptocurrency industry has grown significantly over the past six to nine months with the approval of ETFs. The Bitcoin halving narrative has also had a positive impact on the market.
Alex expressed the importance of cryptocurrency in American politics, especially its influence among voters in swing states. More than 20% of voters in swing states in the United States believe that cryptocurrency is a key issue. This is the result of a Harris Poll survey conducted by DCG and the Blockchain Association, involving five swing states including Ohio, Michigan, and Arizona. This shows that the issue of cryptocurrency has a wide range of concerns among voters, and there is no obvious partisan tendency between Republican and Democratic voters.
Both Mike and Alex believe that in the current dollar-based world, the cryptocurrency market is somewhat similar to commodity industries such as oil companies, whose revenue and activity levels are also dependent on the price fluctuations of the underlying commodity.
The Fed prints money
Mike is very concerned about the national debt and fiscal policy. He stated that the two main issues he is concerned about are cryptocurrency regulation and the national debt. If the US government (whether Biden or Trump) can solve the federal budget deficit of 26% of GDP (should be 20%), it will be bad for Bitcoin. Therefore, bad policymakers and profligate spending in Washington are actually good for Bitcoin.
The price of Bitcoin and gold are rising for the same reason - economic uncertainty. Bitcoin is rising faster because it is a new technology and a new commodity, and its adoption cycle is faster.
While gold ETFs have seen net outflows this year, the spot price of gold is rising. Individuals bought $200 billion of gold, including companies like Costco.
Mike said foreign central banks are buying gold at a record pace, especially China. Part of the reason is that the United States has imposed sanctions on Russia after the war in Ukraine, and other countries are worried that the United States will freeze their dollar reserves, so they have increased their purchases of gold.
Alex also believes that despite the net outflow of gold ETFs, the demand for physical gold remains strong. Both individual investors and foreign central banks are buying gold in large quantities.
About the US dollar
Alex believes that young people are more inclined to view Bitcoin rather than gold as a hedge against the US dollar. They value Bitcoin’s growth potential more and Bitcoin’s adoption is faster than gold, especially in times of economic uncertainty.
Mike said that although the US dollar is stronger than other currencies, it is starting to weaken. There are coordination problems between fiscal and monetary policies in the United States, which has created a false stability in the fixed income market. Treasury Secretary Janet Yellen has been criticized as the worst Treasury Secretary of her tenure because she supports large-scale deficit spending and does not make balanced cuts.
Mike believes that the yield curve and market stability. Yellen has created an illusion of stability in the fixed income market through invisible yield curve control operations. Fed Chairman Powell, who works with her, maintains this artificial market stability. The release valve is manifested in rising gold and silver prices, which should also be beneficial to Bitcoin. In addition, every stock market decline is an opportunity to buy stocks, because such a policy will lead to a nominal growth rate higher than the inflation rate, allowing debt expansion to be concealed.
Mike believes that long-term asset allocation should be carried out. Under the current policy environment, hard assets such as stocks, real estate, Bitcoin, silver and gold will have long-term investment value.
Debt Problem
Alex points out the plight of the middle and working class Americans. Middle and working class Americans are suffering from economic hardship because they do not have enough income to purchase assets such as real estate.
Mike believes that if the conservative estimate of the Congressional Budget Office (CBO) is followed, the US debt-to-GDP ratio will reach 250% in 20 years, which is unsustainable. The next Treasury Secretary will face the most important challenge of solving the US deficit problem, otherwise the country will fall into a vicious cycle.
Mike hopes that Bitcoin will gain popularity slowly and steadily, rather than rising to a million dollars quickly, because that would mean the collapse of society.
He pointed to the troubles in some countries, such as Nigeria and Turkey, due to irresponsible monetary and fiscal policies, as illustrating the instability in the global economy.
Alex believes that if the debt problem cannot be controlled, the United States will face hyperinflation or other serious economic problems, leading to social collapse.
Trump's candidacy
Mike believes that if Trump is re-elected, he will plan to increase his control over the Federal Reserve, which is a bad sign. The complexity of Trump is that his personal ethics has caused social divisions and his policies lack consistency. For example, he may claim to deport 20 million immigrants, but in fact he may only deport 2 million. Such a policy may lead to rising inflation due to the lack of labor.
Mike pointed out that although Trump was not friendly to cryptocurrencies when he was in office, he now sees a political opportunity to use cryptocurrencies to fight against the Democrats. On the same day that Joe Biden said he would veto the SAB 121 bill, Trump announced his support for cryptocurrencies to attract supporters. Nevertheless, cryptocurrencies need bipartisan support to develop in the United States.
Senators and Bill Influence
Mike believes that although cryptocurrency should be a bipartisan issue, currently in Washington, some people within the Democratic Party are opposed to cryptocurrency due to the influence of congressmen like Elizabeth Warren, who has great influence in the field of cryptocurrency.
He also pointed out the two sides of cryptocurrency, which is beneficial to liberals because it represents free choice, and to progressives because it can remove middlemen and achieve fairness.
Mike mentioned SAB 121, an accounting rule that affects public companies, which must record cryptocurrencies on their balance sheets if they hold them. The rule affects banks more than crypto companies because it greatly inflates banks' balance sheets. If the Democrats refuse to repeal SAB 121, it's like they're saying they don't like cryptocurrencies, similar to how they don't like dogs, which is a serious mistake. There are a large number of single-issue voters in the United States who are interested in cryptocurrencies, especially young people, and if the Democrats continue to oppose cryptocurrencies, these voters may turn to support other parties.
Japanese Economy
Mike first discussed the economic situation in Japan. Japan faces an aging population and low birth rate, and is a conservative country that does not welcome immigrants. They are the world's largest saver, and the economy has been in deflation for many years, and only recently has inflation appeared, which has made the economy active. Due to the high interest rates in the United States, Japan hopes that the Federal Reserve will cut interest rates to relieve pressure.
Bitcoin and ETFs
Mike pointed out that Bitcoin still outperforms in terms of risk-adjusted returns, second only to Nvidia and European stocks. Despite not going through the traditional "Bitcoin, Ethereum and altcoin cycle", Bitcoin continues to attract investors because it is seen as digital gold and performs well in the current macro environment.
He also pointed out new trends in the market, the launch of ETFs and the opening of wealth management channels have driven the adoption of Bitcoin. The concept of Bitcoin as digital gold has been deeply rooted in people's minds, and wealth management companies have begun to recommend Bitcoin to their clients. With the potential approval of ETFs, other crypto assets such as Ethereum are expected to gain greater recognition and investment in the market.
Imagine if the Bitcoin ETF was rejected on January 11th, it would be very negative for the Bitcoin price because the market expected it to pass. However, the market generally believes that the Ethereum ETF will not be approved, so the risk is skewed to the upside.
Mike believes that the current price of Bitcoin fluctuates between $73,000 and $57,000. The market volatility is low and many people have sold call options. If there is good news, such as the Fed decides to cut interest rates, the price of Bitcoin may break through $73,000 and rise parabolically. The rise in the price of Bitcoin requires less capital investment because the price is determined by the margin. If future inflation data (CPI and PCE) is lower and employment data declines, the Fed may cut interest rates in July, which will drive the price of Bitcoin up.
Mike believes that most new ETF buyers are not short-term speculators. They are buying Bitcoin for the first or second time and usually do not sell Bitcoin within a week. Usually, there will be an options market one to two weeks after the launch of the ETF, but there is no options market for Bitcoin ETF yet because of SEC restrictions. Once the options market is opened, it will attract a large number of retail investors and increase market activity and trading volume.
Mike mentioned the trading volume of MicroStrategy and Marathon. The trading volume of MicroStrategy and Marathon exceeds that of all Bitcoin ETFs, mainly because they have option markets, which attract a large number of short-term traders and day traders. Michael Saylor of MicroStrategy seized the market opportunity and increased the volatility and trading volume of the company's stock by issuing shares to buy Bitcoin. However, he has been selling shares every day in recent months, which may cause concern among investors, even though the market's trust in him remains strong. MicroStrategy's stock is currently trading at a premium to Bitcoin, but this premium may not last. Over time, the premium may narrow or even turn negative.
SEC
Mike expressed dissatisfaction with the limited cryptocurrency investment opportunities in the United States, mainly because the SEC does not approve many cryptocurrency companies to go public. For example, companies such as Bullish and eToro are waiting for approval, but due to SEC restrictions, investment opportunities are very limited.
Mike also mentioned mining companies and stock dilution. Many mining companies sell stock to buy equipment such as mining machines, and these company stocks trade at a premium to book value because they are seen as momentum stocks. The CEOs of Riot, CleanSpark, and Marathon are all smart to use this premium to sell stock and buy more equipment.
Mike questioned the SEC’s approval of Trump stocks such as Truth Social, which have received high valuations with no real revenue. He believes that the SEC’s actions are not good for retail investors.
Mike also discussed whether the meme stock phenomenon will persist for a long time. He believes that meme stocks have their own unique charm and skill requirements, and although they are speculative in nature, they may continue to exist.
Roaring Kitty and GameStop
Mike mentioned the GameStop stock frenzy that Roaring Kitty (Keith Gill) sparked three years ago. He posted a picture in his basement, which triggered a three-day frenzy that made GameStop's market value reach $17 billion. Mike praised Roaring Kitty's performance in the GameStop stock event, believing that he beat the system.
Mike mentioned the movie Dumb Money, which reflects on the events of the GameStop stock frenzy, indicating its realistic and entertaining representation of the events.
Mike is concerned that many people lost money after buying GameStop shares at high prices, even though early buyers may have made a profit.
Mike believes that low interest rates and massive government money distribution have led to the rise of cryptocurrencies and meme stocks, which is a form of financial nihilism.
Mike strongly criticized the current government's exploitation of the younger generation, citing Scott Galloway's Ted Talk, pointing out the plight of young people in terms of income, education and housing costs, and that young people are angry about the status quo.
