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 1st.
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 is 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 which pioneered the junk-bond market in the 80’s. 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 80’s. However, the distinction is important as Drexel was pivotal in creating a market for a brand new asset class amongst institutional investors and that is exactly the role which 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 U.S. would have required the company to have operated for 2 and a half years. However, the process took longer than expected:
The crypto merchant bank as part of the process to meet the regulatory standards necessary for starting trading 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. Although, crypto prices have recovered somewhat from the end of Galaxys first quarter in March they are still nowhere near the highs seen in early January.
Bitcoin Price Year to Date
Galaxy sold shares at $5 CAD in a private placement in January and Novogratz 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 based on the Price of Bitcoin or on the Prospects of the Company
One of the themes from the conversation which re-occurred was Novogratz’s opinion that “Canadian capital markets aren’t roaring anymore.” In fact he noted that 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 this 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.