Galaxy Digital - Earnings Call - Q3 2020

Transcript

Operator (participant)

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

Christopher Ferraro (President)

Good morning and welcome to Galaxy Digital's 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. With that, I'll now turn it over to Mike Novogratz.

Michael Novogratz (managing director)

Good morning, everyone. Actually, let me pick up the phone. Good morning, everyone. Very different tone today than I've had on probably the last eight of these calls. We started Galaxy two, three years ago with this idea that we'd be the bridge between institutional investors and the crypto community. And with hindsight, we were a little early, and we waited and we waited. And finally, the rain has come. And the world could not look more different today than it did six months ago for our company and for the whole crypto business. COVID, in many ways, was horrible for the world and continues to be horrible for the world as we see it kind of exploding back everywhere in the U.S. But it was really an accelerant for the cryptocurrency business, for Bitcoin, for blockchain, for everything that we do.

And so since April, we've changed our tack from having been cautious to becoming very aggressive. I see an unbelievable opportunity for our company and for the space. Bitcoin is trading $16,300. It's trading like that not because there's a speculative mania going on. It's trading like that because institutions, hedge funds, high-net-worth individuals, family offices are all moving into Bitcoin. They're moving in as a store of wealth. They're moving in as an inflation hedge. They're moving in because it's become an institutional asset. And so our thesis that we would be this bridge between the institutional world and crypto world is finally playing out. What are we doing about it? We've brought in Damien Vanderwilt to be a co-president. He's a five-year partner of Goldman Sachs. We brought in Michael Ashe to help us run investment banking.

We announced today two acquisitions, which I really look at as acqui-hires for talent and for technology, Drawbridge Lending with Jason Urban and Bluefire with Andrew Karos. We brought Amanda Fabiano in to build a mining business, and we're hiring. We've got a help wanted sign out there at 107 Grand here in Soho, and so I couldn't be more excited. I think the opportunity is real. It's not going away, and I don't think this is a flash in the pan. In 2017, we had this speculative mania we were all worried about. This is very, very different.

When PayPal announced they were getting into the business, that's 320 million accounts, it sent a shockwave across all financial institutions that said, "We need to be in this business." Since then, we've had almost every financial institution we know either reach out or to people we know how they're going to get engaged in this space. So this is kind of the first inning for the institutionalization of crypto. We think we're really well prepared for it. We've built a tremendous amount of domain expertise amongst our businesses. We know the game. We know how it works. We think we know where it's going. I'm going to leave the details to Chris to kind of take you through our earnings. We had a good quarter.

We're having a better quarter in the fourth quarter, as you can imagine, with crypto prices going higher and all the activity. But I want to really be clear that we are in growth mode. We see blue skies ahead and couldn't be more excited for the business.

Chris Ferraro (President)

Thanks, Mike.

Michael Novogratz (managing director)

Chris?

Christopher Ferraro (President)

Yep. Thanks, Mike. Hey, look, so Galaxy Digital has had, we've had the most active six months in our history, and certainly this past week has been no exception. We closed on our $50 million pipe financing with a great roster of institutional investors, including Slate Path, CI, Corriente, and the NZ Funds. And as we also announced this morning, we took a critical step forward with the acquisitions of Drawbridge Lending and Bluefire Capital. I'll walk through our strategic rationale for these acquisitions momentarily, but first, let me share what we're seeing in the market that's motivating our decision to continue to reinvest behind our leadership position in the space. As Mike mentioned, 2020 has been the turning point for crypto.

Institutions of every kind are publicly discovering and advocating for crypto, not just as a new digital payment rail or as the new decentralized supercomputer, but also as a low-correlated asset within a broader investment portfolio. These institutions now publicly include some of the largest global multi-asset investment funds, fintech giants, Facebook, PayPal, Square, corporate treasuries, and global central bankers now giving serious consideration to digitally native-issued currency. We're incredibly excited about what's happening in our sector. And so as we go through these results and our strategic considerations going forward, this high conviction moment among both crypto practitioners as well as new institutions entering our community should resonate, hopefully, as a common driver underlying our results, our hiring plans, and our growth decisions.

As Mike mentioned, in Q3, Galaxy reported a comprehensive income of $44.6 million, which added to the prior period of profitability, leads us to $55.4 million of total comprehensive income for the year-to-date period, and that's through September 30th. This reflects year-over-year revenue growth in Q3 2020 versus Q3 2019 across each one of our operating business lines, as well as net realized and unrealized gains from digital assets and our investing activities, which also this quarter included a partial realization on our stake in BlockFi, which successfully completed its Series C financing this quarter in a significant upround from our last investment after continuing to demonstrate phenomenal growth. Another congrats to Zac, Florian, and the entire BlockFi team. Now turning to our business units.

In our trading business, we continue to win market share and grow our client and counterparty-focused derivatives and electronic trading activities, resulting in our OTC trading desk facilitating over $1.4 billion of quarterly volume, amounting to our largest quarter in our operating history. Q3 OTC volumes represented 28% sequential quarter-over-quarter growth over Q2 2020 and over 75% compared to last year's Q3. Galaxy's continued growth in market share is a result of our being one of the go-to trading desks in crypto, able to address the bespoke needs of sophisticated institutions looking for a large audited trading partner. To that end, Drawbridge Lending and Bluefire Capital represent important acquisitions for Galaxy Digital Trading that slot easily and efficiently into our leading GDT platform by amplifying our advantages, filling gaps in our current offerings, and securing additional best-in-class talent.

Let me take a moment now to explain the strategic rationale behind these deals and what trading at Galaxy will look like in the months to come. Drawbridge is an innovator in digital asset lending, borrowing, and structured products, while Bluefire is a technology-driven proprietary trading firm specializing in market making and two-sided liquidity for digital assets. Both firms are located in Chicago and led by seasoned market veterans. The primary benefits to Galaxy Digital these transactions to us are clear. First, this combination further expands trading's activities beyond just our current OTC offering and allows us to accelerate towards our goal of providing a full-service single dealer platform to the market, including expanded derivative and future trading, on-exchange market making, lending, borrowing, and structured products, as well as prime brokerage-like services, including trade execution, clearing and settlement, and margin-based trade financing.

Second, Galaxy Digital intends to leverage our brand, institutional relationships, and our publicly audited balance sheet towards scaling Drawbridge's suite of unique lending and structured product offerings. It's important to note here that we've already been in business with Drawbridge for some time, and we know the team very well. We made an investment into them in 2019 and have built a growing live loan book together, which we intend to expand going forward as a result of this transaction. Next, we intend to point Galaxy's broad sources of liquidity toward Bluefire's best-in-class trading strategies and execution while further enhancing their superior relationships with key global crypto exchanges that arise out of their $40-plus billion of annual notional spot and derivative trading volume.

We expect Bluefire to help us drive the utilization and optimization of our balance sheet, as well as drive trading costs down across the entire platform, which can then, in turn, be passed on to our clients to provide lowest-cost execution and highly efficient financing options. Organizationally, these deals establish a strong regional hub in Chicago for Galaxy Digital to expand agency, prime brokerage, and electronic trading services, and to increase connectivity with the largest global exchange players and traditional derivatives firms as they look to move into the crypto markets with Galaxy as a blue-chip partner. Finally, Drawbridge's CEO and co-founder, Jason Urban, will join Galaxy Digital as co-head of Galaxy Digital Trading and will work alongside fellow co-head, Peter Wisniewski. Andrew Karos will remain the CEO of Bluefire, which will continue to operate as a wholly-owned subsidiary of Galaxy.

Jason and Andrew are both veteran traders, with Jason having run significant businesses at both Goldman Sachs and DRW, and Andrew having built his own firm with a decade-plus long successful traditional equity derivative trading track record prior to turning his attention to crypto in 2018. But beyond Jason and Andrew, we're very excited about the addition of the entire Drawbridge and Bluefire teams to the Galaxy family. These additions will increase our resources in the trading business by over 50%, an important strategic move necessary for us to meet real on-the-ground demand head-on today.

Turning to the asset management business, the second quarter of 2020 has continued to see heightened market demand for Bitcoin and other major cryptocurrencies against the backdrop of excessive global monetary stimulus on the one hand, and major investors, corporates, and regulators increasingly expressing their conviction in the long-term prospects of Bitcoin as a store of value on the other. We have built our strategy around institutional wealth channels and accredited investors and are seeing promising initial traction as our brand marketing, investor education, and partner sales channels begin to amplify one another. As of October 31, our passive index and Bitcoin funds crossed $120 million of AUM and is growing fast.

Also, in the third quarter, our Galaxy Interactive Venture Capital team, who manages the Galaxy ESVC Fund and asset management, continued to expand their leadership role in the interactive content space and upped the pace of their investing over the second quarter with nine new investments and four follow-on investments. Turning to Galaxy Digital Investment Banking, which has continued to build its pipeline of mandates and to deliver first-class execution to clients, including representing Blockfolio in its $150 million sale to FTX. As we communicated on our last call, we were committed to managing the leadership transition in this group before the end of the year, and we have succeeded in doing so. In the past several weeks, we've brought on a new head of investment banking, Michael Ashe, who has previously built multiple industry-focused businesses before at both Citi and Oppenheimer.

We are also excited to launch Galaxy Digital Mining, which has come out of the hard work of the advisory team over the past year and will now be led by another new addition to Galaxy, Amanda Fabiano. Amanda was at Fidelity Investments for the past six years focused on mining, Bitcoin products, and Bitcoin education. I've now personally had the pleasure of working with both Michael and Amanda for the past few weeks, and I'm confident that we have found the two best individuals to fill these roles. I'm very excited to see what both of these teams are going to accomplish here at Galaxy in 2021. Finally, in terms of our firm balance sheet and our principal investment activities, our team has continued to pursue differentiated new opportunities.

The team invested $7.5 million of total new capital in six new and four follow-on investments in the third quarter, including in two of the most prominent DeFi or decentralized finance investment funds in the sector, ParaFi Capital and Robot Ventures. With that, I'll turn it over to Ash to walk everyone through the specifics of our financial performance in the third quarter. Ash?

Ashvin Prithipaul (CFO)

Thanks, Chris. I'll provide some additional details regarding our financial results for the quarter. Our comprehensive income for three months ended September 30th total $44.6 million, with a comprehensive income over nine months amounting to $55.4 million. The current quarterly gain was primarily a result of realized and unrealized gains on digital assets and on investments, partially offset by operating expenses. The fourth 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 $445.6 million as of September 30th, or CAD 2.05 of net book value per share Canadian, or $1.54 of net book value per share US. As of September 30th, the number of compensatory calls per units and stock options outstanding was $17.2 million and $21.4 million, respectively.

The aggregate compensatory awards have a value of $8.1 million remaining to be amortized over their life. Operating expenses for three months ended September 30th were $17 million, inclusive of equity-based compensation of $3.3 million over the same period. Operating expenses were lower for three and nine months ended September 30th, 2020, as compared to the three and nine months ended September 30th, 2019, due primarily to lower equity-based compensation and lower compensation expense in 2020. Regarding our balance sheet, $7.5 million of new and follow-on investments during the third quarter brought the investment balance to $200.7 million. As of September 30th, we have 45 individual investment positions, excluding our cryptocurrency and pre-ICO holdings, with no single investment position representing more than 6.6% of our net asset value.

In regards to the Drawbridge Lending and Bluefire Capital acquisitions, the consideration includes $3.8 million of ordinary shares subject to customary purchase price adjustments, and the company intends to grant $5 million in contingent options to certain employees joining the company as incentive and retention awards. We're pleased to report that we had $144 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 we can address questions from our equity analysts and investors. Operator, any questions from our equity analysts?

Operator (participant)

Yes, thank you. We have a question from Deepak Kaushal with Stifel GMP. Deepak, you may proceed.

Deepak Kaushal (Analyst)

Sweet.

Operator (participant)

Good. We can hear you.

Deepak Kaushal (Analyst)

Oh, excellent. Thanks for taking my questions. Nice to have a positive backdrop in the crypto space with your conference call. Just wanted to jump in on the acquisitions. Looks like you're paying shares and options for the acquisitions, and there's no cash portion. So I assume you guys still have the full $50 million pipe financing at your disposal. What are the plans for spending? How do you kind of carve that up into different parts of your strategy, and what can we look forward to there?

Christopher Ferraro (President)

Sure. Let me take that mic.

Michael Novogratz (managing director)

Yeah, take that, Chris.

Christopher Ferraro (President)

Yeah, so you're accurate in terms of the purchase consideration for the acquisitions and therefore the pipe financing was all primary capital that's being added to the balance sheet. That capital primarily will go towards financing different businesses inside the trading business, as well as helping to launch and start up and add financing to the mining business as well, and so when you think about us expanding our structured product offering, expanding our financing of customer trades and trading and margin-based financing and things like that, as well as adding capital to the existing trading strategies of Bluefire, you should think about that as the primary use of proceeds for the pipe.

Deepak Kaushal (Analyst)

Okay. And on the acquisitions, Bluefire and Drawbridge, what can we think of in terms of the financial impact? I mean, can you share any of the income and profitability metrics that these guys have been pulling in at the growth rates and how you might accelerate that going forward? Any kind of color on potential financial impact here would be helpful.

Christopher Ferraro (President)

Yeah, sure. So we'll speak to and report sort of their performances going forward in time. Right now, we're focused on adding them and integrating them into our existing business quite quickly. And so some of the specifics that we've disclosed we could talk to is, on the Drawbridge side, they bring over $150 million of third-party assets that are being managed in various products and forms to the platform on day one. And in fact, they've been a part of a driver of our existing book as well over the last year as we've partnered with them on adding different financing assets onto our balance sheet. And on the Bluefire side, Bluefire is one of the largest global market makers on exchange. They've done a run-rate basis trade over $40 billion notional annually of crypto.

And so we should think about that going forward as being an engine that's going to generate consistent high alpha return on equity sort of based on the amount of capital we put behind the business. And so we expect both of these to be additive to the business and accretive from an M&A perspective over an 18-month period on the high end, on the long end. But we're going to sort of integrate them and see how it fits into the business going forward.

Michael Novogratz (managing director)

Deepak, it's Mike here. The one thing I would tell you is that in some ways, in the way I look at these things, these are acqui-hires of really, really talented guys at a time when the business is starting to explode. And so you look at Andrew's engine that he's built, plugging our capital and plugging it into some of the systems that we already have, and think, "Listen, it might be 18 months, it might be 12 months, it might be six months based on the amount of volume that's pumping through these markets all of a sudden." And I don't think it's going to go away. Same thing with the derivative business that Jason Urban is bringing over in the lending business. Demand is going way up. I mean, we're having a hard time hiring people fast enough to build out. Listen, there's competition as well, right?

Our competitors are doing the same thing, and so what's exciting from my perspective is we were in a very nascent industry, and it still is, but now you're pretty certain that there are going to be multiple players that are building out real teams, and this is going to be a real business, and so in lots of ways, our business plan has been de-risked. The Bitcoin ecosystem has been de-risked, and so that volatility in kind of life comes down, right? There's no existential threat all of a sudden that you made the wrong bet, that it's going to take too long, and that the regulators are going to screw you, and so now it's really a race to get the right people in the right seats and to really start kind of looking 6, 12, 18, 24 months ahead at where the ball is going.

And so I'm wary of past performance predicting future performance in this case because I think future performance could be a heck of a lot better than past performance.

Thanks, Mike. That's really helpful. You mentioned existential threats. I mean, how do you look at the DeFi space right now in terms of existential threats? I know you put some money into ParaFi and Robot. Why not do that in-house?

We're doing a lot of that in-house. And I think come next earnings call, I think we'll roll out more of our DeFi plan and how we see DeFi. I mean, DeFi is a funny word, really. What DeFi really is, is we're taking a blockchain to the financial services industry. And it is by far the biggest threat to the banking system. It's just early, right? It's a sandbox still. And now it's a growing sandbox, right? It's gone from 500 billion locked up to 12 billion, 500 million to 12 billion. But we're still in, I call it, the sandbox stage. And so we've got some of our smartest guys in the firm working at making investments in that space and really structuring on how we participate in the space.

I think 2021, certainly in 2022, is going to be a big, it's going to be a big driver of things around here. Right now, we're still in that kind of, I'd say, first inning of DeFi.

Deepak Kaushal (Analyst)

Got it. So I'm curious. So if we have a kind of a boom and bust cycle with DeFi like we saw in ICOs, do you think that the Bitcoin and mature cryptocurrency market is insulated from that? Do you think we've passed that stage where everything is kind of correlated to a single event?

Michael Novogratz (managing director)

I do think so. I would split it into three buckets. I would talk about Bitcoin as a macro asset. It's almost a cottage industry these days that I think has reached escape velocity, and we're trading at $16,000 today. It would be surprising to me if we don't take the old highs out relatively soon, and people say, "Well, where can Bitcoin go?" Listen, at $60,000 Bitcoin, we're only 10% of gold. J.P. Morgan just put out a paper talking about Bitcoin as an alternative to gold, and they're seeing clients want to make the substitute, and so I'm not even sure why 10% is a great bogey. I picked that out.

In five years, 10 years, we're going to be looking back and saying, "Well, Bitcoin's worth more than gold." And so this is a multi-year process of adoption in Bitcoin, but I really believe we've crossed escape velocity. And then when you look at everything else, right, the Ethereum blockchain, right, if the price of Ethereum is going higher, I think it will continue to go higher. The Ethereum blockchain is most likely the blockchain that everything else gets built on. So where DeFi will reside, where stablecoins will reside, central bank-issued digital currencies are going to be a thing. Every single central bank is talking about them, trying to figure out, including the U.S., including Europe, including Brazil.

And so we're going to see a rebuilding of the financial architecture of the U.S. and of the world over the next 10 years, 10-15 years, five-15 years. And blockchain is going to be a monster part of it and the Ethereum ecosystem and these projects being built on top of that. And so I kind of look at Ethereum with payments as kind of chapter two, but it's really correlated then to all these new projects, which you want to think about DeFi as peer-to-peer derivatives, peer-to-peer interest rate trading, peer-to-peer futures trading, peer-to-peer equity trading. And listen, there's a regulatory hurdle to go through that's not been worked out. And so the regulators have to kind of catch up to the technology, and the technology's got to fit itself into a regulatory framework. I'm confident that'll happen over the next few years.

And so I split my mind. Half of our business is kind of focused on this opportunity that's here today, which is this Bitcoin really becoming a global asset. One day, if you're lucky, it's the global reserve currency, but really becoming a global asset. And the second is this giant venture bet, which is wildly exciting where we're going to see a real rebuilding of the financial services business. And in a few years, DeFi and fintech, you'll just call it fintech. And so I think in some ways, there are two businesses that are very interconnected, but you can think of them almost as two real drivers. And so that's the way I think about it. And I think, listen, there's going to be great opportunities on both sides.

Deepak Kaushal (Analyst)

Got it. Got it. And so when I turn the focus back onto your operating business, I know you've got good success on your principal book year to date. What are your thoughts then on reaching break-even on the operating side and when you kind of get exit velocity in terms of profitable growth there? Any changes now that the market's a bit hotter?

Michael Novogratz (managing director)

Yeah. Listen, I will be disappointed if we don't do that next year and then some, right? The banking business should be close or might even make it this year. Trading, we've put a big investment in, and it hasn't gotten there yet. It has certainly if you include our proprietary trading. But I think by next year, we certainly should have crossed that threshold. Asset management will be the one that'll take a little longer, partly because it's a game of big numbers, and you're putting an investment, and you need scale there. And so we're getting there. Our asset management business is finally picking up. Listen, we took a tack of going for the wealth channels. They're finally moving in. And so I'm optimistic. We've got lots of partnerships that we are working on, some that have been announced, some that are coming.

And so I think give us some patience on the asset management side. But you put the three together, and I would certainly hope that we're operating at a profit next year on an operating basis.

Deepak Kaushal (Analyst)

Okay. Excellent. Well, I don't want to dominate the call. I don't know how many other analysts are in the wings. So I'm going to jump back in the queue, and then if there's more questions later, then I'll jump back in. Thanks again.

Mike Novogratz (CEO)

Thanks, Deepak.

Operator (participant)

We also have a question from the line of Robert Young at Canaccord Genuity. Please proceed.

Deepak Kaushal (Analyst)

Hi. Good morning. I'm thinking of Galaxy as a bit of a leading indicator for other investors. And your investing activities recently, you said you've done a number of recent investments. Can you talk about what you're seeing out there in valuations and competition for the deals that you're going after, the investments you're making?

Michael Novogratz (managing director)

Most of the investments we've been making are in the, we'll call it the DeFi space. And the game there is to find the best teams with the best ideas and to kind of fight hard to get in at good valuation. We made an investment in a company called 1Inch. We made an investment in a company called Luna in Korea. And what's interesting about the way tokens work, right? Bitcoin is the store of value, and it's valuable because it's valuable. And Ethereum has this potential to be the oil or the gasoline that powers this whole ecosystem. But the cool thing about a lot of the DeFi project is they trade more like equities. They're almost a dividend.

And so you can look at, as this business grows, there's going to be some dividend which is decided by the community, and you can kind of discounted cash flow. And I think you're going to see more and more people, traditional investors, attracted once these companies become of scale to the space because it's a little easier to intuitively figure out. And so we're making small investments in and around the space. These are early venture investments that, if you're lucky, they're six to one, eight to one, 10 to 1, 50 to 1s. And what ends up happening is, as they mature, hopefully, then you become a participant in their part of the ecosystem. So staking coins on their system or lending money into their system or buying insurance from their system. And so I think it really becomes a symbiotic ecosystem in time.

But that's kind of where that investment dollars have gone. Other than that, we continue to have a large cryptocurrency position that I used to trade it pretty actively. I really believe that we're in a structural shift here in that the crypto guys call it hoddling, hold on for dear life, just not trading as much and watching the appreciation. And so I think we'll probably just hold on to our Bitcoin position, if not add at times, just because we're seeing so much demand for it.

All right. And that demand, how is the investment banking pipeline looking now versus, say, three or six months ago, especially in context with the strong new hires they've made? I think you said you could get profitable in that business this year. Does that imply that there's a really good pipeline?

Yeah.

So—

Operator (participant)

Go ahead.

Michael Novogratz (managing director)

Oh, sorry. Go ahead.

I'll follow up.

Go ahead, Chris. You got it. You got it.

Christopher Ferraro (President)

Yeah. Yeah. No. I was going to say the—we anticipated having a little bit of a kink in our pipeline because we transitioned Ian out, and we brought Michael on. That was our anticipation. The reality is actually the pipeline has stayed constant and has grown because the existing team that's there has built up a lot of domain expertise, and it's right at the right time when there is a significant amount of both consolidation internally within the industry as well as external interest to look into the industry for potential acquisitions. So when we think about our pipeline, the focus of the business today, right now, is on M&A. That's where the biggest opportunity is. We hope to, and we expect to see the capital markets side of the business start to expand, but it's still young and early in the capital markets days for crypto.

We've said this in the past. I'll say it again. There were two crypto IPOs historically. We were a part of both of them. We may see some more coming next year, but it's young on that side of the business. Think about it as a corporate advisory and M&A environment. The expertise we've developed there has started to position us quite well, we think.

That's great. And maybe one last question for me. I'll pass the line. The acquisitions you made, I think, suggested there are maybe as much acqui-hire as they are to get trading volume. Any sense of the share that you have now in this market as it's, I think you said, inflecting or growing? Then I'll pass the line. Thanks.

Yeah. So now with the addition of Bluefire, we expect we will start off as and then expand and be a top five market maker and participant on almost all the biggest global cryptocurrency exchanges. Our share there should expand quite dramatically as we put more of our balance sheet behind our trading and the Bluefire team's efforts sort of right out of the gates. Our OTC business today, there's not a ton of industry data on this. Our volumes, as we said, sort of grew almost 30% quarter over quarter in a time when the industry volumes actually were flat to slightly down. Our share of the OTC market, we think, is clearly growing.

But really, what we see is all white space in terms of capturing white space that isn't really share-taking today, which going forward is going to be on onboarding clients and providing different kinds of trade financing and margin-based financing and prime brokerage services. And so that's largely been held just in custody to date. And we think it's going to expand up the stack beyond custody pretty quickly. And that's kind of right where our sweet spot is. And so that's why the addition of these teams helps us to be in a position to meet that demand and do it at efficient and low cost, which is the key that we think we need to be able to offer to clients to really make it the best place to trade.

All right. Very exciting. Thanks for the call, gentlemen.

Operator (participant)

We now have a follow-up question from Deepak with Stifel. Please proceed.

Deepak Kaushal (Analyst)

Thanks, guys. Thanks for taking my follow-ups. Chris, just on the last comment there on the OTC volumes. So the volumes are going up. Your market share is presumably going up, or you're grabbing more of that white space. What are you seeing in terms of trends and spreads and commissions? And can you give us a sense of target ROE versus what you achieved a year ago, perhaps?

Christopher Ferraro (President)

Yeah. Yeah. So hard on the target ROE side because the business is still scaling, right? So it's certainly on a trade level, we're profitable. On a business level, we're scaling into profitability, which Mike pointed out and is clear. The OTC business, sort of margin profitability-wise, has been pretty consistent now for the last 18 months. It's a thin business in the largest, most liquid cryptocurrency, Bitcoin, and it gets thicker as the market gets less, there's less liquidity in assets or more esoteric. But really, the OTC business for us is an important bedrock in the business. It's something that we think will always be demanded and is something where we can, on a one-off basis, provide big block trade liquidity for our biggest and best clients.

That's where the business was historically, where we want the business, where we will drive the business to go, and we think is the most interesting both for us as well as market participants. It provides higher margin opportunities for us. It's going to be in this concept of single dealer access to a variety, a suite of products that include much more capital-efficient trading through financing, as well as different structured products and different esoterics sort of around the spot. And we're starting to see a real pickup in demand and interest level in all those things. And it's on us to really hone our productization of that in a way that we can roll out scalable to the market. So it's a growing, scaling business for us today.

But really, to go forward, our expectation is that the amount of volume horizontally and vertically across different products and the margin capture for us is going to expand all at the same time, right, as the platform grows. That's the trajectory that we have slated for the business.

Deepak Kaushal (Analyst)

Okay. And I got two more, if I may. Just one. Can you offer a bit more clarity on the mining strategy? You had some investments in miners in the past, and then you kind of shifted the narrative to be more of an advisory focus on the mining industry in terms of M&A and financing. And you brought somebody new on board. What's the go-forward strategy here for mining?

Christopher Ferraro (President)

Yeah. Yeah. So our new sort of reconstituted mining group specifically is meant to be an industry vertical that stretches then horizontally across everything we're doing at the firm. And so that group will themselves. We will actually do some proprietary mining ourselves because and this all came out of the advisory group's work in laying out all the players in the space, where all the hash rate was, what the levelized cost of production could be and should be, and sort of really thinking through the economics of Bitcoin mining. We think it's actually a great time to be in the Bitcoin mining space right now. And so you'll actually see that group procure hardware for ourselves as a base investment into the business.

And then from there, the idea is going to be for us to sort of use that access to equipment and the relationships with equipment providers to then provide different kinds of leasing and financing opportunities to people who want to get into the mining business themselves. And so we've internally dubbed the name MyFi Mining Finance. And so that'll be a core component of that group.

But that group's responsibility is also still to maintain coverage of the biggest and most interesting mining participants across the space and make sure that where we can be helpful, whether it's with our trading desk in terms of coin liquidation or hedging strategies, whether it's in our financing teams or more bespoke, like historically our Hut 8 style financing that we did, or in the investment banking group, if there is a capital raising opportunity or an acquisition opportunity or a project financing opportunity to make sure that those relationships get slotted into the experts within our different businesses so that we're capitalizing on the whole space. So that's the task that Amanda and team now have in front of them. And we're super excited about it because we think the space is ripe for new investments in an organized and professional way. And the economics are there.

Deepak Kaushal (Analyst)

Interesting. I mean, it's pretty capital-intensive. Have you got a number that you want to invest in in terms of capital equipment?

Christopher Ferraro (President)

We're debating it now internally. Amanda and team have a number, that's for sure. So yeah, look, it'll depend. We're definitely going to allocate some balance sheet to it. Some part of the pipe proceeds is going to go towards that first investment into the business. It's not going to be. It's not going to be all the pipe financing. It'll be a small amount of it. And then from there, we'll see how the market demand develops for different financing products. And that will determine sort of how much capital we ultimately put into the business, right? My expectation is it'll be a very interesting place to be investing capital for the next year at least, for sure.

Deepak Kaushal (Analyst)

Got it. And my last question for Mike or you is on the M&A side. Do you think there's been anticipation of a consolidation in this industry for a lot of the players that started up or grew through the 2017 growth period? Have we broken the log jam there? Is that going to start to accelerate? You guys are acquiring. Do we expect more consolidation here? And then I'll pass the line. Thanks again.

Michael Novogratz (managing director)

There's going to be more consolidation. I think you're going to see consolidation within the crypto community, crypto to crypto companies, and you're going to see the tech companies looking to acquire domain expertise. I mean, it shouldn't be lost on you that PayPal, which is a giant tech company, ended up hiring a crypto company to help them implement their crypto strategy, right? Because there's just domain expertise that they need to either build or buy, and it's going to be quicker for a lot of these tech companies who are all going to rush into this space. I mean, the one thing that is clear to me is that every single company that wants to be in the financial services market is going to need blockchain and crypto expertise, and so building up that domain expertise is going to be worth a whole lot.

And you're going to see that happen in the M&A space.

Deepak Kaushal (Analyst)

Okay. Great. Thanks again for taking all my questions. I appreciate all of your time today.

Michael Novogratz (managing director)

Yep.

Operator (participant)

Thank you. We will now turn to online questions.

Yes. Thanks. We are getting a lot of good questions. Let me turn to the first one. First question we have: Bitcoin is on a tear and is now above 16,000. Where does it go from here?

Michael Novogratz (managing director)

I said this in my earlier remarks. I think the first obvious stop is 20,000, the old highs. My kids are laughing because I tweeted that I would get a tattoo of the moon on my shoulder. And so maybe that happens before January of next year. Listen, when markets are breaking out and moving like they are, you don't know exactly where they take their first pause. But 20,000 is definitely the next checkpoint. Like I said earlier, I do think Bitcoin at 60,000 is 10% of gold. And that's a good next stopping point. Is that 18 months? Probably it's 18 months. 12 months, 18 months. But when people used to make those predictions, I would say, "That's kind of a wacko prediction. What can they hang it on?" And now I think these are really rational predictions. 10% of gold doesn't seem that far of a stretch.

I think once you get there, you'll probably be readjusting it up over the next two, three, five, 10 years. So I really believe we've crossed this adoption hurdle. Now it's just a question of more and more adoption as this kind of goes viral, right? It's the network effect. I think the most important thing to watch in some ways is just how much crypto is being bought on PayPal every day. Right now, it looks like it's $10-$13 million a day. As that accelerates and you're seeing it being bought on the Square app, you're going to see it bought in funds like ours and in other funds. It's getting put away. There's only 21 million Bitcoin. There will only be ever 21 million Bitcoin. It's a scarce asset.

When demand exceeds supply because supply is roughly getting soaked up so quickly, prices go higher.

All right. Next question. What do you make of the volatility and valuation in DeFi? Is this a repeat of the ICO boom in 2017?

We had what I call a tempest in a teapot. The idea is so powerful. The idea of DeFi is so powerful that people got wildly excited about it in a short period of time. There was some hype. There were some bad projects, and we saw what I would call a mini speculative two-month up-down bubble. And I think you don't want to lose track over the broader trend. DeFi is in the first inning. There are some amazing projects that are going to be built, and in two and three and four years' time, we're not even going to call it DeFi. Like I said, we're going to call it fintech, and so I think you got to keep your eye there. You got to be investing there. Certainly, there'll be more kind of trading opportunities when things get overhyped.

But I wouldn't let the volatility scare, I'm certainly not letting it scare me away or scare Galaxy away. I think we're going to make a big commitment in that space and think it's part of the future.

All right. Our next and final question. There are a number of corporations who have indicated they will move partially from cash to Bitcoin. What is your expectation of how fast treasurers will move to adopt Bitcoin?

My favorite TED Talk is this one about a guy dancing on a street on a hill, a green hill of grass, and he's dancing like a complete lunatic, and everyone's looking at him. There are probably 75 people sitting on the hill having a picnic and looking at this maniac, and then all of a sudden, a second guy goes up and starts dancing with him, and then a third and then a fourth, and then the whole hill is dancing like maniacs. And it always says a movement is started by the second guy or the third guy, and we're seeing that, right? You saw Michael Saylor with his company and then Square. We don't get credit. We were the first company to actually have a lot of Bitcoin on our balance sheet. But we're a crypto company, so people expected it.

I think there are probably companies that we haven't heard of that already have it, certainly private companies. But I think it's going to become a trend. I'm really watching for the next big one because I think once you get to three, you're going to get to 10 real quick. And so I do think something to keep your eye on. And I think it's going to happen.

Thanks. Those are our questions for today.

Guys, I just want to finish up in saying I certainly hope everybody heard my enthusiasm. It is heartfelt and thoughtful. We're seeing great things in this space. We couldn't be more excited about the opportunities that we're working our tails off over here. And look forward to next quarter's call. Hopefully, we'll have more exciting news. And stay long.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.