Once styled as the Goldman Sachs of crypto, Mike Novogratz’s Galaxy Digital crypto merchant bank will begin public trading on Toronto’s TSX Venture exchange on August 1.

Since Galaxy completed its Reverse Take Over (RTO) of an inactive pharmaceutical firm in January, both Canadian capital markets and cryptocurrency markets including Bitcoin have softened considerably. How the stock trades will be telling as to investors’ appetite for the emerging institutional crypto investment firm.

 

What is a Crypto Merchant Bank?

Novogratz, the ex-Fortress fund manager and Goldman Sachs partner, launched Galaxy Digital late last year with the ambition of becoming a full service merchant bank for the cryptocurrency markets.

Galaxy is aiming to be the first bank devoted entirely to the digital asset, blockchain, and cryptocurrency ecosystem. It’s operating four distinct business lines primarily geared towards the growing appetite of institutional investors to get involved in crypto.

Galaxy’s Trading business runs a book comprised of a basket of digital assets and has begun operating an Over the Counter (OTC) sales desk to facilitate trades on behalf of other institutional investors.

The Asset Management business line of Galaxy made news in May of this year by partnering with Bloomberg on the launch of the Bloomberg Galaxy Crypto Index (BGCI). The business also provides treasury services to partners and maintains a passively managed fund to track the BGCI.

The Galaxy Digital Principal Investments business is actively involved in investing in firms involved in digital assets, crypto, and blockchain and has made a number of investments to date, most notably in launching a $325 million EOS venture fund.

Finally, Galaxy’s Advisory business provides a number of services to advise a wide variety of clients on blockchain and digital currency solutions. The business line is also expanding its services to provide capital-related advisory services related to Mergers and Acquisitions (M&A), sales planning for Initial Coin Offerings (ICOs) and developing token models for institutions in the digital asset ecosystem.

Overall, the firm has moved on from Novogratz’s early vision of creating the Goldman Sachs of crypto to creating the Drexel of crypto.

Drexel was the (in)famous investment bank that pioneered the junk-bond market in the 80s. The comparison is a risky one as Drexel is perhaps most known for its stunning collapse in the wake of an insider-trading scandal in the late 80s. However, the distinction is important as Drexel was pivotal in creating a market for a brand new asset class among institutional investors and that is exactly the role Galaxy hopes to play in crypto.

 

Novogratz Tempering Expectations for the Start of Trading but Highlighting Long-Term Potential

For his part, Novogratz sat down for a TV interview with BNN Bloomberg about the process of listing Galaxy publicly and what lies in store for the company and crypto market as a whole.

By using a Reverse Take Over (RTO) in Canada, Novogratz and Galaxy Digital hoped to expedite the process of having the company listed and trading publicly as listing in the US would have required the company to have operated for 2.5 years. However, the process took longer than expected:

There was a surge of companies that listed in Canada and they all traded really poorly, I think the regulators got a little bit more nervous and said, ‘Hey, wait a minute, let’s make sure we know what we’re seeing here’.Mike Novogratz, Galaxy Digital CEO

As part of the process to meet the regulatory standards necessary for starting trading, the crypto merchant bank was required to make public quarterly financial results. The first such public financial results from the company for the first quarter of 2018 were less than stellar, showing a $134 million loss.

Over 60% of the loss was due to unrealized loss on the crypto assets held by the firm. Though crypto prices have recovered somewhat from the end of Galaxy’s first quarter in March, they’re still nowhere near the highs seen in early January.

Bitcoin Price Year to Date

Bitcoin Price Year To Date

Data Source: Yahoo Finance

Galaxy sold shares at $5 CAD in a private placement in January when Bitcoin was much higher and Novogratz recognizes the impact this will have when the stock debuts in a couple of days.

However, he was clear that Galaxy’s real prospects are in the future and implementing its strategy of encouraging institutional investors into the crypto ecosystem is the real value the firm brings to the market.

Novogratz’s goal is for Galaxy to be cash-flow positive by the end of the year and emphasized that each of the heads of the four business units have the mandate to be profitable by Q2 2019.

The ambition continues from there with the goal to make Galaxy a ‘global company’ with intentions to eventually list shares of the crypto merchant bank in European and Asian markets.

 

Will the Market Value Galaxy be Based on the Price of Bitcoin or on the Prospects of the Company?

It’s likely that shares in Galaxy are due to drop significantly from the $5 price at which it raised money.

One of the recurring themes from the conversation was Novogratz’s opinion that “Canadian capital markets aren’t roaring anymore.” His view was that private markets in the crypto space are ‘raging bull markets’ and although he didn’t regret going through the public financing route he may have delayed listing his crypto merchant bank by as much as a year in retrospect.

This is especially true for other crypto- and blockchain-related companies who took a similar route to public listing in Canada and whose stocks were in Novogratz’s opinion ‘overvalued’.

Many of those companies are involved in crypto mining and so their profits are even more tilted towards the price of cryptocurrencies. However, given both the challenging financial results from Galaxy’s first quarter and the headwinds and volatility still facing the price of Bitcoin and other cryptocurrencies, it’s likely that shares in Galaxy are due to drop significantly from the $5 price at which it raised money.

But one thing is for sure, given the amount Novagratz has invested both personally and professionally in the enterprise you can bet he will be out beating the drum for the future of institutional crypto and crypto merchant banking for some time to come.