Galaxy Digital - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good morning and welcome to today's Galaxy Digital Conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the formal remarks, we'll conduct a question-and-answer session. Webcast participants can submit a question online directly through the webcast. Further instructions will be provided as Q&A begins. At this time, I'd like to turn the conference over to the investor relations team. Please go ahead.

Good morning and welcome to Galaxy Digital Shareholder Update Conference call. We're joined today by our founder and CEO, Mike Novogratz, President, Chris Ferraro, and Chief Financial Officer, Ash Prithipaul. Before we begin, please note that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors, including those identified in our filings with the Canadian Securities Regulatory Authorities on SEDAR and available on our website. Forward-looking statements speak only as of today and will not be updated. In addition, none of the information on this call constitutes a recommendation, solicitation, or offer by Galaxy Digital or its affiliates to buy or sell any securities, including Galaxy Digital Securities. And with that, I'll now turn it over to Mike Novogratz.

Mike Novogratz (Founder and CEO)

Good morning, everyone. Listen, it was just six weeks ago that we did the last of these calls the way our earnings work, and at that point, I highlighted that we were kind of entering a new era, that my optimism for the opportunity set that we saw had gone limit up relative to where it had been even four months before. That was mostly based on Corona and the dramatic response central banks and ministries of finance around the world have had, flooding the world with liquidity, creating a powerful, powerful macro narrative of why scarce assets like Bitcoin will be more and more important in people's portfolios, and why the digitalization of the world is going to accelerate. Stablecoins, hence, are growing by leaps and bounds, and so the whole infrastructure play that we've constantly focused on here, just more optimistic about that.

And I would tell you, in those six weeks, that enthusiasm has only grown. We've seen hallmark trades like Paul Tudor Jones buying Bitcoin in a hedge fund. There have been plenty of hedge fund managers that had dabbled in it, but no one had publicly bought it in their fund in a big macro way. That adds credibility to the space, but it also opens up the whole hedge fund universe to be able to think of Bitcoin specifically in this case as a macroeconomic tool. And so I'm sitting here today thinking, our business hasn't been stronger really since we started. You could talk about when we started right before the market really started to slip. But we started this thing as the idea that we were going to tap into the institutional adoption of crypto and Bitcoin and blockchain.

To date, it's been mostly a retail business, and some of our portfolio investments have done great if they were in that retail side, in that platform side. Institutions have been slow coming. You've been on these calls, and sometimes I sound like a broken record. They're coming, they're coming. We finally are seeing it. The Tudor Investment Corporation being one of the first hedge funds. We've seen other hedge funds since participate. They just haven't made themselves public. We are seeing it in asset management with more activity, with people coming to us and us looking at different partnerships for distribution. We're seeing it in our investment banking business with more activity, both people inside the industry where they see a consolidation, but also outside the industry. I'm seeing it even in the non-Bitcoin ecosystems.

Block.one, part of the EOS system, they're going to be launching their Voice token in a week. They spent a huge amount of money on it, and when you look at what's happening with Facebook and Twitter and the president, there is a wider opportunity today than there was six months ago for a decentralized blockchain-based social media presence, and so I guess my optimism is high. Last time I told you I was frustrated with our stock price; we were going to try to do a better job of telling our story and marketing our stock. Our stock has rallied a decent bit since. I am still frustrated with our stock price. We trade significantly below book. We have what we think is a growth business in a growth industry.

We are starting to hit metrics that will, in time, I think, make you guys and certainly make us feel like this is a growth business. And so there's been really a tectonic shift in momentum and thinking that I want to highlight. We see lots of opportunities, and so we're going to look for ways to find accretive capital for this firm. We are completely well-capitalized for the business we're running, but I see big opportunities both on the balance sheet and in our businesses. And so I'm not sure if that ends up being debt or converts or partnerships or joint ventures, or at one point, once our stock is at an accretive value equity. But I couldn't be more bullish right now, the opportunity set. Proud of the way our team has handled this crappy Corona season. We have been mostly remote and working very efficiently.

Chris is going to talk on it. So I'm going to stop there. I'm going to hand it over to Chris Ferraro for kind of business-by-business details, but just want to leave you with a sheer sense of my enthusiasm for the opportunity right now. I think Bitcoin is going to take out this 10,000 level, which has been resistance recently, and that opens up a much higher price range, first 14,000, then 20,000, and I just know how this works. Higher prices are going to generate more excitement, more activity, and more enthusiasm, and so a lot of my enthusiasm is built on this macro call, but I've got high conviction on it, so I'm going to leave it there and pass it to Chris.

Chris Ferraro (President)

Thanks, Mike. Quick note on COVID-19. Obviously, we are all collectively around the world continuing to face the challenges of the pandemic, its impact on the global economy, and its very real human cost. As a company, Galaxy Digital continues to prioritize the safety of our people, and we continue to work remotely. While we are heartened by the green shoots and improved prospects of reopening, we also remain sober about the risk going forward in making a full return to normalcy, and so we'll be taking a pragmatic and measured approach to any proposed reopening, allowing team members whose commercial activity benefits from in-person connectivity to come back to the office, travel, and so on under permitted clear guidelines, while allowing all other teams and employees to continue to operate remotely until we have much more clarity on the situation. Remember, we are Galaxy Digital.

Relating to the markets, after the liquidity and margin-driven declines in March, Bitcoin has staged a dramatic recovery, up 46% since March 31st and up 31% year-to-date. This compares favorably to almost every other liquid asset class. The S&P was up 17% since March 31, but down 7% on the year. NASDAQ was up 22% since quarter-end, but only up 4% on the year. Euronext, European stocks, up 10% since March 31, but down 18% on the year. Even gold was up 9% since March 31 and only up 12% on the year relative to Bitcoin. As Mike previously mentioned, and despite what some other old guard Wall Street firms may outwardly claim now as their position, we continue to believe that Bitcoin's thesis as a digital store of value has never been more clear and that the path forward towards institutional adoption has never been more compelling.

To that end, as you all know, we have to date geared Galaxy Digital towards being an institutional service provider and market participant in the cryptocurrency sector. We're pleased to report that April and May have been some of the most active and productive months for us on the business development front across all of our businesses, despite the quarantine and global pandemic. While I cannot talk in detail yet about some of the more impactful initiatives we are pursuing, we do have a full calendar of announcements to share ahead in the coming days and weeks, so stay tuned. Outside of Bitcoin, 2020 has brought a number of significant tangible examples of cryptocurrency, digital assets, objects, and distributed ledger technologies beginning to take root in commercial applications and other use cases. Mike mentioned EOS and Block.one and the launch of Voice.

Stablecoins, for example, have continued to gain adoption with total market cap for the two largest coins, Tether and USDC, growing from $4.6 billion at the end of the year to $9.6 billion today, almost doubling. It's $5 billion of net incremental digital wealth entering the ecosystem since the beginning of the year. Bakkt, one of our portfolio companies and a subsidiary of the Intercontinental Exchange Group, announced their launch later this year of an ambitious Bakkt consumer app that will allow consumers to store, buy, sell, trade, and redeem all of their digital assets: cash, Bitcoin, reward and loyalty points, in-game points, etc. We've seen the demo, and our entire team is excited to become day-one users. Also, just two weeks ago, Reddit, the 19th most visited website in the U.S. and the world, announced that they would begin testing their own on-platform cryptocurrency content reward program.

The list goes on, but I think it's important just to highlight that the grand cryptocurrency experiment is far from over. In fact, it is still very much in its infancy. And we believe the opportunity set for Galaxy as a service provider and capital allocator focused on this space is going to continue to expand for years to come. Turning briefly to results, and I'll let Ash go through this next in much greater detail, in the first quarter of 2020, Galaxy reported a comprehensive loss of $27.7 million, reflecting first realized and unrealized mark-to-market losses in digital assets of $25 million and second gross operating expenses of $15 million. These first two components were partially offset by positive realized and unrealized investment gains, as well as operating income totaling $12.3 million.

As we discussed recently on our Q4 update call, the significant decline in the crypto markets and in risk assets more broadly in March were the primary driver of this loss. At the end of the first quarter, we held 10,092 Bitcoin when its trading price was approximately $6,400 per coin. However, as I've already pointed out, since March 31, Bitcoin and the BGCI have posted increases of 46% and 35%, respectively, and furthermore, we've continued to accumulate additional Bitcoin through our business activities, such that as of May 27th, we held 13,338 Bitcoin with prices trading around $9,400 per coin. Now, let me take a few moments to discuss each of our operating businesses, how they contributed to the quarter, and why we're so excited about the remainder of fiscal 2020.

In our trading business, the first three months of 2020 brought an uptick in market volatility across the board. This led to a strong increase in trading volume in actively trading counterparties, which has continued into April and May. Our franchise trading business grew its counterparty base by 18% quarter over quarter and saw a noticeable uptrend in traditional asset managers entering and completing the onboarding process with us. Our trading arm is particularly well positioned for the increased interest we've seen from these traditional players entering the digital asset space. Our team has the experience and background, and more importantly, the audited institutional-sized balance sheet needed to facilitate trades at a larger scale than the vast majority of our competitors. We believe the trend of traditional asset managers entering the space will continue.

We're having new conversations now nearly every day with multi-billion-dollar fund managers asking to learn more about Bitcoin and discuss how they can responsibly add it to their portfolios. We've successfully built the infrastructure to scale our trading business, and our priorities for the remainder of 2020 remain the same, completing the migration of counterparties to our eOTC product, giving them electronic access to spot trading, automated settlement, and research and commentary, expanding our eOTC product offering into a full single dealer platform, giving counterparties access to electronic agency execution, lending, margin financing, derivatives, and synthetics, optimizing our own balance sheet through cash lending and basis trading, as well as the relaunch of our digital asset lending offering, and finally, scaling up our market-making capabilities and alpha-generating strategies in our quantitative trading business.

Asset management, as I've articulated now throughout, 2020 has seen increased market demand for Bitcoin, and we continue to focus on the Galaxy Bitcoin Funds accordingly. Whereas our Galaxy Crypto Index Fund holds a basket of the largest, most liquid cryptocurrencies, our Bitcoin funds meet the strong current market interest for safe, simple, and secure ownership of Bitcoin. Our continued conviction in the case for Bitcoin has deepened as we observe a whole new class of institutional players entering the space, especially since March. In our regular surveying of the registered investment advisor community, asset management has seen interest in Bitcoin lift significantly, with 54% of surveyed advisors in May, "likely to allocate to Bitcoin in the next 12 months," compared to only 25% in January, even just considering an allocation.

In the immediate here and now, overall demand in Q2 has picked up with the Bitcoin funds realizing net weekly inflows each week in the second quarter thus far. To capitalize on this market momentum, asset management continues to develop the Galaxy Fund Management, or GFM, brand as the public face of our crypto products. Our targeted 2020 marketing campaign has driven strong initial results. The campaign is increasing brand awareness across institutions and advisors, positively shifting their perception of digital assets and educating them about the role of digital assets in portfolios.

Further to this strategy, I'm pleased to announce that Galaxy will be launching in June a six-month cross-channel content program with the Financial Times to educate the FT's 185,000-financial advisor audience on digital assets and Galaxy's differentiated solutions, allowing us to continue to strengthen our brand positioning as the bridge for traditional wealth advisors and the institutional adoption of digital assets. In regard again to the first quarter, our Galaxy Interactive Venture Capital team, who manages the Galaxy EOS VC Fund within the Asset Management Group, continue to take advantage of their expertise and access in the interactive content space. They made seven new investments and one follow-on investment in the first three months of the year.

The quarantine period, this pandemic is acting as an accelerating factor for existing trends towards e-commerce, work from home, and the interactive online metaverse, and our interactive team is continuing to see some of the early-stage opportunities there are in the space. Overall in asset management, we ended the first quarter with $356 million in AUM, and I'm happy to report that Galaxy Fund Management has now, on an interim month basis, crossed the $50 million of AUM mark during the month of May, a key early milestone for that team. I'll now proceed to our investment banking business, Galaxy Digital Advisors, which continues to establish itself as the leading strategic advisory firm in the blockchain technology and digital asset sectors. In 2020, we've seen further consecutive quarters of growth in our mandated backlog, and the business has a number of active M&A and financing mandates currently underway.

In terms of completed business in the first quarter, Galaxy Digital acted as a strategic advisor to a confidential client in the Bitcoin mining space, as well as sole placement agent on a Series A capital raise for a consumer lifestyle and leisure brand. Not directly in our core end market, but the kind of innovator in its sector for which Galaxy was a strong fit, and our role there demonstrates the broad expertise of our investment banking team and the multiple areas we have for potential growth in the future. One area of particular focus for Galaxy Digital Advisors is our emerging franchise in Bitcoin mining. The sector is capital-intensive and currently undergoing an evolution that is seeing the emergence of large-scale Bitcoin mining data center projects with commensurately large and more sophisticated financing needs.

Galaxy Digital has firmly established itself, its domain expertise, and is working with a number of clients currently. We expect a lot more to come in the space. Finally, in terms of our balance sheet and principal investments, our team has continued to pursue opportunities across both debt and equity, and our portfolio remains healthy and strong. The team's five follow-on investments total $14 million in the first quarter, and we've begun deep-dive industry mapping across adjacent sectors in order to broaden our scope and ensure that we're finding the best companies building towards the future of digitization. With that, I would now like to turn it over to Ash to walk everyone through the specifics of our financial performance for the first quarter. Ash?

Ash Prithipaul (CFO)

Thanks, Chris. I will now provide some additional details regarding our financial results for the quarter. Our comprehensive loss in the three months ended March 31st totaled $27.7 million. The current quarter loss was largely a result of realized loss on digital assets and operating expenses. The first quarter 2020 figure includes $1.6 million of equity-based compensation expense, which is a non-cash charge and has no net effect on equity. This brings our total equity or net book value to $328 million as of March 31st, or CAD 1.64 of net book value per share, or $1.16 of net book value per share. As of March 31st, the number of compensatory Class B Units and stock options outstanding were $18 million and $14.6 million, respectively. The aggregate compensatory awards have a value of $12.1 million remaining to be amortized over their life.

Operating expenses for the three months ended March 31st were $15 million, inclusive of equity-based compensation of $1.6 million over the same period. Regarding our balance sheet, $14.2 million of follow-on investments during the first quarter brought the investment balance to $169.6 million. As of March 31st, we held 40 individual investment positions, excluding our cryptocurrency and pre-ICO holdings, with no single investment position representing more than 8.9% of our net asset value. We're pleased to report that we had $97 million of liquidity as of quarter end, inclusive of net digital assets and net of forward commitments and projected future expenses, providing ample liquidity with which to continue to operate the business. With that, I'll now turn the call back to the operator so we can address questions from our equity analysts and investors. Operator, any questions from our equity analysts?

Operator (participant)

Yes, we have one question from Deepak Kaushal with Stifel GMP. Please proceed with your question.

Deepak Kaushal (Managing Director)

Oh, hi. Good morning, guys. I hope you guys are all staying healthy and positive.

Chris Ferraro (President)

Hey, Deepak.

Mike Novogratz (Founder and CEO)

We're trying.

Deepak Kaushal (Managing Director)

Excellent.

Ash Prithipaul (CFO)

Thank you. Yeah.

Deepak Kaushal (Managing Director)

Excellent. So I've got a couple of questions. First, some housekeeping questions, maybe for Chris and Ash, and then some bigger picture questions for Mike. Just looking at the trading losses, the realized trading loss in Q1, $37 million. I'm just wondering if you can give us some color on how you traded through the flash crash. So there's $37 million realized loss, $14 million unrealized gain. What were kind of the moving parts there? Can you walk us through that?

Mike Novogratz (Founder and CEO)

Yeah, I can. The reality is we didn't trade it wonderfully. The good news is we didn't sell anything at the lows, and after the bounce to kind of reasonable levels, we added some. And so it was kind of P&L up early in the year, right? You forget we had a big rally in the early part of the first quarter, kind of a surprising rally to me. I was perplexed by it. We were long, but we weren't overly long, our index, because I didn't understand where the buying was all coming from. It turned out it was tremendous amounts of Asian leverage. As that got washed out, we had a big loss, and then as the market bounced back, we've made that money back and then some. And so, listen, with better trading, we would have sold a lot during the breakdown.

It happened very fast, and we were slow and didn't react quick enough, and hence didn't have a ton of powder to buy at the really distressed levels but did add some. And so I think your net of the whole thing is an opportunity lost and exposing ourselves to much more P&L volatility than I would have liked to have, right? You would have rather cut some of your position at 8,000 and bought a lot back at 5,500. And we didn't manage to pull that off. And so call it a neutral. And I know the P&L shows differently because some of those were coins that we were short against longs, and you'll take a loss on some, and there's unrealized on others.

But kind of from where I look at it, the net of the whole thing over the down, up, down, kind of $8,000-$8,000 is probably neutral.

Deepak Kaushal (Managing Director)

Okay. That's helpful, and so primarily on your own book of trading, not related to facilitation of client trading?

Mike Novogratz (Founder and CEO)

Yeah. I think one of the things to be clear about, and it's something that we very much think and hope will change over time. And one of the, I'm sure, the frustrations with you guys as analysts is that our balance sheet is still large. A good portion of it's in coins, and the volatility of that balance sheet still overwhelms the volatility of our earnings in our core businesses. When we started this company and went public two and a half years ago, the idea was over time those businesses would grow and the balance sheet would be less important relative to the business earnings. And it's been a long haul. We haven't grown the businesses fast enough to do that yet. I'm optimistic that we're finally seeing the sunshine. And a year from now, I hope that the P&L of those businesses is stable enough.

Listen, banking P&L is stable. It goes one way. It goes up or flat. Asset management P&L goes, you get assets, you get paid, and so it's constant revenue versus how much you're spending, but that's a pretty stable business, and our customer flow trading business should be a heck of a lot more stable than the proprietary business that I broadly manage, and so we're still the volatility of our company still is a little overwhelmed by the big moves to the market. If you're long 13,000 Bitcoin, you can do the math on how that moves the P&L, and again, my fault for not having sold a bunch more when it was high and not bottom low. I mean, that's what I'm supposed to do, but that's just the reality of where we're at.

Deepak Kaushal (Managing Director)

Got it. Well, if we could all time the market perfectly, there wouldn't be any opportunity to time that, so I get it. But just on the operating side, Mike, I know you guys have a pretty good discipline on what you expect to burn over the coming year. What are your thoughts on, as we exit in the post-halving environment, thoughts on breakeven, when you might be able to achieve that in your business based on current outlook and trajectory?

Mike Novogratz (Founder and CEO)

I think, listen, I'm hopeful that the banking business does it this year. You look at the pipeline that they have and the opportunity. I have to assume that a bunch of the stuff in the pipeline gets done because it feels like it will. And so I think that business could. And then I think we're probably 12 months away. Chris, you might want to chime in on trading business and the asset management business the way we have cost allocated.

Chris Ferraro (President)

Yeah. There's a couple of things, Deepak, that I think I want to articulate here, which is totally agree with Mike on the advisory business. I also think I want to caution you, though, that the growth in the pipeline of that business and the opportunity stuff for that business is such that we would be making a mistake as we execute on some of the current mandates to not continue to grow the team, to broaden out and really go attack the opportunity set. So I think there's going to be a push-pull between "profitability" and growing the business like most other growth companies. And so we're going to pay close attention to that. But I think for shareholders and for ourselves, limiting the growth of the business by constraining the team would be a mistake.

I think that that's one that we'll see that we're going to monitor. The trading business, as we articulated before, is a big investment for us, both across the front office team, but much more so in the technology engineering team, the operations team, for our finance team, because we're building infrastructure for a market that just didn't exist before. That business is going to get there with industry volume and our share capture growth increasing, and it's going to get there with going horizontal with additional products and higher margin trading products. That's why we've referenced derivatives and synthetics and structured products a lot. It's a big focus of ours. We were in that business in earnest in the first quarter. We've continued in the second quarter.

That combined with share capture and bringing more customers in and more volume on our platform, as well as financing, rolling out the single dealer platform and financing customer trades is going to be what gets us there on that. Our asset management business, the only thing I'll point out is that, and it explains a little bit of what Mike referenced with our balance sheet, we have asset management fees from the EOS VC fund and from our Galaxy Fund Management business coming in. We don't accrue internal asset management fees or performance as revenue for our own balance sheet, and yet we have the team managing, as Ash pointed out, over $170 million of capital internally for the company. That distorts, in my view, the "profitability" of the asset management business. We manage significant assets, and that group is profitable.

And so anyway, I just want to characterize it that way for you.

Deepak Kaushal (Managing Director)

Okay. That's helpful. And so a year from now, aside from the principal book and stripping out that internal management piece, what do you expect to be the biggest bucket of year four in the business?

Mike Novogratz (Founder and CEO)

It should be the trading business, revenue-wise. Not profit-wise, but revenue-wise. That's where the growth has to come. And within the trading business, I think our edge, if you want to think of it that way, is going to be the volatility book, i.e., derivative structured product book, which is always paired with the financing side.

Deepak Kaushal (Managing Director)

Okay. That's helpful. That's helpful. Thanks, guys, Mike and Chris. So bigger picture question, the halving's come and gone, Libra's come and gone before that, Telegram's kind of come and gone. I guess from a mainstream perception or mind share interest, we have the macro thesis push and pull between inflationary pressures or deflationary pressures, short-term, long-term. Mike, what's next? I mean, in terms of a big mainstream catalyst, something my taxi driver is going to be asking about related to Bitcoin, is it only an ETF? I mean, what else do you see on the horizon that could create the 2017 environment?

Mike Novogratz (Founder and CEO)

What's interesting is, I think it's still hard to buy Bitcoin. It just is. JPMorgan and Wells Fargo just recently decided they would bank Coinbase and Gemini, right? The two kind of most regulated exchanges or well-behaved exchanges in the U.S. When Facebook brought out Calibra, which they renamed after me called Novi. Well, they actually didn't rename it after me, but they didn't. When they brought that out, Facebook, one of the biggest companies in the world, couldn't get banking for Calibra, and so there's been this bias against crypto, and that is melting. It's melting relatively quickly, and so what I think the next 12 months is going to be in Bitcoin is easier and easier access points, right? Listen, our fund, we are hoping to get it rated by the big consultants. That hasn't happened before.

We want to sell it through the registered investment advisor channel. That hasn't happened before. I think TD Ameritrade is, at one point, going to allow their customers to buy direct on their platform. Gemini just did a partnership with Samsung where now when you get a Samsung phone, you have a Gemini account, and you can buy Bitcoin direct. So I think you're just going to see easier access, easier on-ramps to Bitcoin and the whole crypto universe, especially as stablecoins become a real thing that everybody participates in. Listen, the Calibra/Novi project is going to happen and is probably going to happen this year. That's 2.8 billion people that are going to have a wallet that allows them to use crypto and to buy Bitcoin.

And so I just think this is a story of adoption, and we're going to see an acceleration of adoption because the macro story ain't going away. The economy might feel better right now because in America, at least, disposable income year on year is up, not down, which is a crazy statistic. That's how much money the government is putting in the system. Think about it. I just said disposable income is up, not down. And so we have this bizarre in-between state where we just keep writing IOUs. At one point, that IOU story is going to. You're going to see fixed-income markets yield curves steepen, but that IOU story is going to continue to bubble and then erupt. And so I don't see the macro story, which is supporting this enthusiasm I have, deteriorating. There's no easy fix for it.

It's not like, "Oh, we're buying the highs, and then it's all going to reverse," and we're like, "How do we ever make that mistake?" This is just math. The amount of borrowing has accelerated, and it is accelerating, and we're going to an election year, and so unless a dam bursts or Mars flies down and we have a whole new regime set, I just think this is going to be a growing story. Tell me where I'm wrong.

Deepak Kaushal (Managing Director)

And then my last. Yeah. That's helpful. So just to play it back, so continued positive macro environment and gradual growing adoption, but no real mainstream catalyst on the horizon.

Mike Novogratz (Founder and CEO)

Yeah. I don't think we get an ETF this year. I don't. Goldman Sachs put out a paper, which is interesting. Listen, Goldman Sachs is a big and diverse firm, right? They've got different divisions and different personalities. The woman who runs the CIO of the wealth management business who wrote this paper is actually a friend of mine, and I debated her a month ago privately on this thing. Listen, they put out a negative piece on Bitcoin, hammering it for a few things. I think it was a 2014 view of Bitcoin and crypto, not a 2020 view, and we'll see. I do think you're going to see. I mean, just put yourself in the position. So you've got Tudor Jones, one of the biggest hedge funds. Now, let's assume within the next six months, 10 other hedge funds start participating in Bitcoin.

Just make that assumption for a second. You're running Jefferies or Bank of America or Goldman, and you're like, "Wait a minute. Our biggest clients are now starting to trade something, and we're not going to participate?" That's just not the way the world works. And so once the opportunity set gets big enough, these guys are not going to want to miss it. And I know factually, I have friends in lots of these organizations, there are big debates and fights going on in a lot of these places about how do we get involved in this kind of shift. And there's multiple parts of it, right? There's trading Bitcoin and then other cryptos. When we have a dollar-based stablecoin and part of the FX world is trading there, it's irrational to think that the big FX players aren't going to want to participate.

I think this is just a matter of time before the bulge bracket firms are participating in digital assets from Bitcoin to other digital cryptos.

Deepak Kaushal (Managing Director)

Okay. Sort of an institutional FOMO as opposed to a retail FOMO we saw in 2017. Okay, so my last go ahead.

Mike Novogratz (Founder and CEO)

It's a FOMO to start, but it just becomes a reality, right? China is moving their currency to a—they're going to launch this year, they say, right, a crypto Renminbi. When Libra and USDC, as those crypto dollar-backed stablecoins, become a bigger and bigger part, it's almost an essential that you're participating.

Deepak Kaushal (Managing Director)

Okay. Thanks. So my last question, and I don't want to dominate the call, but hopefully there's more sell-side analysts with questions out there. Telegram pulled their TON token. They had a run-in with the SEC. What are your thoughts on the implication of this to the ecosystem? And the biggest question I get from investors by far since you went public is, when are you guys ready to start talking about your business more actively with U.S. investors? So just can you square those two things together and give me a sense of the regulatory environment here?

Mike Novogratz (Founder and CEO)

Yeah. Listen, so there are two different answers. Telegram, the SEC made it really clear that they were not going to allow the ICO process the way it used to run to happen, right? Period. You're going to have to go through some registration process to raise big capital. I made Telegram the poster child of that. Telegram thought about launching the token without the U.S. and realized the strong arm of the U.S. regulatory environment is just too strong to mess with. They've got an amazing business. Their business is probably worth $15-20 billion just as a messaging business if they wanted to sell it to somebody. I think they shelved that and went back to doing what they were doing. Very frustrating. I didn't think we needed another blockchain, right?

I kind of think Telegram could have, in some ways, just as easily put Bitcoin on their messaging system. I mean, if you think about even what Libra and Calibra are, Libra is a blockchain-based system that's going to have its own cryptos on it. Calibra, the Novi wallet, is Facebook's interface with it. Did they really need to build another blockchain, or could they have used the Bitcoin blockchain or the Ethereum blockchain or the EOS blockchain? And so in some ways, I'm not positive we needed another blockchain with Telegram, but it's a real frustration because they have 300 million users that would have also been instantly using crypto. I keep telling them, or at least sending messages, that they should put Bitcoin on their messaging system and see how fast that helps the ecosystem grow. And so we'll see.

With us, listen, we are a registered we're a Canadian-listed company. We're based in the U.S. We're a Cayman-based company. And we are still under restriction, partly because of the makeup of our balance sheet. There's a thing called the 1940 Act in the U.S., which doesn't apply in other jurisdictions, which, even with Bitcoin not seen as a security, we have a big venture part of our balance sheet. And so we're working on that. We certainly understand our stock would trade better if we were able to market it in the U.S. We haven't given up on the Canadian markets at all. We're going to make a concerted effort to be up there more often and try to tell our story better in Canada. I've seen what happened in cannabis.

What drew me to Canada originally was the Canadian markets took a frontier approach, and people made a lot of money, and there was a lot of good liquidity, and not just once. It kind of came and went and came and went and came and went in the cannabis sector, and so I'm hoping that the Canadian market kind of reawakens to the opportunity set in digital assets and crypto, and other than that, we're going to continue to work to expand our footprint.

Deepak Kaushal (Managing Director)

Yeah. On the latter, I couldn't agree with you more. Seeing what happened to cannabis, you guys have outperformed a lot of those blow-ups. So we're hoping the Canadian market reawakens to this as well. I appreciate all of your thoughtful answers, and I'll hand over the line. Thanks again.

Chris Ferraro (President)

Thanks, Deepak.

Operator (participant)

Thank you. Thank you. We will now turn it over to online questions.

Great. Well, thank you. We're getting lots of good questions, so thank you to everyone who submitted. Our first question is, can you talk a little bit more about how your advisory business is developing? Where are you focusing? IPOs, follow-on opportunities, M&A, and beyond mining, what sectors are most relevant to your advisory business?

Mike Novogratz (Founder and CEO)

Chris, you want to take a crack at that?

Chris Ferraro (President)

Yeah. I'll take this one. Yeah. As I said in the prepared remarks for the call, one of the big sectors we are focused on in the advisory business is the Bitcoin mining sector. It's a sector that we've identified early as being ripe for us and opportunity for a lot of reasons. One, there was a clear catalyst this year, just this month, with the supply issue in Kazakhstan. And so that just changes the economics of the whole industry. And you've got multi-billion dollars of capital invested in largely fixed, not removable assets that need to get either replaced or retooled for the new economics. And so between that catalyst and real-scaled and experienced operators, thinking about the economics of Bitcoin mining, but also using Bitcoin mining from an energy and electricity grid perspective to offset peak times when capacity is low to generate incremental revenues.

There's lots of really cool opportunity and really good ideas going on there, real big players, and obvious capital needs for that space. And so our team has been spending a large amount of their time traveling the world, meeting the players coming in and being a part of the conversation. And so there's just whether it's restructuring, M&A, new project financing, both equity and debt financing, there's a number of opportunities that we're in active engagements on. And I think that sector is going to be an obvious one for us for recurring repeat business every year. So that's one. The other areas that we're seeing activity in, certainly in M&A, we're at the point in some areas in cryptocurrency and blockchain of consolidation.

And so I think if you just look in the news media, they're kind of press release after press release of smaller subscale market participants being merged or being acquired by larger participants. And so that opportunity for us, having known all the players and having the perspective to either play sell-side or play buy-side or play both in some cases as an advisor, is sort of what we underwrote, and it's what we're seeing right now. And so outside of mining, the areas where we're seeing that is both on the exchange side as well as on the consumer app and information and data side.

Operator (participant)

Great. Thank you. Our next question is, what's your view of MMT, QE, and sustained monetary stimulus? Is there a bright line for your team when debt and budget deficits cross the Rubicon? Said differently, what odds are you placing on substantial US dollar currency debasement?

Mike Novogratz (Founder and CEO)

Yeah. Let me answer that. Because I've thought about this thing for years. So MMT, for those on the call that don't follow it, is this theory that as long as there's not inflation, you can run as big of a deficit as you want forever. And so let's not be scared about borrowing more and more money because inflation will give us the signal when we've borrowed too much. That's broadly the simplified version of what MMT is. And until the world says, "Oh, no, you're wrong," you can feel very smug that you're right, right? Look at what Japan has borrowed for all these years, and they haven't blown up. And so we've just taken our budget deficit from 5%, which was stupidly wide for full economy, full employment GDP growing, to now 20%-25%. We've only had deficits this high in World War II.

We don't really have a political environment right now that's going to try to stop that, right? We had the Tea Party that came out after 2009's QE and all that kind of craziness where everyone worried that they were going to debase the dollar. And then the Tea Party showed up and stopped spending. We don't have the Tea Party anymore. Donald Trump swallowed the Tea Party and spat them out. And so we've got populism on the left, free college, free this. And so the worry with MMT is you don't know when the market says enough. There's a thing in economics called the Minsky moment, which is really where confidence breaks down. You don't know when confidence breaks down. You don't know what the spark that breaks it down is, but you know it's out there, right?

Money doesn't grow on trees, and if you just keep pushing more and more money into the system, at one point, people devalue money. There's interesting statistics. If you look at the price drops in the 2009 collapse versus this collapse, you could argue this collapse was a lot worse than 2009, but prices are a full 2% higher, right? They fell 2% more in 2009 than they have fallen so far here, even though the GDP collapse is a lot worse. So the market and people already are sensing, "No, no, no, no, no. There's going to be more inflation." And so as markets smell inflation, even if there's low growth, then you get stagflation. You have this breakdown of confidence. And again, I don't know where it is. I know we're a hell of a lot closer to that space, to that invisible line of confidence breaking.

You can see this all the time in emerging markets or developing markets when all of a sudden you have the Thai baht explode or Venezuelan currency explode. If you grew up in Brazil or Argentina, you understood how this happens all the time. It hasn't happened in developed markets for a long time. We now have developed markets starting to behave like emerging markets in terms of the borrowing. So why I think the Bitcoin story doesn't go away is we're in really dangerous territory. Listen, I might be saying the same thing a year from now or two years from now. I'm hoping we don't hit this breakdown in confidence. It'll be good for the Bitcoin business, but it'll be shitty for everything else in America and in Canada. We're a lot closer than we ever have been.

Hope that makes some sense.

Great. Well, it looks like we have time for one more question. Mike, you mentioned Paul Tudor Jones and other hedge funds buying Bitcoin in the past month. What are you hearing from other hedge funds? Is this a short-term trade or a longer-term view that they're taking?

Look, I think the story I just told of the fear around debasement of currencies and breakdown of confidence is not a short-term thing. It's a medium to long-term hedge to everything else they have in their portfolios. And so while we constantly tell people, "Put 1%-2% of your net worth in Bitcoin because the probability of shitty things happening is going higher," I think hedge funds are looking at this the same way. Does that mean they won't trade it when it rallies up and buy it when it sells up? Of course not, right? Hedge funds are commercial animals. But most people aren't. When I ran a macro hedge fund, if I wanted to get bullish the euro, I might get 80% net long the euro of my whole fund. So if I had a $1 billion fund, I might be long EUR 800 million.

People aren't doing that in, and so they really run leveraged. They're not doing that in crypto. They're buying 1%-2%. And so when you buy 1%-2%, you think of it more like an equity, and you've got much wider stop losses and a much longer horizon than you would on, say, a leveraged currency. And so I think that's a significant point that this is more of a medium to long-term play for most of these hedge funds, partly because of the sizing of it.

Operator (participant)

Great. Well, Mike, I'll turn it back to you for any closing remarks then.

Mike Novogratz (Founder and CEO)

Guys, I appreciate your time. I'm sure you've done too many Zoom and conference calls in the last three months. We hope your health is good. We are working our tails off here. We are optimistic. You don't build Rome in a day. And so even though we see the institutions coming, I beseech you guys to kind of hold us accountable six to nine months from now, not six days from now, because we have a plan we believe in. We see it happening. We see lots of opportunities, and I couldn't be happier. And so thanks for your time, and have a great day.

Operator (participant)

Thank you.

Chris Ferraro (President)

Thank you, everybody.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.