How Galaxy Digital, a TSX crypto company, became a global juggernaut – then crashed

Mike Novogratz, founder and CEO of Galaxy Digital, gestures as he speaks during the Bitcoin Conference 2022 in Miami Beach, Florida, on April 6th.MARCO BELLO / Reuters

It took four years of relentless conviction, but in November 2021, Mike Novogratz finally proved, and emphatically, that his skeptics were wrong. Or so it seemed.

A former Goldman Sachs Group Inc. trader GS-N and Fortress Investment Group which was eventually abandoned by Wall Street, Mr Novogratz made a killing out by soon entering cryptocurrencies. Convinced that a parallel financial system would flourish around these assets, he decided in 2017 to build a major hub for the new ecosystem.

Galaxy Digital Holdings Ltd. GLXY-T, the company he founded, went public on the TSX Venture Exchange the following year. At the time, the cryptocurrency industry was still in its infancy, and Wall Street used to make fun of its future. But Novogratz marketed his company as the “Goldman Sachs of crypto.” “Either I’m going to look like a genius or an idiot,” he told The New Yorker at the time.

At first, Galaxy’s performance was turbulent: the price of bitcoin, the most popular cryptocurrency, has fallen by 50 percent or more twice in three years. However, Mr. Novogratz endured the changes, and by the end of last year the company was worth $ 14 billion.

Six months later, Galaxy is in disarray. The company’s share price has fallen 81 percent since November and its losses have started to accumulate as investors flee the crypto sector.

In the midst of the chaos, Mr Novogratz issued a mea culpa last week. He, and by extension Galaxy, had been one of the main promoters of the US and USD cryptocurrencies, but in a matter of weeks their values ​​plummeted and $ 40 billion was wiped out, much of them lost to the average investors who had followed suit. of people like Mr. Novogratz.

“Reading the stories of retail investors who have lost their savings on an investment is heartbreaking,” Novogratz wrote in a public letter.

As it stands, Galaxy is not very dead. Only a fool would rule out a company – and a sector – that has persevered through wild swings several times. But the forceful correction caused people to reconsider who and who they supported.

Galaxy Digital CEO Mike Novogratz apologizes after Luna and TerraUSD cryptocurrency crash for $ 40 billion and predicts future problems for industry

At Goldman Sachs, Novogratz began as a money market seller, then became a Hong Kong-based macro trader who bet on major events, such as the Asian financial crisis of the late 1990s. But in 2000, he abruptly left the investment bank. Very little was said about his departure, but the optics were not good. In 2018, he told The New Yorker that his dismissal resulted from “leaving like a rock star,” and added, “It was a humiliating outing.”

A few years later, he re-emerged in Fortress, an asset manager that invests in everything from real estate to private equity to debt. Again, Mr. Novogratz made trades based on macro issues, but in 2015 it made some major bets that exploded, including one on the Swiss franc and another on Brazilian interest rates. Fortress closed its macro-fund shortly after, and Mr. Novogratz left the company.

With his reputation damaged, Mr. Novogratz went into self-imposed exile. During this time, in late 2015, he said he invested about $ 500,000 in ether, when the cryptocurrency was trading at less than $ 1. At the end of 2017 it was trading at $ 400 and Novogratz earned $ 250 million, according to Bloomberg News. Some of his profits were used to buy a Gulfstream G550.

Mr Novogratz did not return a request for comment on this story.

After a few years away from Wall Street, Mr. Novogratz decided he wanted to return to gambling, but this time he imagined a cryptocurrency trading bank offering asset management, trading, investment banking, and cryptocurrency mining.

To lead the public company, he looked north, to Canada, where it is relatively easy to design a reverse acquisition that involves merging a private company with a small, fictitious one that already operates. With GMP Securities acting as financial advisor, it acquired Vancouver-based First Coin Capital Corp. and merged it with Bradmer Pharmaceuticals Inc., which was already listed on the TSX Venture Exchange.

When Mr. Novogratz first announced its plans in late 2017, the timing seemed ideal because the price of bitcoin was in tears. However, Canadian regulators took their time reviewing the plans, and by the time Galaxy began trading in August 2018, bitcoin had lost nearly two-thirds of its value.

It wasn’t until the summer of 2020 that the crypto industry found new life and caused Galaxy’s stock to skyrocket. In April 2021, the company’s stock price skyrocketed to $ 35 from $ 2, driven by unrealized gains on cryptocurrency investments. In addition to investing in cryptocurrencies, Galaxy has also acted as a kind of venture capital backing, putting money into private cryptocurrency companies.

As their shares skyrocketed, traditional asset managers became aware, including CI Financial of Canada, which has partnered with Galaxy to launch publicly traded cryptocurrency funds that catered to the mass market. Such partnerships have helped expand the industry’s appeal, and by the end of 2021, Galaxy’s managed assets were hovering around $ 3 billion.

It has been mostly misery ever since. With inflation rising to multi-decade highs, interest rates have begun to rise, hurting growth assets such as technology stocks and cryptocurrencies.

Despite this trend, Mr. Novogratz began advertising the blooming cryptocurrency moon, getting a tattoo of a wolf howling at the moon with the label “Moon” on its arm in January. He tweeted a picture of her and added the line “I’m officially a lunatic !!!”

It’s important to note that building the “Goldman Sachs of crypto” is a weird couple. Many cryptographic evangelists want their ecosystem to be completely decentralized, that is, without Goldman acting as an intermediary. Do Kwon, the creator of Luna’s sister cryptocurrency, terraUSD, often equates fiat currencies such as US dollars with “state violence.”

However, Mr. Novogratz’s enthusiasm seemed clever for a few months. However, in early May, the price of the moon began to fall, and this caused problems for its sister cryptocurrency.

TerraUSD is what is known as stablecoin, used as an intermediary to transfer in and out of cryptocurrencies without having to convert US dollars. Typically, stablecoins have US dollar reserves in a bank account, but terraUSD was backed by the moon and a fund of other cryptocurrencies, including bitcoin. When the prices of these cryptocurrencies went down, the bottom fell.

By then, Galaxy shares were already struggling because of the widespread cryptocurrency sale. The pain became even stronger as the moon began to crash. Galaxy recently revealed that it is expected to lose $ 300 million during the current quarter.

According to Mr. Novogratz, there is likely to be more pain to come. In his public letter last week, he said he still believes in the long-term value of cryptocurrencies, but warned that rising interest rates mean problems for the sector.

“At a high level, it is important to understand that volatility is likely to continue and that the macro situation will continue to be a challenge,” he wrote. “There is no cavalry coming to drive a V-shaped recovery. The Fed cannot ‘save’ the market until inflation falls.”

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