Galaxy Digital - Q3 2023
November 9, 2023
Transcript
Operator (participant)
Good morning, and welcome to Galaxy's Third Quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. At this time, I would like to turn the conference over to Jonathan Goldowsky, Head of Investor Relations. Please go ahead.
Jonathan Goldowsky (Head of Investor Relations)
Good morning, and welcome to Galaxy's third quarter earnings call. 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 on SEDAR and available on our website, or in future filings we make with other securities regulators. 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 or its affiliates to buy or sell any securities, including Galaxy Securities. With that, I'll turn it over to Mike Novogratz, Founder and CEO of Galaxy.
Mike Novogratz (Founder and CEO)
Yeah, good morning, everyone. You know, it's funny that the last 40 days seems like a whole different chapter than the third quarter. I'm gonna leave Chris Ferraro and Alex Ioffe to really go through the results and go business by business and, you know, I'm gonna focus a little bit more on the outlook and the macro. You know, there's a new energy in the crypto space. It's primarily being driven by the anticipation of the cash ETF that we hope to see this year or very soon. It could happen as early as next week. And so the market is anticipating that, it's getting geared up. Often in these situations, it's a buy the rumor, sell the fact kind of thing, right?
People get really excited and, you know, the announcement comes out, and then, you know, you start trading an ETF in early January, and that could be the top of a market. I actually think this is gonna be a little different this time. We have been waiting for institutions, almost like that famed Waiting for Godot, sitting on the subway station, waiting for the car to show, and a lot, you know, dip their toes in. This ETF is gonna make it really easy to open the door for institutions, coming into the crypto space.
You know, when you marry that with the uncertainty in the world, with the fiscal crises, quite frankly, that's going on in the U.S. and in the rest of the developed world, with the slowdown in China, it just makes for a really interesting time for institutions to put one, two, three% of their, of their assets into, into Bitcoin and other cryptocurrencies. And so I kind of think this is gonna be the start, not the finish. Will prices go straight up forever? Of course not. There'll be volatility around the announcement. There'll be volatility around the actual implementation of an ETF, but I think six months, 12 months down the road, you will have seen a lot of capital shift, small for portfolios, a lot in aggregate, you know, shift into, to our space.
That's given the firm a new energy. You know, listen, it has been a hard 18 months of building and, you know, lower volumes, trying to keep, you know, for each employee to keeping their own morale up. And so really having, you know, the price go up 35%, but also the phones ringing more, the opportunities more, the bankers busier, makes this a lot more, makes this industry more fun to work in. It's not all roses. We still have regulatory frustrations here in the U.S. specifically. I've been in D.C. I was in D.C. yesterday. I was in D.C. two weeks ago. The bright news is, I think the leadership of both parties does see this as a bipartisan issue that will get done in time.
There are some obstructionists that have really held back any legislation, and quite frankly, right now, there are other priorities, right? Will the government be shut down in a week? We've got a war, both in the Ukraine and in Israel. We've got elections coming in. So I'm not pollyannaish. I don't think anything gets done this side of the election, but there are plenty of smart guys in Washington and plenty of good pieces of legislation already crafted that will propel this industry forward in the next 18 months. And so, you know, 18 months can seem like a long time. In the big picture, it's not. And so we've got, you know, at least the potential of regulatory clarity coming.
We've got a Fed that's gonna stop hiking rates and probably will be cutting rates by the first quarter next year, right? The economy is slowing. The experiment of raising rates, 550 basis points in a straight line is actually gonna work, and it's gonna slow the economy down finally. I think once that Fed cuts, it's another tailwind for crypto. To put it all together, it just feels better. You know, our results in the third quarter weren't great. You know, the first month, we already made that up and then some, and we're off to a good November. You know, on top of that, each of our businesses is starting to fire, right? We're winning mandates in asset management.
Our mining facility is up and running and has performed great. Our derivative business, our lending business, our trading business is doing great. We're recruiting new talent. We've got two new traders that I'm wildly excited about. A little pressure on you guys. So couldn't have a, you know, a more different view than I did even three months ago. So with that, I'm gonna turn it to Chris to get into the details of the quarter and the details of each business, and then Alex to really go granular. Thank you.
Chris Ferraro (Co-President, CIO)
Thanks, Mike. Our third quarter results are a testament to Galaxy's diversified and resilient business model as we continue to drive growth in each of our three operating businesses. Let's start first with global markets. Despite lower trading volumes across the industry, Galaxy's counterparty volumes increased 70% quarter-over-quarter, confirmation that we're continuing to gain market share. Despite the uptick in volumes, our counterparty trading revenues decreased to $14 million in the quarter due to historically low volatility and a decline in revenue from derivatives. However, in October, we realized the benefits of our market positioning and the recent uptick in volatility, and generated approximately $24 million in counterparty trading revenue, representing over 70% growth in the first month of Q4 alone versus the entire prior quarter. The lending side of our business continued to grow in the third quarter as well.
Loan originations were $117 million, and our average loan book size increased by 9% quarter-over-quarter, growing to $553 million notional as of September 30th, reinforcing our position as one of the largest collateral-backed lending counterparties in the digital asset space. Our desk continued to onboard new counterparties, bringing the total count from 999 at the end of the second quarter to over 1,020 at the end of September. We believe the approval of a spot Bitcoin ETF in the U.S. will serve as a key catalyst for several of these counterparties who onboard with Galaxy, but are not yet trading with the desk, and our preliminary October trading performance and counterparty engagement supports this thesis.
Over the past several quarters, we have been focused on developing a unified digital asset marketplace for institutions called Galaxy One. We have 10 clients committed from our initial beta user cohort, of which a handful now have live access to use the platform. We are continuing to build upon our current beta offerings of agency spot trading, custody, and reporting functionality in the platform, and we'll be introducing new features, including margin, lending, API connectivity, and derivatives in the coming quarters. Turning to investment banking. While the backdrop for deal execution broadly remains challenged, our investment banking team did successfully close two transactions in the third quarter. The team served as an advisor to Gamercraft on its latest investment round, and also acted as the exclusive financial advisor to Securitize on its acquisition of Onramp Invest.
We expect to realize the revenue associated with both of these deals at a later date. Additionally, as we noted on our last earnings call, the team was also selected to represent Prime Trust, a financial technology company providing trust and custody services to the digital asset industry, in Nevada receivership in an ongoing critical restructuring mandate. Our investment banking pipeline remains strong, with 24 mandates, representing $2.2 billion in potential deal value being pursued by the team currently. Moving to our asset management business. We ended the third quarter with $3.9 billion of assets under management, up 58% quarter-over-quarter. The increase in AUM was driven by net inflows into our active strategies, a result of Galaxy Asset Management being selected to manage certain assets within FTX's liquid digital asset portfolio in September.
Over the past several months, our asset management team has been working closely with the FTX estate to develop a comprehensive plan to appropriately manage its digital asset holdings for creditors. FTX oversaw an extremely diligent diligence process to determine the best partnering investment advisor for the mandate, and for Galaxy Asset Management, being selected as a testament to the team's credibility with respect to risk and volatility management. While I can't comment specifics on the mandate, what I can say is that Galaxy Asset Management is committed to managing these assets and any sales required by the mandate in a responsible manner that protects and maximizes value for creditors and helps the industry continue to rebuild trust and credibility. Note, we expect the assets under management tied to this specific mandate with FTX will decrease over time as we monetize the portfolio.
We also remain very focused on the U.S. ETF landscape, and in the third quarter, we filed spot Bitcoin and spot Ether ETF applications with the SEC in partnership with Invesco. Invesco is one of the largest asset managers in the world, with approximately $1.5 trillion in assets, including over $500 billion in index-based ETFs and other passive vehicles. By combining Galaxy's knowledge and experience in managing digital asset ETFs with Invesco's experience in structuring and launching ETFs, our partnership offers unparalleled experience in product creation, operations, crypto expertise, distribution, and education on both the asset class and the wrapper. This is what it takes to win in such a competitive market and why I'm incredibly confident that we are well-positioned to be the industry leader.
While the SEC's approval timeline for a spot Bitcoin ETF remains uncertain, our unwavering belief is that the approval is now not a matter of if, but when. Additionally, we remain focused on developing digital asset ETPs in Europe in partnership with the DWS Group, and we'll keep you updated as we firm up a launch date. Galaxy Asset Management is one of the largest, most diverse digital asset managers globally now, with nearly $800 million in passive AUM, $1.7 billion, billion in active AUM, $1.5 billion in venture AUM. Our balanced platform approach sets us up very well to capture institutional capital in what we believe is a multi-hundred billion dollar fund management opportunity in digital assets in the future.... Turning to our digital infrastructure solutions business. It was another strong quarter for the mining team.
Our mining revenue, which includes our proprietary mining and our hosting operations, was $14.3 million in the third quarter, relative to hosting fees and purchase power costs, net of curtailment credits of -$2.2 million, resulting in over $16 million of direct mining profit margin. We reached 3.9 exahash of hash rate under management across our proprietary mining and hosting footprint. Our prop mining operations represented 1.8 exahash of our hash rate under management and resulted in the production of 309 Bitcoin in the quarter, and our hosted mining business accounted for the remaining 2.1 exahash.
We are on track to reach our year-end target of 4 exahash, and now have line of sight to continue to grow our hash rate under management into the new year by over 25% to 5 exahash by the end of Q1, with the vast majority of this increase of hash rate coming from own machines that were already previously purchased being brought online in our next expansion phase at Helios. Our effective power management strategy and integrated site operations led to a negative cost of power for the quarter, resulting in a negative average marginal cost to mine. Throughout 2023, we have chosen to hedge the majority of our power costs, which has proven to be a very successful strategy.
This has led to an extremely low cost of Bitcoin production in the summer months, as we were able to curtail our mining operations during peak demand periods to generate curtailment credits. Looking ahead to the fourth quarter, we expect to maintain a highly competitive but higher cost of Bitcoin production compared to the third and second quarters, as we anticipate fewer opportunities to curtail and a higher network hash rate. Our core thesis, developed during the acquisition of Helios, was that the infrastructure is strategically positioned in a dynamic power market that's rapidly evolving as additional wind and solar generation interconnect into West Texas.
Coupled with ERCOT's market structure and our mining team's proven ability to develop and operate digital infrastructure at scale, we are extremely confident in our ability to navigate the Bitcoin halving, expected in April 2024, while maintaining a healthy margin in our mining business. Turning finally to GK8. Across our infrastructure business, we've been encouraged by the growth of GK8, with the team expanding to a total of 16 clients in the quarter and maintaining a strong pipeline of potential large enterprise clients. We remain incredibly excited about the long-term growth prospects and therefore enterprise value creation potential from this business, given the enormous TAM that global asset digitization broadly presents.
The investments we've made here at Galaxy over the past five years are driving momentum in each of our operating businesses now, which we believe will generate further operating leverage as more institutional capital now begins to flow into the ecosystem. I'll now turn the call over to Alex to cover financial results, and then we'll jump right into questions. Thank you.
Alex Ioffe (CFO)
Thank you, Chris. Good morning. In the third quarter, driven by lower digital assets values and historically low trading volumes and volatility, Galaxy reported a loss of $94 million. This reversed in October. Improved market conditions, including higher coin values and our market positioning at the start of the quarter, resulted in approximately $124 million in income before tax for the first months of the quarter. Our operating expenses, excluding non-cash items, were $200 million in the first nine months of this year, reduced 14% from prior year. This decrease was primarily driven by lower compensation and marketing expenses, partially offset by larger mining expenses as we significantly scaled our mining business this year. Our equity capital was $1.5 billion at the end of the third quarter and $1.6 billion at the end of October.
Total liquid assets were $750 million at the end of this quarter, up from $700 million in the second quarter, consisting of $395 million of cash, cash equivalents, and stablecoins, and $354 million of net digital assets. For the four-month period, July through October, Galaxy repurchased 1.2 million shares at an average price, Canadian, of CAD 4.69. Now back to the operator for questions. Thank you.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today is from Andrew Bond with Rosenblatt Securities. Please go ahead.
Andrew Bond (Senior Research Analyst)
Hey, thanks. Good morning. Just on the, FTX mandate, can you talk a little bit about the significance of, of winning that kind of its crypto business versus traditional TradFi players, and if this is leading to other new business opportunities in asset management and other segments? And, additionally, FTX's venture portfolio also spans over 400 investments and $4 billion. Could Galaxy be involved in, the unwind of some of these assets as well?
Chris Ferraro (Co-President, CIO)
Yeah, I'll take that, Andrew. Thank you, and good to talk this morning. Yeah, look, we're... The team has been working on the FTX estate, doing diligence and scoping out what's in there and how we could be helpful, really, for over a year. And so winning that mandate for us was really the culmination of a lot of hard work put in. I'd like to say around the firm here, that this could be Galaxy's BlackRock moment, post the financial crisis, when BlackRock really took an opportunity to take root its hold in the traditional financial space, and become the one to help clean up balance sheets.
This opportunity for us represents that opportunity in the digital asset space. I think it's a testament to our team's credibility. It's a testament to what we've built here, how we operate, how we understand risk, and how we can help other companies sort of manage through difficult situations. So yeah, you know, the initial mandate to work with the estate on their liquid assets is one of both hedging risk and also helping the estate work out and monetize assets for the creditors over time. We know that there are other assets in the estate that we've already spent tons of time working on and understanding. There is the illiquid venture portfolio.
There's also a portfolio of trust assets and other assets in there that we know very well. I think having won this mandate, and having worked closely with John Ray and the team now, you know, on a weekly basis, and getting the creditors to know us and understand what we're about and what we can do, like, best positions us to be front of line in those conversations.
Andrew Bond (Senior Research Analyst)
Thanks, Chris. Just a follow-up on capital allocation and share price has moved nicely over the last month. How are you guys thinking about allocation here of capital in terms of share repurchases versus M&A, or, say, buying Bitcoin or other digital assets?
Mike Novogratz (Founder and CEO)
Yeah, listen, you know, last quarter, our stock was trading at a significant, significant discount to NAV. And, you know, we bought a small amount. I wish we had bought a lot more. There was not a lot of sellers down at those low prices. There were not a lot of liquidity. You know, now we're trading somewhat north of book, and we'll probably be less willing to, in the short run, spend our capital on equity. There's a new momentum. We think there are people coming to buy our stock. We think our story is really good. We're gonna work real hard in the next quarter at getting out and telling our story.
You know, I still think each of our line businesses have a good story themselves, and our balance sheet is really strong. You know, we've caught this move really well. Our derivative desk was well positioned, our proprietary desk was well positioned, and so, yeah, we feel pretty strong right now and don't think we'll be, you know, buying stock at the $7 range. And we'll keep you posted on the rest of the capital plans.
Andrew Bond (Senior Research Analyst)
Thanks, guys.
Operator (participant)
The next question is from Chase White with Compass Point. Please go ahead.
Chase White (Senior Research and Policy Analyst of Blockchain & Cryptocurrency)
Thanks for taking the question. So, I was just wondering, are the reports of market makers pulling back from exchanges that we've been hearing out there, I mean, is this a real issue, or do you think that these reports are exaggerated? If they're pulling back, what gets them back in the market, or is this more of a permanent trend in your view?
Chris Ferraro (Co-President, CIO)
Yeah. So, thanks, and good morning. Liquidity has dropped across the market, you know, through the third quarter. So that's true, and one function of that is our market makers pulling back. I think they're. You know, what we saw in 2022 and 2023 was the result of improper counterparty credit analysis and market structure. And so one reason, you know, people in the industry got hurt from prices falling, people in the industry got hurt from bankruptcies and credit implosions, and so they therefore have pulled back generally. It hasn't gotten to the point where it's really hurt the industry in a lastingly negative way. What everyone is focused on now on the go forward, though, is how the market structure is gonna evolve.
And so market makers pulling back from exchanges is actually really a step back and a retooling of market structure. And everyone's talking about things like off-exchange settlement to really hold assets in separate, segregated, ring fenced custody arrangements, while using that asset and credit to then trade on exchanges. And so I actually think it's a temporary, it was a temporary reset of market structure, and is actually starting to reverse itself.
Mike Novogratz (Founder and CEO)
Yeah. One thing I'd add to that is, even with the kind of drop in liquidity, our volumes at Galaxy were up 70% quarter-on-quarter, and much higher in this fourth quarter. And so I think it's a testament to us getting market share, period. We just feel like with a lot of our competitors are out of business and a lot were wounded. And so we did think this is our time to shine, and that's why we're gonna be leaning in.
Chase White (Senior Research and Policy Analyst of Blockchain & Cryptocurrency)
Got it. That's very helpful. And, in the mining business, how should we think about mining power costs now that, now that we're out of the summer months? Is there kind of a level that you're hedged at in terms of power price, that we should be thinking about? Any color there would be great. Thanks.
Chris Ferraro (Co-President, CIO)
Yeah, sure. So yeah, I mean, we went from, for pretty much all of 2023, from the beginning, with a strategy of putting on a long-term hedge for the year. We thought power price—the power price curve early in the year was very attractive and set us up for a year where we wanted to have good visibility on profitability. That ended up being a very smart decision, not just because the economics locked in were great, but it set us up to be able to participate dynamically with the crypto market and really add additional unexpected profits of the year. We're still hedged as a business.
As we go into 2024, our outlook on our strategy there is gonna be a little more dynamic. There's a lot going on in 2024. Obviously, the price action of the commodity we have a view on and has an impact on our strategy that the halving coming in around midyear is also going to change the landscape for miners in terms of their cost of production, sort of definitionally. And so, our expectation is we are gonna continue to put our balance sheet behind the business and lock in attractive prices when they're available. We are gonna more dynamically manage our fixed versus variable exposure next year as we see how the market develops.
Chase White (Senior Research and Policy Analyst of Blockchain & Cryptocurrency)
Got it. That's helpful. Thanks.
Operator (participant)
The next question is from Michael Legg with Benchmark. Please go ahead.
Michael Legg (Managing Director and Equity Research Analyst)
Thanks. Good morning. Nice to see how things turning around for the industry. Can you talk a little bit about what you're seeing from investment in this space? I mean, we have a new focus from a lot of investors on investing in AI. You know, 2021 was big in the crypto space for investment. Talk a little bit about what you're seeing and if AI is taking away from any enthusiasm in crypto investing?
Mike Novogratz (Founder and CEO)
You know, there's not a ton. There's a lot of talk that at one point, crypto should be very helpful in AI, in terms of authenticating deepfakes and authenticating. There are a few tokens that have adjacency to AI that jump just on frenzy and have kind of come back off. Some of the miners have pivoted to becoming, you know, AI data, you know, data centers, and that has been an interesting business. You know, if you have the contacts that, you know, NVIDIA and you had the chips, you know, good on you. But in general, we really haven't seen the convergence yet.
I think you will, because the problem with AI for most companies is to be big in it, to be good in it, it's an unbelievably capital intense effort, right? And so my own gut feeling is you're gonna have two or three giants that, just like in cloud, win the dominance of AI. And so I think it's a, it's a harder venture space than crypto was. And, you know, we're thinking a lot about how, how crypto becomes, supplemental to it, but we haven't really seen great, you know, great, great angles in yet.
Chris Ferraro (Co-President, CIO)
Yeah, I think to add a little bit, early on, maybe nine months, a year ago, we saw a very quick, I would say, sort of divergence of capital, like to AI outside of crypto, you know, from tech forward investors, growth investors. That's kind of come and gone. I don't. It's not a factor today when we think about people allocating capital and the conversations we're having. Where some themes, where money is floating around and actually going inside the crypto space, I think I'll give you, which is part of your question. From a strategic perspective, from companies looking at what they should be doing with their balance sheets, the consolidation is a big theme.
And so, you know, whether it's custody exchanges, things of that nature, wallets, security, surveillance monitoring, really people are looking for who are the standouts who have gotten some scale and who are gonna win, and they're looking to either buy those companies or put money behind those companies for them to then consolidate the smaller players. And so I think we're gonna see that trend happening, for the next foreseeable future. In terms of, like, deep tech investing, you know, there's a lot of focus on Layer 2s and Layer 2 scaling and roll-ups. And so, our venture team has spent the bulk of their 2023 having developed a thesis on roll-ups and where we should be investing and where value accrual is gonna happen, sort of on chain, across the stack.
And so there, there's a lot of new developments happening there, which are exciting, and are pretty early. And so I think that's where the early money has moved to. And then I mentioned before, market structure-wise, people are looking for exchanges historically that were unregulated to move into regulated venues and for bifurcation of market structure between exchanges, dealers, venues, and custody. And so you're looking at lots of different technologies that are looking to stitch those two, three together off exchange settlement, clearing, things like that. And that's where a lot of people are focused now.
Mike Novogratz (Founder and CEO)
Yeah, and if you want to kind of get my, the rolling view of how this is gonna play out, 2024 literally is gonna be a year of institutional adoption, primarily at first through the, you know, the Bitcoin ETF, which will be followed by an Ethereum ETF. And as institutions get more comfortable, as the government gives its seal of approval that, you know, Bitcoin is a, is a thing, you're gonna see the rest of allocators starting to look at things outside of that. And so money will flow into the space. I think it will probably take until 2025 until all this investment in tokenization and in wallets really start to show up, right? Stablecoins are growing every single day, certainly more so abroad than here.
The biggest, I think, security issue for the United States is getting our stablecoin right. We're gonna continue to be dollar dominant. We better have a, you know, dollar-backed stablecoin that reflects our values and, and, and, and is taken up around the world. I literally think that becomes kind of the 2025 chapter when we see all this investment start playing out. And it needs to, right? For crypto to really fulfill its destiny, we do need tokenization. We need projects built on blockchains that are scalable and fast and, and, and that's all happening. You know, we got way ahead of ourselves in 2020, 2021, and thought this world was going to be built overnight, and it just takes time.
So, like I said, this ETF is giving us all breathing space, putting life in the system. That brings in capital that allows the rest of this stuff to flourish. But I think if you looked at the crypto long-term plan, it's on target.
Michael Legg (Managing Director and Equity Research Analyst)
Okay, great. Second question, around the Halving event. When you look at, you know, the marginal miners out there, when the return profiles change, does that give you an opportunity? And how are you looking at that from a possible growth perspective in mining?
Chris Ferraro (Co-President, CIO)
Yeah, so, you know, I think, so factually, when the halving hits, you know, that all else being equal for every miner out there, that should effectively double the marginal cost of mining for everybody. And so, you know, where you are on the cost curve matters, as you're pointing out. We're—we've been laser-focused on how we enter this space, with what asset, to make sure that we are as far down the left side of the cost curve, and well positioned to manage that as possible. Give us a check for that. Very confident in the asset that we purchased and what we've done with it, and we've built our positioning there.
In terms of offensiveness, you know, I would say that those opportunities, it's pretty hard to move a fixed asset if you're in a bad location for energy. And so, it's less likely that fixed infrastructure, from a distressed perspective, is going to sort of magically become interesting if it's uneconomic. But that being said, talent and more movable infrastructure like ASICs, et cetera, for distressed companies, I think are going to be a focus for us in terms of being opportunistic and being offensive. So that's how I think about, like, when we think about offensiveness.
Michael Legg (Managing Director and Equity Research Analyst)
Yeah. Okay, great. Thanks. And then just the last question, Mike. I know it's your favorite subject, but you put it at the top of the press release this time, so I wanted to try to understand the U.S. listing and bring it to the front of the press release. Is there any indication of your thoughts? Can you just talk about that?
Mike Novogratz (Founder and CEO)
You know, there's not a lot we can say. The SEC has not approved anybody in a long time. We are continuing to be in dialogue with them. You know, when we file, it's public, but we're waiting for our comments back and, you know, it takes a long time, a lot longer than it did when I was at Fortress. And so that's. You know, it's frustrating, but that's just where we are.
Michael Legg (Managing Director and Equity Research Analyst)
Yeah.
Mike Novogratz (Founder and CEO)
Um-
Michael Legg (Managing Director and Equity Research Analyst)
It's been 90 days since our last filing.
Mike Novogratz (Founder and CEO)
Yeah. Listen, I have not given up on the U.S. Like, we're a New York-based company. While we're building abroad, and I think we'll continue to build our international offices out. U.S. capital markets is by far the deepest and best capital markets. And, you know, it feels un-American that there's only one, you know, broker-dealer, Coinbase. I'm jealous that gets to tap the U.S. capital markets. I look at where the miners trade and the liquidity that they're given on a daily basis. And, you know, it gets me angry that we're not through the gauntlet of the SEC approval process yet. I do think it's worth it, and it's been costly, and it's been frustrating. I do hope there's some light at the end of the tunnel.
This SEC administration won't be there forever, and if we don't get through this time, you know, post-election, I think no matter who wins, you probably get some new bodies in the SEC. And so we're gonna keep our nose to the grindstone.
Michael Legg (Managing Director and Equity Research Analyst)
All right. Thanks, guys. Congrats on the quarter.
Operator (participant)
The next question is from, and please excuse any mispronunciation, Bill Papanastasiou with Stifel. Please go ahead.
Bill Papanastasiou (Director of Equity Research)
Hi. Good morning, everyone. Thanks for taking my questions. Good to see Q4 shaping up better here. Mike, just wanted to get your thoughts on the digital asset space post potential Bitcoin spot ETF approval. Will we see capital flow towards Ethereum space on the belief that a spot ETF could be approved there as well? And can you comment on the potential hurdles with respect to an Ethereum spot ETF? Or, you know, will it be a relatively smooth process to get that one over the finish line after a Bitcoin spot ETF is approved?
Mike Novogratz (Founder and CEO)
Yeah, I think there's a big difference. I do think there will be a spot ETF approved. I'm not sure it will be as well received as the Bitcoin ETF for a very simple reason that, you know, Ethereum's model of validating is a staking model, and there's a staking yield. And unless they can figure out an ETF that actually passes through the staking rewards, it will be a kind of a subpar product from just owning Ethereum and with someone like us and having it staked. And so that technical difference is kind of a big difference when you're looking at, you know, 4%-7% yield, depending on where you get ETH staking. But I do think there'll be one approved in time.
The same way you have a futures ETF, it's going to be broadly the same argument that the Bitcoin ETF is getting approved through. And so, I do think you know, while Bitcoin has way outperformed the rest of crypto this year, you'll see some rotation into Ethereum, and you've already seen some into the other alts. Solana has been on a tear. And so, you know, the rest of crypto is getting you know, much needed capital and enthusiasm injected. Listen, I think in the long run, these utilities are gonna need to really serve a purpose and be used and have stuff built on them to sustain long-term value. But in the shorter run, the broad enthusiasm around their story is enough.
And, you know, we've got speculative money coming back into the space, and, and, there's still not a lot of leverage in the space. I mean, we've seen futures in the U.S., you know, get as high as they've been on, on the Bitcoin side. But if you look at broad leverage across the space, we're trying to build up our, our loan book. It's, you know, roughly just shy of $600 million. You know, back in 2021, there were much bigger loan books all around the, the street. And so, as confidence builds, capital comes in, leverage will pick up, and, and prices should go higher. That should drive the development of the space.
Bill Papanastasiou (Director of Equity Research)
Appreciate that color. And then to shifting gears to the infrastructure side of things, we've seen recent announcement of the Bitmain S21 next generation miners at really attractive promotional pricing. I'm curious to hear if your team's been thinking through potentially expanding the fleet and purchasing some hardware just given also the uptick in mining economics recently.
Chris Ferraro (Co-President, CIO)
Hey, Bill. Yeah, we have. I think the... You know, our position right now is, we are a data center infrastructure business first, and a self-miner second. You know, roughly, a little under half of our capacity today are our machines. The other, more than half of the capacity are external client machines. That mix will kind of bounce around, but that is our target mix. And so for ourselves, investing in new ASICs and building capacity, it is on the horizon. We're looking at it. I think when we step back and we look at our uses of capital, we have a fairly sizable investment, in terms of our total capital base committed to our mining assets.
Again, a lot of that is in owning the data center and owning the infrastructure than it is purely in the ASICs. And so I think we will look opportunistically to swap into better machines, particularly depending on pricing. If the capital markets open up for us, as they look like they are going to, then I do think that you could see a future where we are looking to use the capital markets to fund growth in the business. But we're sort of sitting and watching right now. Kind of depends on how the market develops.
Bill Papanastasiou (Director of Equity Research)
Okay, thank you very much. That's all for me. Keep up the hard work.
Operator (participant)
The next question is from Patrick Moley with Piper Sandler. Please go ahead.
Patrick Moley (Director and Senior Research Analyst of FinTech & Digital Assests)
Yeah, good morning. Thanks for taking my question. Maybe just elaborating on the comments you just made about the capital markets opening up for you guys. I was hoping you could give an update maybe on where the pipeline in investment banking sits today, and, Mike, maybe how you see that playing out over the next 12-18 months. Thanks.
Chris Ferraro (Co-President, CIO)
Sure. I'll hit our investment banking division and pipeline, and then Mike talks more broadly about the markets. I think the last year has been challenging across the street, forget crypto and our sector, in terms of the banking business. And that is purely a function of valuation resets, right? Like, when interest rate regimes change and valuation regimes change, the only people looking to raise money are people who have to. And so markets lock up, capital markets activity locks up, M&A activity slows down because it's much more difficult to get people to agree on what their relative values are. And so that's happened pretty much across the board in markets. In particular, it's been particularly acute in the crypto markets.
So it's been a challenge to find investors to help our clients to input money into them. It's been a challenge to get to agreement on relative valuations for M&A, but we've done so. Like, we've had successes. We have deals that we helped get closed. You know, now I do think if you're talking about a future where the Fed has paused and maybe in reverse, you're talking potentially about a valuation regime shift again, the opposite way, which is positive, which will be positive for the capital market. So we're encouraged. We're encouraged with crypto prices having bottomed and sort of come the other way.
Like, all those things are the right ingredients for the recipe that should lead to a more vibrant market, which is what our banking business has been waiting for.
Mike Novogratz (Founder and CEO)
I also think we can't underestimate the psychological impact that, you know, once this ETF gets approved, the SEC approving this ETF, BlackRock... I mean, Larry Fink is one of the most influential, you know, men in this entire industry, in the entire asset management industry and the entire financial markets. You know, him being a, an endorser of Bitcoin, it frees up the, some of the internal indigestion at, at big institutions to say, "Hey, now maybe it's safe to, to, to, to get into the water." And so companies that you couldn't sell, at $0.50 on the dollar, you might be able to sell it at par.... because the outlook looks so different. You know, from an institutional perspective, this is a giant watershed moment, of adoption.
You know, the Bitcoin story has been there for 13 years, and it's been a story that governments are profligate, and that at one point, they have to debase their currencies. They have to inflate their way out of the debts that they print. And, you know, you just see that everywhere. We're spending 25% of GDP on our federal government budget deficit, and that story is picking up. And so, like, the macro narrative for Bitcoin, at the same time you're seeing institutional adoption, really makes for a powerful combination. So my bet is, even for our company, you know, when we finally decide we want to raise capital, it will be far easier, with this new mindset of crypto being... And certainly, it's been focused on Bitcoin.
We need it as an industry to to move to the rest of the ecosystem. You know, I think stable coins, there's a tremendous amount of energy around tokenization and wallets. Everybody is working hard to to build the wallet of the future. I think people really understand where the the architecture is going. It's not being used yet. But as that stuff starts filling in, I think you're going to see a lot of demand from institutions to get a foothold in this space. I guess I put everyone to sleep with that answer.
Patrick Moley (Director and Senior Research Analyst of FinTech & Digital Assests)
Oh, I'm sorry. I had a follow-up, but that was a great color. Just on, I guess, the asset management business, I was hoping to maybe get your thoughts on where you think demand sits today for active strategies. You know, we could see a lot of money come in through these passive vehicles, but just wondering maybe where you think we sit today in terms of that demand for active management in crypto.
Mike Novogratz (Founder and CEO)
Yeah. Listen, I think one of the issues with active was that a lot of the active strategies in 2020 and 2021 were really biased long, and very few of the fund managers, you know, had roses around their neck at the end of 2022. And so really, you know, performance was not great. Not for all of them, but for the bulk. And I think people stepped back for a second. I do think we will see active start up again first quarter. We're already talking to allocators, and they're looking at making allocations in the first quarter. And so as this space gets relegitimized, as the bad actors...
I mean, I think Sam Bankman-Fried being found guilty on seven counts was actually a really important day for crypto, because it symbolically is kind of sweeping out the bad chapter and starting in the new chapter. And I do think it takes allocators a little more than it takes family offices and, you know, hedge fund guys to jump in. But I think by the first quarter, you're gonna see people, you know, start to allocate to active again. And we're really looking really hard at, you know, how we make sure that we show up in that space with product that people like that fits the demand, and we'll keep you posted on that.
Patrick Moley (Director and Senior Research Analyst of FinTech & Digital Assests)
All right, thank you.
Operator (participant)
The next question is from Owen Lau with Oppenheimer. Please go ahead.
Owen Lau (Executive Director and Senior Analyst)
Hey, good morning. Thank you for taking my questions. So I want to go back to the point about the adoption. Your trading counterparty increased 3% sequentially, but your active trading counterparty decreased 2%. So can, can you please talk about the dynamics here and what you see in October and early November? Do they just sit on the sideline and really wait for the opportunity, or these kind of parties are, like, being more opportunistic about spot ETF and will come and go, and how do you see that trend continue? Thank you.
Chris Ferraro (Co-President, CIO)
Yeah. Hey, Owen, how are you? Thank you for joining the call today. Yeah, I think you're right. So, like, when we see active counterparties sort of flatlining, but we see volumes up a lot, for us, that means that we're, we are shifting over time, which we think is natural, particularly when half the industry, we're shifting over time to larger, higher volume, more active traders, and clients than we have had historically. And so I think there's a natural amount of sort of, underneath it all, attrition of smaller clients who, you know, have underperformed or going out of business, larger clients coming in, new capital bases, have a new thesis and are going to trade more and more. And so that's great for our business.
I don't think the trading activity is ephemeral. I think that's important. Like, we did see, you know, really industry lows in terms of volatility and activity in Q3. And the snapback for industry lows outside of us, like we said, sort of us gaining 70% volume quarter-over-quarter versus industry down probably 20% on average, if you look at on-exchange volumes at competitors, is a big deal. I think that's a testament to like what we've built and what we offer. And then the continued resurgence of activity, not just with us then, but with the whole industry in anticipation of the ETF, I think we think is a lasting trend.
And so I would take away as, you know, we think it's not ephemeral, and we think that the counterparties who are now onboarding and trading are much bigger, much more sophisticated, have new capital bases, and so are going to be a lot more resilient.
Owen Lau (Executive Director and Senior Analyst)
Got it. And then, can you please give us an update on your international expansion strategy and the competition from the firms in other countries? I mean, do you still see U.S. to be a leading force for blockchain, or there's a real threat that capital and projects are moving, or I should say, are building up in other countries? Thanks.
Chris Ferraro (Co-President, CIO)
Yeah. So, the question is, do we see the U.S. as gonna be a continued force in blockchain and cryptocurrency going forward? Like, we hope so, right? We have today, we have about 25% of our employees now that reside outside of the U.S. That will likely continue to trend up, meaning what we'll likely... You know, as we add employees, I think there'll be a higher percentage of employees added outside the U.S. than in the U.S. That is a function of regulatory structures being set up ex-U.S., international jurisdictions that are gonna allow us to really grow the business in a regulated license way with big institutional clients globally. And so that's the main driver.
We do see capital forming, like we've said on the last call, outside of the U.S. And like I said, when that happens, that, that tends to be sticky. And so I, I do think, you know, our performance, meaning the U.S., over the last three years, will have hurt the U.S.'s market share for a while. We do still remain pretty bullish, the U.S., long term, and, and we think it'll sort itself out, but, but, you know, we've got a little bit of a hole to dig out in terms of market share for, for the time being.
Mike Novogratz (Founder and CEO)
If you take out China for a second as its own entity, the U.S. is larger than the 10 next largest economies combined. So it's hard for a U.S.-based company to think about a crypto universe without the U.S. So we're doing whatever we can here now. We are advocating in D.C. for sane crypto legislation. We are watching this Coinbase case with very beady eyes because, you know, they could potentially win this case sooner than people think, and that changes the whole landscape. So I do think... Listen, we need legislation here in the U.S.
I do think we'll get it. I said that early on, and I think the U.S. will be an important part of the crypto universe, because it kind of has to be. But listen, it's not to say it hasn't been frustrating, as Chris said, and we as a country in the U.S. have certainly given up some ground. I don't think, you know, it's long-term unsustainable. I mean, insurmountable. Anyway, thanks.
Owen Lau (Executive Director and Senior Analyst)
All right, thanks a lot.
Operator (participant)
The next question is from Kevin Dede with H.C. Wainwright. Please go ahead.
Kevin Dede (Managing Director and Senior Technology Analyst)
Good morning, gents. Thanks for having me on. Chris, you touched on investment banking, and pipeline looks flattish sequentially, but the value's doubled. Could you speak to that?
Chris Ferraro (Co-President, CIO)
Yeah. You know, our team is about the same size, and so our coverage is about the same as it could be. There is at least one large engagement that's in the pipeline now, which wasn't in before, which from a dollar perspective portends, you know, takes the pipeline up a lot. And so there's some-- there's one large engagement that really changes it quarter-over-quarter, is like the specific answer.
Kevin Dede (Managing Director and Senior Technology Analyst)
Ah, okay.
Chris Ferraro (Co-President, CIO)
Just-
Kevin Dede (Managing Director and Senior Technology Analyst)
Okay.
Chris Ferraro (Co-President, CIO)
For Q3, our pipeline, it's about 60% M&A, 40% capital markets.
Kevin Dede (Managing Director and Senior Technology Analyst)
Right, right, right. Okay. Mike, just a quick one for you. I know you've spent some time in D.C., but yesterday there was a bill that surfaced that looks to squash Tether, and I was wondering if people are talking about that down there and what the impact could be. I know you're big on stablecoins. I agree with you 100%. It looks like Circle sort of muddling along. What's your take with what happens?
Mike Novogratz (Founder and CEO)
You know, it wasn't talked about when I was down there yesterday. I didn't see the bill yet. I haven't looked at it. Listen, Tether is growing, you know, weekly. It's becoming the dominant stablecoin. I'm sure, you know, Jeremy at Circle would like to change that. There's a lot of fear, uncertainty, and doubt around crypto offshore. You know, this is a complicated industry, and, you know, it was set up with this idea that it wanted to provide access to people that didn't have access, right? You remember where crypto came from. So, I think, you know, Tether's got their job to do, convincing, you know, people to trust it. They do. They seem to be wildly well-capitalized at this point. They're making investments.
You know, I think Tether's probably making over $1 billion a quarter, and so it's without a doubt, probably the most profitable crypto business. They run with a small team. They've got huge margins. They're smart guys, and so I think they are probably doing everything they can to stay within the good graces of their counterparties here in the U.S., right? Howard Lutnick and his group do a lot of the buying and holding of U.S. securities for Tether. You know, he's a very smart guy. I don't think Howard is gonna put himself in. So I think this is a political thing. If I was the U.S., I would pass stablecoin legislation and make it really clear.
I think it's really, really important that we have a strong dollar-backed stablecoin. I'd rather have it be in the U.S. than not in the U.S., just as a patriot. But, you know, Tether is the preferred stablecoin of the world right now, period.
Kevin Dede (Managing Director and Senior Technology Analyst)
Yeah, no, I clearly see that. I was just, you know, given the conversations you had, I thought you could shed some light on how you see it moving forward. Yeah, I guess it's very political.
Mike Novogratz (Founder and CEO)
Certainly, there's certainly a fear in D.C. of things that aren't, you know, in their control. So are the politicians. You know, you see the same thing with around Binance. I said this publicly, the single best thing that would happen to crypto after the ETF is that Binance settles with you know, our regulators, and pays a fine and gets a clean bill of health and goes on and runs a more you know, regulated platform. They are, you know, in Abu Dhabi, they're in Dubai, making that transition. Again, you know, does that happen or not? I think it probably happens in time.
I wish it happened yesterday because, you know, that brings in leverage to the system, that brings in confidence to the system. But our politicians are certainly more nervous about things overseas than they are about the stuff here that they have control over.
Kevin Dede (Managing Director and Senior Technology Analyst)
Chris, you, you mentioned four exahash target and Helios year-end, and five next year. Do, does that mean... And given your earlier comments, does that mean you already own those machines? And is there enough room in that current building to support that hash target, or are you going to have to build something else?
Chris Ferraro (Co-President, CIO)
That's right. So, yeah, so we've basically hit four exahash already in the third quarter. I think it was literally like 3.996 or something. And we have been making a relatively small investment to expand the existing building, which is phase one, out to its full capacity. When we acquired the asset, there were roughly a quarter of the total capacity was sort of available capacity, and the building was unbuilt. And so, after we stabilized the asset, we got everything plugged in, then we went on the exercise of further developing, you know, that last quarter in terms of space in the building. And so, we're finishing that up.
We're gonna fill that space with machines we already own. So from a CapEx perspective, you shouldn't see additional ASIC CapEx at all to get, go from four to five on our side. We also have some additional limited space that we are working with a pipeline of clients to add new hosting clients as well. Nowhere near as large as an exahash in terms of capacity. So we're gonna use that space to fill up any remaining idle machines that we've already purchased, that we own. That's a Q1 2024 event, not five exahash is for Q1, not for the whole year.
Kevin Dede (Managing Director and Senior Technology Analyst)
Okay, I guess we'll look forward to speaking to you about it on the year-end report. Thank you very much, gentlemen. Appreciate you having me on.
Operator (participant)
The last question today is from Spencer Anson with Susquehanna. Please go ahead.
Spencer Anson (Equity Research Associate Analyst of IT Services and FinTech)
Hey, guys. Thanks for taking my question. Michael, if I could just ask, on a high level, are there any interesting developments or applications within the payment space that you're excited about?
Mike Novogratz (Founder and CEO)
I think, Chris... I mean, what's, what's complicated with payments is that in the U.S., right, things like Apple Pay work really, really well. And so we don't have a payments crisis in the U.S., or a payments need in the U.S. We do when it comes to remittances, and so if you're, you know, one of the many, many, many immigrants and growing number of them that want to send money back to Venezuela or whatnot, it's wildly expensive. And so, like, this is why it drives me crazy that the, that the left has been kind of more obstructionist in crypto. You know, but that's, that broadly is, is, you know, just sending stablecoins over a... You know, the, the single largest payment network in the world all of a sudden looks like it's Tether over Tron in terms of crypto.
It's used all over the world outside of the U.S. Why do they use Tron? He made it really cheap and really easily, you know, easy to access. And so I don't think there's anything that's that kind of technologically cutting edge that's gonna change things. Where stablecoins have the next potential real giant leg is when we all of a sudden start going, you know, Internet of Things. When you're putting an engine efficiency, you know, with a smart contract, and so if it runs over 90%, it's giving, you know, micropayments to the or taking micropayments to from the user, and if it's running poorly, it's sending them back and forth. Like, once you have regulated stablecoins, that big industry trusts, I think you'll see an explosion of new use cases.
But in general payments, certainly from a U.S. perspective, there hasn't been anything that's, you know, changing the way we operate. And so this is much more of a developed market—a developing market and a, and a remittances game. Now, that is growing, but there's nothing that we've invested in specific.
Chris Ferraro (Co-President, CIO)
The only thing, other thing I'd point to is, I mean, this is obvious, but like PayPal and PayPal's stablecoin, I think is a potentially pretty big deal. And, you know, they very quickly came under the purview of the U.S., the SEC, very fast. And so we're monitoring that because, you know, that'll help tell us what direction the U.S. regulators sort of want to go with an entity like PayPal, which I think is a big deal.
Mike Novogratz (Founder and CEO)
Yeah.
Chris Ferraro (Co-President, CIO)
Which is pretty different.
Mike Novogratz (Founder and CEO)
Listen, the banks are lobbying like crazy to have the tech companies put under their thumb. Right. If if we're getting regulated, they need to get regulated too. And so one of the things that, you know, when you're in these disruptive industries, you think, "Oh, all all should go with efficiency." And there are incumbent players that have a lot to say about that. Why we don't have blockchain-based ticketing yet? Ticketmaster doesn't really want it, period. And so, that doesn't mean the revolution dies. It just means it's... You know, you got to come back with different angles, and you got to keep pushing.
Spencer Anson (Equity Research Associate Analyst of IT Services and FinTech)
Great. That's all for me. Thanks for sneaking me in.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Mike Novogratz for any closing remarks.
Mike Novogratz (Founder and CEO)
Guys, thanks a ton for the questions. I hope my energy starting the conference call was positive. I feel that way. We're gonna miss you for a while because, you know, full year, you know, full year ends this 31, and then it's a longer reporting time because it's a full year audit. And so, maybe we'll get back in touch. You can watch me on CNBC, and you can watch our, you know, watch our predictions. We feel good. I hope, like, the next time we talk to you, there's a lot more really interesting things to bring to light. And, have a great Thanksgiving. Take care.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.