Dialogue with Galaxy Founder Mike Novogratz: What’s next for the crypto market?

Original Title: 《Where Crypto Goes Next with Mike Novogratz》

Author: Galaxy

Compiled by: Deep Tide TechFlow

Host: Alex Thor, Head of Galaxy Digital Firmwide Research

Guest: Mike Novogratz, Founder and CEO of Galaxy

Podcast Source: Galaxy Brains

Original Title: Where Crypto Goes Next with Mike Novogratz

Release Date: May 17, 2024

Key Takeaways

In this episode of Galaxy Brains, Alex Thorn discusses the latest developments in the crypto market with Mike Novogratz, Founder and CEO of Galaxy. Shortly after Galaxy's Q1 earnings call, the conversation delves into the performance of various departments within Galaxy, including record achievements in mining and asset management. Mike shares his views on broader market dynamics, including the impact of ETF approvals and his predictions for Bitcoin's trajectory under volatile market conditions. Alex and Mike explore the intersection of finance, technology, and regulatory environments that will shape the future of digital assets.

Summary

• Alex notes that Bitcoin's price rebounded last week, with inflation data coming in below expectations, leading to a positive market reaction.

• The interview discusses Galaxy's Q1 earnings, cryptocurrency, the mainstreaming of Bitcoin, and macroeconomic factors, as well as issues related to Japan and some political topics.

• Mike states that Galaxy performed well in Q1, achieving $400 million in revenue. Notably, the mining business had its best quarter ever, and asset management and trading also performed excellently.

• The importance of cryptocurrency in U.S. politics is increasing and becoming hard to ignore.

• Mike expresses confidence that, although prices may not rise every month or quarter, more institutional participation in the cryptocurrency space is likely over the next 12 to 24 months. He believes the next price movement for Bitcoin could be upward, especially if the Federal Reserve lowers interest rates close to the elections.

• Mike believes that the cryptocurrency sector is a narrative-driven industry that requires use cases and proof of concepts to drive development. Over the past six to nine months, institutional confidence in the cryptocurrency sector has significantly increased with the approval of ETFs. The narrative around Bitcoin halving has also positively impacted the market.

• Alex highlights the importance of cryptocurrency in U.S. politics, particularly its influence among swing state voters. Over 20% of voters in U.S. swing states consider cryptocurrency a key issue. This is the result of a Harris Poll conducted by DCG and the Blockchain Association, covering five swing states including Ohio, Michigan, and Arizona. This shows that the cryptocurrency issue has broad attention among voters, with no clear partisan bias between Republican and Democratic voters.

• Both Mike and Alex agree that in the current dollar-based world, the cryptocurrency market is somewhat similar to the commodities sector, such as oil companies, whose revenues and activity levels also depend on the price fluctuations of underlying commodities.

Federal Reserve Money Printing

• Mike is very concerned about national debt and fiscal policy. He states that the two main issues he is focused on are cryptocurrency regulation and national debt. If the U.S. government (whether Biden or Trump) can address the federal budget deficit, which is 26% of GDP (should be 20%), it would be detrimental to Bitcoin. Therefore, poor policymakers and excessive spending in Washington actually benefit Bitcoin.

• The rise in both Bitcoin and gold prices is due to the same reason—economic uncertainty. Bitcoin rises faster because it is a new technology and commodity, with a quicker adoption cycle.

• Despite net outflows from gold ETFs this year, spot gold prices are rising. Individuals have purchased $200 billion worth of gold, including companies like Costco.

• Mike mentions that foreign central banks are buying gold at a record pace, particularly China. Part of the reason is the U.S. sanctions on Russia after the Ukraine war, and other countries are concerned that the U.S. might freeze their dollar reserves, leading to increased gold purchases.

• Alex also believes that despite net outflows from gold ETFs, demand for physical gold remains strong. Individual investors and foreign central banks are buying gold in large quantities.

About the Dollar

• Alex believes that younger people are more likely to view Bitcoin rather than gold as a hedge against the dollar. They place more emphasis on Bitcoin's growth potential, and Bitcoin's adoption is faster than gold, especially in times of economic uncertainty.

• Mike states that while the dollar is stronger than other currencies, it is starting to weaken. There is a coordination problem between the U.S. fiscal and monetary policies, creating a false sense of stability in the fixed income market. Treasury Secretary Janet Yellen has been criticized as the worst Treasury Secretary in history for supporting massive deficit spending without making balanced cuts.

• Mike believes that the yield curve and market stability are artificial. Yellen has created a false sense of stability in the fixed income market through covert yield curve control operations. The Federal Reserve Chairman Powell, who works with her, maintains this artificial market stability. The release valve is reflected in the rising prices of gold and silver, which also benefits Bitcoin. Additionally, every market downturn is an opportunity to buy stocks, as this policy will lead to nominal growth rates exceeding inflation rates, masking the expansion of debt.

• Mike believes in long-term asset allocation. In the current policy environment, hard assets like stocks, real estate, Bitcoin, silver, and gold will have long-term investment value.

Debt Issues

• Alex points out the plight of the American middle class and working class. Middle-class and working-class Americans are suffering economically because they do not have enough income to purchase assets like real estate.

• Mike believes that if the Congressional Budget Office (CBO) conservatively estimates that the U.S. debt-to-GDP ratio will reach 250% in 20 years, it is unsustainable. The next Treasury Secretary will face the most significant challenge of addressing the U.S. deficit issue; otherwise, the country will fall into a vicious cycle.

• Mike hopes that Bitcoin can gradually and steadily gain adoption, rather than skyrocketing to a million dollars, as that would indicate a societal collapse.

• He points out that some countries (like Nigeria and Turkey) are in trouble due to their irresponsible monetary and fiscal policies, highlighting instability in the global economy.

• Alex believes that if the debt issue cannot be controlled, the U.S. will face hyperinflation or other severe economic problems, leading to societal collapse.

Trump’s Candidacy

• Mike believes that if Trump is elected again, he will plan to exert more control over the Federal Reserve, which is a very bad sign. The complexity of Trump lies in his personal ethics causing societal division, and his policies lack consistency. For example, he might claim to deport 20 million immigrants but may only deport 2 million. Such policies could lead to rising inflation due to a lack of labor.

• Mike points out that although Trump was not friendly to cryptocurrency during his presidency, he now sees a political opportunity to use cryptocurrency against the Democrats. On the same day that Joe Biden announced he would veto the SAB 121 bill, Trump announced his support for cryptocurrency to attract supporters. Nevertheless, cryptocurrency needs bipartisan support to develop in the U.S.

Senators and Bill Impact

• Mike believes that although cryptocurrency should be a bipartisan issue, currently in Washington, due to the influence of senators like Elizabeth Warren, some Democrats are opposed to cryptocurrency, and Warren has significant influence in the cryptocurrency space.

• He also points out the dual nature of cryptocurrency, which benefits libertarians as it represents choice and benefits progressives as it can eliminate intermediaries and achieve fairness.

• Mike mentions the SAB 121 bill, which affects the accounting rules for public companies that hold cryptocurrency, requiring them to record it on their balance sheets. This rule impacts banks more than cryptocurrency companies, as it would greatly inflate banks' balance sheets. If the Democrats refuse to repeal the SAB 121 bill, it is akin to expressing a dislike for cryptocurrency, similar to disliking dogs, which is a serious mistake. There are many single-issue voters in the U.S. regarding cryptocurrency, especially among young people, and if the Democrats continue to oppose cryptocurrency, these voters may turn to support other parties.

Japan’s Economy

• Mike first discusses the economic situation in Japan. Japan faces issues of an aging population and low birth rates and is a conservative country that does not welcome immigration. They are the world's largest savers, and the economy has been in deflation for many years until recently when inflation has emerged, leading to some economic activity. Due to higher U.S. interest rates, Japan hopes the Federal Reserve will lower rates to relieve pressure.

Bitcoin and ETFs

• Mike points out that Bitcoin still performs excellently in risk-adjusted returns, second only to Nvidia and European stocks. Despite not experiencing the traditional "Bitcoin, Ethereum, and altcoin cycles," Bitcoin continues to attract investors as it is seen as digital gold and performs well in the current macro environment.

• He also notes new trends in the market, with the launch of ETFs and the opening of wealth management channels driving Bitcoin adoption. The concept of Bitcoin as digital gold has become deeply ingrained, and wealth management firms are beginning to recommend Bitcoin to clients. With the potential approval of ETFs, other crypto assets like Ethereum are expected to gain greater recognition and investment in the market.

• Imagine if the Bitcoin ETF had been rejected on January 11; that would have been very detrimental to Bitcoin's price, as the market expected it to pass. However, the market currently generally believes that the Ethereum ETF will not be approved, so the risk is skewed towards an increase.

• Mike believes that currently Bitcoin's price fluctuates between $73,000 and $57,000. Market volatility is low, and many people have sold call options. If positive news emerges, such as the Federal Reserve deciding to lower interest rates, Bitcoin's price could break through $73,000, leading to a parabolic rise. The rise in Bitcoin's price requires relatively little capital because the price is determined by marginal demand. If future inflation data (CPI and PCE) decreases and employment data declines, the Federal Reserve may lower rates in July, driving Bitcoin's price up.

• Mike believes that most new ETF buyers are not short-term speculators; they are first or second-time Bitcoin buyers who typically do not sell Bitcoin within a week. Usually, an options market emerges one to two weeks after an ETF launch, but there has not yet been an options market for Bitcoin ETFs due to SEC restrictions. Once the options market opens, it will attract a large number of retail investors, increasing market activity and trading volume.

• Mike mentions the trading volume of MicroStrategy and Marathon. The trading volume of MicroStrategy and Marathon exceeds that of all Bitcoin ETFs, mainly because they have an options market that attracts many short-term traders and day traders. MicroStrategy's Michael Saylor seized the market opportunity by issuing stock to buy Bitcoin, increasing the volatility and trading volume of the company's stock. However, he has been selling stock daily in recent months, which may raise concerns among investors, although the market's trust in him remains strong. MicroStrategy's stock is currently trading at a premium above Bitcoin, but this premium may not last. Over time, the premium may narrow or even turn negative.

SEC

• Mike expresses dissatisfaction with the limited cryptocurrency investment opportunities in the U.S., mainly due to the SEC not approving many cryptocurrency companies for listing. For example, companies like Bullish and eToro are waiting for approval, but investment opportunities are very limited due to SEC restrictions.

• Mike also discusses mining companies and stock dilution. Many mining companies sell stock to purchase mining machines and other equipment, and these companies' stocks trade at a premium above book value because they are viewed as momentum stocks. The CEOs of Riot, CleanSpark, and Marathon have cleverly taken advantage of this premium to sell stock and buy more equipment.

• Mike questions the SEC's approval of Trump's stocks (like Truth Social), which have no actual income but receive high valuations. He believes the SEC's actions are detrimental to retail investors.

• Mike also discusses whether the meme stock phenomenon will persist in the long term. He believes meme stocks have their unique appeal and skill requirements; although speculative in nature, they may continue to exist.

Roaring Kitty and GameStop

• Mike mentions Roaring Kitty (Keith Gill) and the GameStop stock frenzy he sparked three years ago. He posted a picture in his basement, triggering a three-day frenzy that brought GameStop's market value to $17 billion. Mike praises Roaring Kitty's performance during the GameStop stock event, believing he defeated the system.

• Mike mentions the movie "Dumb Money," which reflects the events of the GameStop stock frenzy, indicating its true representation and entertainment value.

• Mike worries that many people who bought GameStop stock at high prices suffered significant losses, although early buyers may have profited.

• Mike believes that low interest rates and the government flooding the market with money have spurred the rise of cryptocurrency and meme stocks, which is a form of financial nihilism.

• Mike strongly criticizes the current government for exploiting the younger generation, citing Scott Galloway's TED talk, which highlights the struggles young people face regarding income, education, and housing costs, leading to their anger at the status quo.