Galaxy Digital - Earnings Call - Q2 2020
August 14, 2020
Transcript
Operator (participant)
Good morning. Welcome to today's Galaxy Digital conference call. Today's call is being recorded. At this time, all participants are on listen-only mode. Following the formal remarks, we'll conduct a question-and-answer session. Webcast participants can submit questions 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.
Moderator (participant)
Thank you. 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 Authority's 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. I hope it's a wonderful morning where you are. It certainly is here in Long Island. Listen, this is going to be a more fun call than our last few. I think back to fourth quarter last year, early this year, and our mindset was tighten the belt, make sure costs are under control, and grind through till the space really started picking up. We had made this bet early on on the institutionalization of crypto, that it would move from a broadly retail-driven market to more and more institutional adoption, and that was slow. And I would tell you that the world changed in the crypto space and in our space with COVID. COVID really accelerated both the digitalization of everything. Microsoft's CEO said they did in two months what they thought two years would take, but certainly in our space.
So you've got the digitalization of assets, but you also have the macro story, which has brought in the adoption of Bitcoin as a proper inflation hedge, a proper risk hedge, a proper hard asset for many, many people. And so when things change, hopefully smart companies change. And so our mindset, and certainly my mindset, has shifted dramatically into one of growth, into one of investment in the business, into one of really excitement about the opportunity ahead. I'm going to kind of do macro, and Chris Ferraro is going to then take over and go through the business cues and micro and talk about the quarter. But big picture, we had a very good second quarter. A lot of that was Bitcoin going up, but it wasn't just Bitcoin going up.
It was our trading desk doing over $1 billion in OTC volume, by far our biggest month in OTC volume. Asset management linking up partnerships, our investment banking team having lots of mandates from being an idea to actually a real banking team. And I think you'll see in the next quarter real results of that. And our venture book, lots of the bets we had made in the last couple of years starting to really perform. And I think same thing in the future, you're going to see some hopefully good write-ups in that space. And so I'm sitting here today more optimistic than I've been any time in the last two years, ready to make investments in the business. The overall outlook is bright, but I would also say in both a tough scenario and in a good scenario, the competition is coming.
We're not the only people that are investing in this business, and so the bright side of that is it really credentializes the whole space. You've got banks getting into the custody business. You've got other people hiring bright employees to get into the trading business. More money is going into venture, and so if there was a doubt that blockchain, crypto, Bitcoin was a business a year ago, that doubt is over, and now it's people investing in the space and the space growing. There'll be moments where it grows and the prices go up too fast, and then you'll have some corrections, but in general, I think we've crossed the Rubicon. We've crossed the bridge that this might not happen. Bitcoin is now an asset. Blockchain is being deployed all over the place.
And so in a lot of ways, the last few months have been really the most important few months in the history of this space because now it's established. And so that leaves me excited. It leaves me excited for our team. We are increasing headcount. We're going to bring in more talent. We're doing good things here. We upgraded from the TSXV to the TSX. Our stock price has gone up significantly. We were buying stock at the end of last year thinking this was really frustrating. Our stock was constantly trading below book. Trading with very little energy. And since then, I think the market's recognized the shift in the overall space and the shift in our company. And so I'm going to leave it there and pass to Chris, but I would tell you I'm bullish. I'm optimistic. I think Bitcoin has a long way to go.
I think DeFi is just getting started. I think the rest of the projects have new energy in them. And so that's what I want you to take from my messages today. I want a positive energy and excitement. Chris?
Chris Ferraro (President)
Thanks, Mike. I'll start by confirming that we continue to monitor the COVID-19 situation daily and are managing the firm's response to the pandemic as such. To that end, we've announced a continuation of our primarily remote working environment, which we expect to continue with through at least the end of September. Is partial work from home effective for us? Yes. Is it as good as being together? No. We prefer to be back at our desks as we, as a team, thrive working together in the trenches. That said, I continue to be proud of and impressed by the team's productivity, commitment, and accomplishments in 2020.
Just as importantly, we recognize the importance of our people and our culture, and therefore have taken the opportunity during this unusual period of remote connectivity to engage as a team and help define and cultivate our culture, including recurring all-hands Zoom meetings, our first employee survey, teach-ins on industry topics, the formation of a diversity and inclusion committee at the firm, monthly salons with external thought leaders on the topics of diversity, equity, and inclusion, and also recurring Zoom breakfasts and happy hours with senior team leaders from around the firm. Moving briefly on to markets, and this is largely Mike's category, but saying 2020 remains unique, I think, would be quite the understatement for the year. I'm not sure, after witnessing the volatility in asset price declines in March, that any of us would have predicted Apple today at nearly $2 trillion in market cap.
But what we did know in March and April was that the fundamental investment case for Bitcoin for traditional investors was crystallizing at an extraordinary pace on the back of unprecedented global central bank balance sheet expansion. Everyone saw it happening, but few outside those of us focused on the supply side theory of money recognized the clarifications of these actions, and then the world started to wake up. And so now Bitcoin is up 60% year to date and up 26% alone since the June 30 quarter end. Moreover, other cryptocurrencies, particularly Ethereum, has also experienced outsized price appreciation on the back of incremental network technology developments and new and increased user engagement, particularly around DeFi, which you'll hear about. You can see that in the Bloomberg Galaxy Crypto Index's basket of cryptocurrencies, which is now up 89% year to date and 47% just since the quarter end.
The performance of the cryptocurrency markets in FY 2020 should now be difficult to ignore by any global investor who's paying attention. It compares favorably by a significantly wide margin versus almost every other liquid asset class year to date. Markets can be fickle, but they tend to trend towards the truth in the long run. And we here at Galaxy have a long-term fundamental thesis, and thus far the trend is pointing in our direction. With all this as a backdrop and Galaxy's ongoing maturation as an operating business, July, as Mike mentioned, was an opportune month for us to graduate from the TSX Venture Exchange to the main board of the TSX. The Canadian markets have been very supportive of innovation over the years, which is the primary reason why we chose to go public via an RTO on the TSX Venture Exchange back in 2018.
Over the past year, we have met with public investors, conducted teach-ins for wealth advisors, discussed our business with equity analysts, and broadly committed to educating those interested in understanding and experimenting in the cryptocurrency, digital asset, and blockchain technology sector. This uplifting to the TSX is part of this evolution, not just of Galaxy Digital, but of the sector itself, and we take our mission of being the bridge between the institutional and crypto world seriously, especially as one of the most visible and active companies in the space. We'd like to thank the TSX, our Canadian regulators, and most importantly, our growing base of investors for their support over the past two years, and we do look forward to advancing our business and the sector here for years to come. Now, let me touch briefly on our second quarter performance.
In Q2, Galaxy reported comprehensive income of $38.5 million, which puts Galaxy ahead on the year now with year-to-date comprehensive income through June 30th of $10.8 million. This reflects both net realized and unrealized gains from digital assets and investing activities of $28.3 million, as well as year-over-year operating revenue growth of just over 24% for the first half of this year versus last across all of our operating business lines, including asset management and advisory service fees, financing activities, and derivative gains. Turning to our trading business, the second quarter of 2020 saw our OTC trading desk generate over a billion dollars of quarterly volume, our second largest quarter by volume in operating history. Additionally, Q2 OTC volumes represented over 15% sequential quarterly growth over Q1 2020 and 46% sequential growth compared to Q4 2019.
Even excluding OTC spot equivalent option volume, which is a business that we've gotten into pretty significantly this year, our spot OTC volumes were still up 2% sequentially, while industry spot exchange volumes were down 17%, which signals to us continued market share gains for the Galaxy trading platform. OTC desks that succeed in growing their volumes do so because they offer optimized outcomes for large bespoke trades that generic retail exchanges are unable to fulfill. For Galaxy's OTC desk, we believe our strong year-to-date volume growth continued to build in Q2 as a result of our sustained investments into key relationships in and around the space, low-cost access to a global diverse pool of liquidity, high-quality execution, as well as our differentiated profile as a trusted public and audited counterparty in the space.
Institutions trade with Galaxy because we provide them with a knowledgeable and experienced team, low-cost market access, and a trusted counterparty who not only has the resources but is committed to delivering on our promises in any market conditions. To that end, in June, our trading business in Bakkt, which is Intercontinental Exchange's digital asset derivatives trading and custody platform, announced a partnership to launch a joint white glove service for asset managers looking to acquire, build positions in, and securely store Bitcoin. Galaxy Trading is providing the market access, lending and financing, and a suite of bespoke structured products, while the Bakkt Warehouse, a qualified custodian of Bitcoin regulated by the NYDFS, is safeguarding those digital assets for the clients.
We already have counterparties live in this joint solution, and we see this offering as a key point of differentiation and growth for the business going into second half 2020. Turning to asset management, 2020 has been a period of increased market demand for Bitcoin and cryptocurrencies generally. As we've said in previous quarters, our Galaxy Crypto Index Fund holds a basket of the largest, most liquid cryptocurrencies in order to provide broad-based exposure to the growth of the asset class, while our Bitcoin funds meet the growing institutional and wealth demand for safe, simple, secured ownership of Bitcoin for its store value utility in what is now becoming a clearly inflationary market environment.
In June, Asset Management announced a strategic partnership with CAIS, a leading alternative investment platform to provide financial advisors with streamlined access to Galaxy Digital's investment products, as well as educational resources spanning blockchain and digital assets. The CAIS platform offers financial advisors with over $1 trillion of client reach, direct access to complete end-to-end solutions, including a broad selection of alternative investment funds and products, independent due diligence from Mercer, tools and analytics, a streamlined investment process, and integration with custodians for greater reporting accuracy. Galaxy Digital Capital Management is the only asset manager offering cryptocurrency and blockchain technology-related investment product on their platform. As of today, we do expect to be live there and accepting subscriptions into our funds. We believe this speaks volumes to the long-term scalable infrastructure that we've worked so hard to put into place.
And when paired with strategic relationships like this with CAIS, we believe constitutes the right formula for strong scalable growth for our platform going forward. Finally, in the second quarter, our Galaxy Interactive venture capital team, who manages the Galaxy EOS VC Fund within the asset management group, continued to press their advantage in the interactive content space, investing $21.8 million across five new investments and three follow-on investments during the quarter. As you all know, the positive trends in the gaming and interactive space have accelerated at an unprecedented pace, in part as a result of the pandemic's impact on consumer behavior. And so we could not be more excited here at Galaxy about having a top-tier team focused on this correct sector at the right time. Overall, in asset management, we ended the second quarter just above $375 million of AUM.
Let me now proceed to Galaxy Digital Investment Banking, which has continued the hard work of establishing itself as the leading strategic advisory firm in the digital asset and blockchain sector. The team here deserves all the credit available to them. They've worked themselves into the center of many of the most interesting strategic conversations around the space in mining, exchanges, consumer platform offerings, and they've built a strong and growing franchise here within Galaxy that the entire firm can truly be proud of. In 2020 thus far, we've seen continued growth in our mandated backlog of engagements, a growing pipeline of expected future realized fee income, and the team is currently in the execution phase of multiple active M&A and financing mandates.
This sustained positive momentum we expect will help Galaxy Digital in transitioning the leadership of our investment banking business in the fourth quarter, as our current head of investment banking, Ian Taylor, will be departing back to Australia then. We wish Ian the best, and we thank him for his significant contributions in establishing this business for Galaxy, particularly in assembling such a highly capable team around him of smart, experienced, and trustworthy professionals who have really become sectoral experts and key relationship builders here for the firm. We're excited to see this team drive our investment banking franchise here at Galaxy into its next phase of success. Finally, in terms of our firm balance sheet and principal investments, our team has continued to selectively pursue compelling strategic opportunities across equity and debt financings.
The team invested just over $5.7 million of total new capital in the second quarter into two new and four follow-on investments in the second quarter. With that, I'd now like to turn it back over to Ash, who's going to walk everyone through the specifics of our financial performance in the second quarter. Ash?
Ash Prithipaul (CFO)
Thanks, Chris. I will now provide some additional details regarding our financial results for the quarter. Our comprehensive income for the three months ended June 30th totaled $38.5 million, with a comprehensive income for the six months amounting to $10.8 million. The current quarterly gain was largely a result of realized gains on digital assets. The second quarter 2020 figure includes $3.3 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 $375 million as of June 30th, or CAD 1.82 of net book value per share, or $1.33 of net book value per share. As of June 30th, the number of compensatory cost per unit and stock options outstanding was $17.2 million and $22.1 million, respectively.
The aggregate compensatory awards have a value of $11.2 million remaining to be amortized over their life. Operating expenses for the three months ended June 30th were $14.8 million, inclusive of equity-based compensation of $3.3 million over the same period. Operating expenses were lower for the three and six months ended June 30th, 2020, as compared to the three and six months ended June 30th, 2019, due primarily to lower equity-based compensation and lower compensation expense in 2020. Regarding our balance sheet, $7.2 million of new and follow-on investments during the second quarter brought the investment balance to $177.8 million. As of June 30th, we held 42 individual investment positions, excluding our cryptocurrency and pre-IPO holdings, with no investment position representing more than 7.8% of our net asset value. We are pleased to report that we had $135.8 million of liquidity as of quarter end.
Our liquidity includes our working capital and net digital assets, which is then netted against forward commitments and projected future expenses. Our current liquidity is ample and will allow us to continue to operate the business and take advantage of market opportunities. With that, I'll now turn the call back to the operator so that we can address questions from equity analysts and investors. Operator, any questions from equity analysts?
Operator (participant)
Thank you. Our first question is coming from Deepak Kaushal of Stifel GMP. Please go ahead.
Deepak Kaushal (Managing Director of Equity Research)
Oh, hi. Good morning, everyone. I've got a bunch of questions, and I kind of hesitate dominating the call, but I'll ask a few, and if it gets too long, I'll jump back in the queue. Just on the operating business, I'm just trying to get a sense of how you guys performed on your principal book relative to the market. If we had a cash deployment, we're seeing a 37% return versus the market up 50%. Did you guys outperform, or did you underperform, or were you in line? How do you kind of rank yourself?
Mike Novogratz (Founder and CEO)
Well, so listen, I would break it into two halves, right? If you're thinking about our balance sheet, you can roughly think half of it has been in coins, Bitcoin and other coins, and half of it has been in venture investments. Those venture investments aren't nearly as fast to adjust in pricing to the moves of Bitcoin itself. And so my sense is, on the quarter, there were not a whole lot of write-ups in the venture book. But I think coming down the pipe, a lot of those investments are doing much, much better, and you'll see those in Q3 and Q4. And so when I think of it in terms of what beta should we have to the market, how have we done? I think we probably did very well.
We outperformed a little bit of what it would be if you had just had purely held an amount of Bitcoin, and I like our book. So it's hard to, we don't have a great index. I think we've probably added $10 million of alpha versus just being long Bitcoin. And in the venture book, we'll see over the next two quarters, but I feel pretty good about it.
Deepak Kaushal (Managing Director of Equity Research)
Okay. Are there any? Go ahead, sorry.
Chris Ferraro (President)
Sorry, Deepak. I was just going to back that up with emphasizing the illiquid part of our balance sheet, which is significant in terms of our investment portfolio. There is definitely a lag in terms of events and financial reporting in that book, and therefore future gains or losses versus real-time market moves in our digital assets, and the other thing I'd say is I think we ended the year last year with $106 million of cash. We still maintain a large cash balance. We are also pivoting a part of our balance sheet. We are dedicating towards financing companies and other folks in the space in terms of their trading, right, and so the character of where our balance sheet is exposed relative to the market is certainly never going to be one-to-one beta and is likely going to be dampened going forward too.
Deepak Kaushal (Managing Director of Equity Research)
Got it. If I think of your - and it may be a hard question to answer - if I think of the venture book or the illiquid book as a whole, what would be the vintage of that mark? Would it be a mark in the 2017 heyday, or would it be an average mark during crypto winter? I mean, how should I think about the potential for the revaluation of that part of your book versus what we've seen in the public markets or the trading markets?
Chris Ferraro (President)
Yeah. So I'll try and answer that, and then I'll kick it over to Ash or Mike to add color. I mean, I think what you're asking is, so we remark all of the investments on a line item basis every quarter based on new information of portfolio company performance, portfolio company financings, and also market conditions. So the positions in our balance sheet, some of them do maintain consistent and have not changed. They are reevaluated every quarter. So in general, I would say the vintage of our balance sheet should closely represent sort of the current times at all times. And now there's some lag earlier and later in that, but in general, it should move with it.
So I would think about current market conditions, what they were at the end of June, what they are today, should ultimately, over the medium to long term, result in commensurate moves if we're doing our job correctly in value of our illiquid investment portfolio.
Mike Novogratz (Founder and CEO)
Deepak, let me take another crack at that too. So if you take a little time to go through our balance sheet, if you break it down into, we have a bucket of investments in the interactive gaming space, which those things aren't going to get marked, they're going to trade more like classic venture investments. They'll get marked up with each ensuing fundraising round, not with a real beta to the market. We have some investments that really have a high correlation to Bitcoin itself, right? Claims in Mt. Gox's bankruptcy, some companies that we invest in that hold a whole lot of Bitcoin themselves. And so there's some where there's a pretty direct correlation to the overall market. And then we have a lot of investments in infrastructure, in custody, in security. And those things will do better with a lag.
The fact that this whole space is energized means if you're a good security company, a good custody company, a good trading company, your business is a heck of a lot better than it was six months ago. Not necessarily doing a financing round to mark yourself up right away. You're not necessarily selling yourself or have a real good way of marking it up. And so there's a real definitive lag in lots of the portfolio. And so again, at the same price, you'd be so much happier to buy it today than you would have three months ago. And so it's a hard way to answer. We're going to try to, in the long run, get more specific about bucketing the pieces of our book for guys like you so you can have a better way of estimating.
But I think you almost have to go through specifically the, and we do disclose, I think, our top 10 investments. But it's a mix. It's a mix.
Deepak Kaushal (Managing Director of Equity Research)
Yeah, and we're still going through, there's a lot of details that you guys disclose. We're still going through it, and we'll probably publish the details Monday, but.
Mike Novogratz (Founder and CEO)
I would say vintage-wise, right, you think what we originally contributed in 2018 were really 2017 vintage stuff. The average is probably somewhere in 2018, right? You had some investments that were contributed in 2017, and then we've deployed capital over the last two and a half years. That's a pretty steady state to give you a sense of vintage would be.
Deepak Kaushal (Managing Director of Equity Research)
Great. So just to kind of recap, if most of those were in 2018 during crypto winter, then there seems to be a lot of hidden value in the venture book on your balance sheet. Is that the conclusion here?
Mike Novogratz (Founder and CEO)
I think our venture book is going to do well, yes.
Deepak Kaushal (Managing Director of Equity Research)
Okay. Okay. Great. Just skipping over to asset management, you seem like other things in the market get some AUM, and your AUM has kind of been slow. I know you've got the partnership with CAIS. How big of a catalyst can CAIS be?
Mike Novogratz (Founder and CEO)
Well, listen, we have.
Deepak Kaushal (Managing Director of Equity Research)
What's the pipeline of those channel partners, and what's kind of the target AUM for the next six, 12 months?
Mike Novogratz (Founder and CEO)
We're going to know a lot more if we may. Listen, we've worked our butts off. We've got great partnerships. We are going after the wealth channel, not the retail channel, and quite frankly, we'll go after some of the institutions, but they're not coming as fast as what we think the wealth channel will be, and we have set up, we think, the best product with great partnerships, and the checkered flag is just falling now. Listen, we've had some inflows, right? We're over $15 million in that fund, but nothing like what we need or what we expect, and so my expectation, my hope, and my real belief is that come the end of the year, we're going to be gaining assets at an accelerating rate in both these partnerships and with these products that we've built.
And so listen, if it's March of next year and we haven't, we're going to really have to scratch our head and say, "What did we do wrong?" But I don't think we've done anything wrong. I think we took a long time to build the right product. Getting approved by Mercer and a green light there is a big, big deal. We're the only fund that's got one of the consultants that have rated them. And that's a big deal for the institutional world and for the wealth world. And so give us three to six months on that before you make judgments, and I think you'll be happy.
Chris Ferraro (President)
Yeah. I think, as we said, CAIS platform has clients that reach $1 trillion of assets under management. The wealth space is, I think, over a $10 trillion market, and we're actively working across that entire space. Look, the asset management business, the strategy there, which we've invested a lot in this business, this is the year we started turning on marketing. I think you'll see in the FT we have full spreads talking about Bitcoin and talking about our funds management business. The strategy of the asset management platform is to build the pipes and an institutional quality platform that investors can trust and invest in, and then launch products that we think make sense over the long term that are not going to be flashes in the pan, that are going to have longevity through markets, through changes in market structure.
Those are the products that we've launched, and we think they have long-term prospects, which differs, we think, from our competitors, regardless of current AUMs.
Deepak Kaushal (Managing Director of Equity Research)
Okay. Excellent. I'm patient, so I'm looking forward to that. I got one more question on the operating business and then a couple of big picture questions for Mike. So just on the advisory side, how should we read into Ian's departure? This isn't another pivot in that business, is it? Or just kind of reaching there?
Mike Novogratz (Founder and CEO)
Not at all. We are going to double down on advisory. Listen, it's frustrating. Ian had his own reasons to go back to Australia. I like him a lot. He did a great job. He was entrepreneurial. He helped establish and build a great team. It's frustrating, but he's got reasons to go, and I'm going to wish him well. We're going to double down on this business. Hopefully, you'll see in the next quarter or two some great results that we have coming down the pipeline. But it's a business that we spent a lot of time developing domain expertise in certain verticals. We've got guys that know more about mining than almost anyone in the space.
And so it was always a long lead business of you can't hire a banker and say, "He'll go bank something that you know nothing about." But now I got guys that know so much about mining and guys that know a lot about the exchange business. And so as we build that expertise in the verticals and as this overall business heats up, I just think there's lots to do there. And so we're going to be adding bodies and wishing Ian well and thanking him for the good start he gave us.
Deepak Kaushal (Managing Director of Equity Research)
Got it. Got it. Okay. So Mike, big picture question. So are we really seeing an institutional wave here in this latest rally? What specific signs are you seeing? Because I'm seeing just the Robinhood retail rally in traditional equities. Why is this different?
Mike Novogratz (Founder and CEO)
No. Listen, we are seeing an institutional wave. It can't come as fast as everybody wants because if you look at Paul Tudor Jones as an example who got into, you've got to often change your fund documents. You've got to go to your investors. You've got to figure out where you're going to custody and who you're going to deal with. So it's not as easy as saying, "Oh, I want to buy gold. Let me pick up the phone and call my broker." We are seeing tons of activity under the hood and people buying, right? And so I would tell you almost every macro player either personally has a little desk participating in this and are working at looking, "Should I put it into my fund or not?" Some have put it in their fund. They just haven't been public about it.
And so I think you're going to see hedge funds move into the space. But more importantly, you're going to see, again, the wealth platforms, which are institutional in their nature, right? I mean, I've been on calls with heads of wealth management businesses at the major places, at the big bulge-bracket banks, who are all saying, "Okay, how do we do this?" You saw the OCC news that banks can now be custodians. And so when you look down the road, and it doesn't have to be 10 years down the road, three, four years down the road, with stablecoins which are on their way and growing fast, with Bitcoin becoming a bigger hedge, with Ethereum's platform growing, with almost every single bank is going to have to participate in this.
When your big clients, if you're Barclays Bank and you're trading on exchange and your big clients want to trade foreign exchange to a stablecoin or want to trade Bitcoin, and you say, "No, I can't do it," it's not a great answer. And so like I said on my earlier calls, I think we crossed the Rubicon, and now everyone is scrambling to try to be in this business. And so I can just tell by the calls I'm on the level of portfolio manager who's engaged in this, who's not asking first-level questions but asking third-level questions, that we're a lot further along, and we're starting to see adoption. Listen, we were a 98% retail market. We're not anymore, but we haven't gone to a 50% market. What's good about the institutional hands is they're less leveraged, right?
It's hard to get leveraged institutionally in this space at this point, where a lot of retail get leveraged out on the Asian exchanges. And so in the long run, it will result in less volatility. You're kind of taking, if you think about Bitcoin, there are only 21 million coins. There'll only ever be 21 million coins. And so when this public company buys $250 million worth and puts them in their treasury, most likely they're not selling those in the next few weeks. You're just taking supply off the market. And so to me, this is an important migration of people. And there's the tailwind that's not going away.
I'd be much more nervous if I thought, "Oh, we're going to cure COVID, and all of a sudden, everyone's going to be fiscally conservative." But there's not a political map that I can come up with that shows this huge wave of fiscal conservatism coming. And so that's it.
Deepak Kaushal (Managing Director of Equity Research)
So I've got one more question. And again, I thank you for all the airtime. I appreciate it a lot, and I'm happy to have it. Nasdaq market, we've seen some crypto stocks get quite the bid. Coinbase is talking about listing. Is the window open, and what's the timing for you guys to look at that market for listing?
Mike Novogratz (Founder and CEO)
Listen, we always consider all the capital markets options we have. We have a specific issue in that we have a big balance sheet. We need to grow our franchise businesses big enough to organic growth or acquisition to qualify under the 40 Act to be a U.S.-listed company. I would love to be on the Nasdaq today, only in that there's a lot more liquidity there, and there's more excitement there, and I think our stock would trade higher. And so we're commercial people at our core, and getting there is certainly an agenda item at one point. But we still have a big balance sheet. So it's a question of growing the rest of our business so the balance sheet isn't as big as it is relative to, and it's interesting. Bitcoin, since it's not a security, doesn't count. And so that's a big plus.
But it's certainly something on our mind.
Deepak Kaushal (Managing Director of Equity Research)
Okay. Well, hopefully, you can solve the 40 Act issues soon, and you get a bigger audience out there. But thanks again for taking all my questions. I appreciate the time.
Mike Novogratz (Founder and CEO)
Yep.
Operator (participant)
Thank you. Our next question on the line is coming from Mitch Steves of RBC Capital Markets.
Mitch Steves (Research Analyst)
Yeah. Thanks for taking my question, guys. So I kind of wanted to start on the investment banking comments you made there, talking about doubling down. So what does that kind of look like in your view in six months? What I mean by that is, are you looking at basically more crypto mining companies going public? Are you talking about special purpose acquisition companies? I think that SPACs are probably the more likely here. That's kind of the message I'm getting. But maybe you could just walk me through what you think that landscape looks like in call it six to 12 months.
Chris Ferraro (President)
Sure. And just to clarify the question, do you sort of mean for us, or do you mean also for the market broadly for sort of advisory options?
Mitch Steves (Research Analyst)
Just both. Just so I see if there's a difference.
Chris Ferraro (President)
Yeah. I mean, hopefully, the same. We want to be pursuing where the action is. Look, I think this year started in earnest what we thought was coming, which was consolidation and M&A opportunity. And so there have been a handful of smaller trades, a couple of big trades. We're actively working mandates at the moment that will likely conclude this year. And so we see the pipeline for that activity continuing and growing. And that's just on the back of having a really fragmented landscape, various degrees of success or not so much success. Some companies running out of funding runway, but great teams, great technology. And so you're going to see the M&A activity from a consolidation standpoint within the industry is a trend that is now, and we think will be here 6 months and 12 months from now.
I believe you'll also see external M&A activity or, at the very least, investment from non-crypto blockchain companies investing capital and/or buying technology into the space as a way of getting involved, which I think they're one example. You've seen a bunch of articles out around JPMorgan investing in ConsenSys, one of the largest Ethereum-based developer shops and technology businesses in our space. That's an example of a part of the market I think you'll see grow quite substantially six months, 12 months from now. Mining side, really big opportunity in mining. We've said that now for the last couple of months. We've done the work. We've done the math. The economics are solid and sound. And if you understand Bitcoin and you understand the thesis and you understand how mining economics work, then it looks like attractive return on capital, significantly better than alternative forms of infrastructure investment.
And so as a piece of a portfolio, we're very focused on the opportunity set for infrastructure funds, for yield-seeking infrastructure investors to look at Bitcoin mining because the math is there. The capacity is moving towards jurisdictions where investment is a lot easier, like North America and the U.S. in particular. And so that is. I think you'll see a lot of project financing. I'm not sure if you'll see a lot of public activity, but you'll definitely see a lot of project-style financing activity in Bitcoin mining, we believe. And then you mentioned SPACs. I could say for sure we have had a number of inbound SPAC sponsors, SPAC opportunities, SPACs looking for acquisition targets into our space very recently, which is probably no surprise given the amount of capital that's been raised into the SPAC space.
And so whether I have a very specific example of a company we're invested in who has been thinking about it, and their perspective has been, "First, we're going to make the decision about whether we want to be a public company. And then if we want to be a public company, let's make a decision around whether a SPAC gets us there faster, more efficiently, or not." And so whether that converts into a bunch of actual converted SPAC positions, maybe. Not sure.
Mitch Steves (Research Analyst)
Okay. Helpful. The second one I had is just a little bit changing gears here. It's just you guys' advertising campaign and talking about what the higher institutional demand. So I'm just wondering how you guys measure or see the value in your own ad campaigns versus just more people being interested in the space by themselves. I'm just curious as to how you guys can bifurcate the value you're getting there, if there's any interest from that, or if it's really just primarily people coming up to those conclusions by themselves?
Mike Novogratz (Founder and CEO)
I think there's a certainly in the wealth space, what those ads are targeting, right, is there's an education process that us, Inc., are doing. We've been doing for a long time on our own, and now we're doing it jointly with them in that space of getting the wealth managers, the registered investment advisors, comfortable at how the whole thing works, how mining fits into the Bitcoin system, what custody actually means, and so that education piece is, I think, important. Listen, the ad itself and marketing is to try to build our brand in that sense. It's so easy to get a brand on TV, and we think everyone knows about Galaxy, but our original surveys was we weren't as well known as we thought.
And so we've done a really good job through a small advertising budget, really, between online targeted ad marketing and some of these ads to get the name recognition and the brand recognition way up. And I think that's the first piece of building a sustainable, big asset management business. And so kind of back to my first answer, a lot of infrastructure investment. Now it's time to start harvesting.
Chris Ferraro (President)
Yeah. Specifically to one of the partial questions, we've done surveys on Galaxy brand awareness. The numbers are we began the year at 2% brand awareness through the IRA channel for Galaxy. And as of the beginning of August, we're at 40% new brand awareness in the IRA channel now after the marketing push this year. So there's quantitative data that drives our decision that at least has validated the marketing effort thus far. And so from there, once we build brand, our thesis in all asset management businesses is build brand first, have good product, AUM follows.
Mitch Steves (Research Analyst)
Okay. Understood. I'm going to shift gears again. So you guys have a lot of crypto assets, whether it's Bitcoin and some other alt that maybe you can't disclose specifically what you own. So I'm curious about how this works in terms of the regulatory framework and legal framework. So as you guys know, there's a very popular way of earning money in crypto space now called farming and decentralized finance, right? So if I think about your position now, is there, I guess, any plans? Are you able to participate in that market to help generate additional returns? And then secondly, do you have a view on Coinbase's recent entry to allow customers to put up their crypto as collateral and take out loans? Is that something you guys can participate on?
Just wondering how it works for you guys and if there's either of those or interesting avenues to you.
Mike Novogratz (Founder and CEO)
Sure. I'm going to let Chris take it. Listen, we've had a big investment in a financing company. I'll let Chris talk about that space, and I'll chime in at the end.
Chris Ferraro (President)
Yeah. Sure. So we've had a team inside of Galaxy spending a lot of time on DeFi from a protocol level up, to use your example. Look, we've done the work. We understand all of the projects. We have them rank ordered as to what we think is interesting and what we think is not. We, unlike some of our non-regulated smaller competitors, do have today issues with some DeFi projects. The reality is we've done the analysis, and dealing with a decentralized contract is not clear, at the very least, as to whether or not you're satisfying proper KYC/AML procedures in not knowing who your potential counterparty could be. And so we're coming at the space a little differently. We have a handful of initiatives internally where we're making investments in technology around implementing into DeFi as opposed to necessarily interacting with the DeFi protocols ourselves.
They're still pretty small. The entire flow and space of DeFi in terms of scalability versus our balance sheet makes it such that to date, I don't think we've missed a whole lot from not participating in yield-generating stuff in DeFi. And so, yeah, look, we're close to it. I think for us, in terms of actual participation, is a little bit of wait and see as to see how the regulatory framework evolves, how it scales, and whether it makes sense to us to really be involved directly. Turn to the other side, CeFi, centralized finance, which I think Coinbase's launch of crypto-backed loans is a great example of that. We partnered with Zac Prince and Flori Marquez over at BlockFi two years ago when BlockFi created, I think, the first crypto-backed loan.
And so we've been partnered with them and originally were helping them finance all of their crypto-backed loans from the very beginning. And so we're definitely big believers of it. We think it's a great product. I think Coinbase has sort of just come to the party in that regard. So that's an activity we've been doing. BlockFi has been in a big way. There are a couple of other players who have done that, Unchained Capital, for example. And so that is all fair game for us. It's all, we think, very interesting. We think the risk-adjusted yields and returns in those kinds of products are far better than traditional markets because there isn't a lot of capital chasing it, and there's not a lot of people focused on it. And so that's an area where we put a lot of time into.
We put our balance sheet behind, and we're pretty bullish on.
Mitch Steves (Research Analyst)
Okay. And then just last one for me. You guys obviously talked about educating people on the space, and you mentioned Bitcoin several times in this conversation and maybe only Ethereum once. So I'm just curious, maybe you could walk me through from a high level how educated the average investor is. I don't expect you to give me ultra amounts of details, but I'm just trying to get an idea of what the range is. I mean, people still really don't understand what Bitcoin is. I mean, are they educated to the point where they know what zk-SNARKs is? They know what sharding is? They know what different types of items are? So I'm just curious where people are at.
Mike Novogratz (Founder and CEO)
I think the average institutional investor understands Bitcoin as digital gold and has bought into the identity, the social construct that enough people believe Bitcoin is a digital gold, therefore it is a digital gold. And they understand how it's mined and how a Bitcoin ledger works. But I would bet you 80% of the institutional investors buying Bitcoin don't know what zk-SNARKs are or lots of the broader ecosystem and how it works. Now, listen, the core crypto-native community and a lot of retail community, believe it or not, that has fueled so much of the kind of crypto revolution over the last four years. They're very educated. And so it's interesting, right? You could have a much more sophisticated conversation with smaller-scale investors than you would with the big-scale investors because those projects are too risky for them or too small in liquidity for them.
Some institutions are also buying Ethereum, and they like to use the silver-gold analogy as opposed to, I mean, my view of Ethereum is very bullish, but it's very different than Bitcoin. Ethereum is still in the venture space, right? It's a big, big bet on building a backbone, a trust level, a trust layer that lots of stuff can get built on, like decentralized finance, like stablecoins. If Ethereum works, it can be very, very valuable. The entire non-Bitcoin part of crypto still is venture. It's still a big sandbox, and it's proof of concepts. It's things that are starting to work, but it's not ready for prime time for the rest of the world. Where Bitcoin is the finished product, it's ready for prime time for the rest of the world.
And so I think it's a lot easier to have a conversation with a serious wealth manager about putting some of their portfolio in Bitcoin to be a hedge, and they understand that, the hedge versus central banks printing nonstop, than it is to get them to try to understand, "Well, do I need to have a bet on DeFi because it's going to, at one point, disintermediate JPMorgan and everyone else?" And so I kind of split those into the macro bet and the venture bet. Makes sense?
Mitch Steves (Research Analyst)
Yeah, it does. Just a quick follow-up just to kind of wrap this up is just out of curiosity, so you said 80% are kind of familiar with Bitcoin. Just to me, in my world, once you understand Bitcoin, the next step is to understand a basic smart contract. So what percent would you say of your kind of larger cohorts of institutional investors understand what a smart contract is?
Mike Novogratz (Founder and CEO)
I think, listen, I think they all understand it. Their desire to go down the rabbit hole is probably less. But I think they, and so a lot of that is just like, "What can I justify? What feels right for my investors or for the bet I'm willing to make?" Again, if you think of everything other than Bitcoin as a venture bet, it's a very different mindset than who might be buying Bitcoin.
Chris Ferraro (President)
Yeah. I mean, we've actually seen tangible examples of traditional asset managers who we trade with who have purchased Bitcoin through us who have, in the last two months, shifted some of their research efforts on, as you point out, that is the natural place to go onto smart contracts and Ethereum specifically. And so it's now a process of our team spending time walking through all the information that we have, our research pieces on Ethereum. That's the next focus. That's where that sort of opens up the world, I think, to everything else next. But the next stop is Ethereum and smart contracts. And Ethereum is the obvious asset for them to look at for that because of its relative size.
Mitch Steves (Research Analyst)
Okay. Thank you for taking all the questions.
Operator (participant)
Thank you. We will now move to online questions.
Moderator (participant)
Great. Thanks. And thank you, Mitch and Deepak. Our first question is, can you go through the strategy for your trading business, and what are the components of it?
Chris Ferraro (President)
Sure. I'll take this one, Mike, if that's okay. Yeah, so look, the strategy for our trading business is it's been a long build for us, and it will continue to be a long build and heavy investment. For us, the trading business starts with liquidity, connectivity, and liquidity access, and so we've poured a lot of resources into ensuring that our platform has access to the deepest pools of liquidity on a global basis and that we can access them quickly, efficiently, and at low cost. And with that as a foundation, the idea is to take that access and turn it around and offer it to other market participants, and so fundamental there, market access and connectivity, and then from there, offering market participants spot trading and execution, and so that can be either principally with our OTC desk or relatively soon through agency execution.
They can interact with the markets, our connectivity via voice and chat, as we've done historically, more recently through our electronic platform where traders can access markets either via our GUI that we've built or directly via our connectivity via API. And then in addition to from there, from spot connectivity, then we ourselves maintain inventory and have an active lending desk, which is meant to provide lending and borrowing for counterparties and allow short sale facilitation and working capital finance for some of the big trading shops. And so our desk offers that. We do bespoke financing and bespoke leverage in that we will finance on a secured basis coin. And I think you'll see us over time productize that into what ultimately becomes everything that traditional investors think about as margin financing and prime brokerage.
And then we've made a big push into being a market maker and providing liquidity to the derivatives market. And so whether that's exchange for physical from futures into spot, it's the Bitcoin and Ethereum options market, and really pricing and trading volatility, and then wrapping it all together in structured products and solutions for miners and for market participants who want synthetic access to a specific trend or a specific metric without necessarily wanting to own the physical. And so our structured product lineup is something that we're actively cultivating and also going to be offering on platform. And so that's the strategy for our trading business.
It is meant to be a full-service sell-side suite of trading offers to the marketplace, and there will be a very heavy push on the trade financing, margin financing, portfolio-based, cross-margining, prime services offering for us on a go-forward basis to help facilitate market participation.
Moderator (participant)
Great. Thank you. It looks like we've got time for one more question. Our last question will be, the OCC issued a letter allowing banks to offer cryptocurrency custody services. How does this affect your asset management strategy?
Chris Ferraro (President)
Yeah. Sure. I think the OCC announcement makes our business better. It makes not just our asset management business. It makes our asset management business, our trading business, and our future prime service offering makes that all better, right? We've said from the beginning, we're focused on value-added products sitting on top of custody. We ourselves, we're not going to invest in being a custodian. And so having a service provider for us, a custodian, get the custodian role be pushed into larger, validated institutions with big balance sheets who are going to give comfort to investors to hold their assets there, all that does is make our business stronger because our business is meant to focus on building products that sit on top of that layer. And so we welcome the banks to start providing custody solutions.
We're in active dialogue with a number of them today, as it stands, for us to be the service provider on top of the custody layer that the OCC has now said they're comfortable with banks providing, and so across the board, it makes our business better, I think, is the easy answer.
Moderator (participant)
Great. Thank you. And I'll turn it back to Mike for some closing remarks.
Mike Novogratz (Founder and CEO)
All right, guys. I hope you heard our enthusiasm for what we see in our own business and the landscape going forward. We're looking forward to, I hope, a very productive third-quarter call in the next three months. We're off to a great start in the quarter, and couldn't be more excited about the opportunity set. So thanks for your time, and have a great end of summer, if you can call COVID summer summer.
Operator (participant)
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and have a wonderful day.