Forbes Exclusive Interview with Galaxy Founder: Bitcoin ETF and the Next Bull Market

Written by: Maneet Ahuja, Forbes Staff

Compiled by: Luffy, Foresight News

Long before cryptocurrencies became popular, Mike Novogratz, founder and CEO of Galaxy Digital, was already a recognized Wall Street veteran. Novogratz began his decade-long investment career at Goldman Sachs in 1989 and became a partner while the firm was still privately held. He then led a macro-focused hedge fund at private equity firm Fortress Investment Group before returning to Goldman Sachs as the firm's president.

Novogratz is now at the helm of cryptocurrency investment firm and commercial bank Galaxy Digital, one of the most active early adopters and staunch supporters of cryptocurrencies. As of the end of January 2024, Galaxy manages $6 billion in assets, and as the company's largest shareholder, Novogratz's current stake is worth about $2 billion. Novogratz has not always been a winner; he was a significant supporter of Luna, a token associated with the algorithmic stablecoin Terra USD, which failed catastrophically in 2022, losing about $50 billion in market value in less than a week. Novogratz was so fascinated by Luna that he had its logo tattooed on his arm.

In response to the turmoil caused by the FTX collapse in 2022, Galaxy and other companies are seeking to expand the use of crypto assets. Last month, the U.S. Securities and Exchange Commission approved applications for 10 spot Bitcoin exchange-traded funds (ETFs) to be listed in the U.S., which many believe is a watershed moment for the broader crypto industry.

The following interview was conducted recently at the iConnections Global Alts Summit in Miami. ------Maneet Ahuja

Mike Novogratz, CEO of Galaxy Digital, Source: Bloomberg

Forbes: Mike, a lot has changed since a year ago. Can you provide us with a comprehensive perspective on where we stand now from a macroeconomic and crypto industry standpoint?

Mike Novogratz: In the cryptocurrency space, we witnessed a significant shift in 2021 when the Federal Reserve adjusted its policies and began to raise interest rates sharply. Generally, one might expect that cryptocurrencies and hard assets like gold would decline in such a scenario. The decline was exacerbated by widespread fraud and misconduct within the industry, particularly with entities like Celsius, leading to a pessimistic outlook for the future of cryptocurrencies. These factors eroded the fundamentally established confidence in the crypto market, resulting in a classic market capitulation with extremely negative sentiment. Despite the prevailing pessimism, extremely low moments often harbor lucrative buying opportunities. For instance, in hindsight, Bitcoin's price dropping to $7,000 in 2018 was an excellent buying point for savvy investors. As the Fed signaled a shift towards a rate-cutting cycle, the tide began to turn again. Additionally, significant events like the legal battle between Grayscale and the SEC, along with endorsements from influential asset managers like Larry Fink, have helped restore confidence in the crypto industry.

Subsequently, concerns surrounding major exchanges like Binance were alleviated, helping to mitigate systemic risks and pave the way for a more stable environment. However, looking ahead, despite ongoing regulatory uncertainties, the bipartisan consensus on legislative measures (with few exceptions like Elizabeth Warren) indicates that a regulatory framework is on the horizon. Coupled with the recent launch of crypto ETFs and the Fed's impending rate cuts, this lays the groundwork for increased institutional adoption. This is very exciting.

Forbes: Last year, we saw Bitcoin rise by 150%. Part of this increase is due to the limited supply of Bitcoin in circulation, with over 70% of the supply not changing hands. Why is that?

Mike Novogratz: I think you have to look back at Satoshi Nakamoto, the creator of Bitcoin, and the original white paper and code. The anonymous creator of Bitcoin initially wrote the cryptocurrency white paper in response to growing concerns about centralized financial systems.

The essence of Nakamoto's white paper lies in its vision of decentralization, which starkly contrasts with the monetary policies of past U.S. presidents. During the tenures of Donald Trump and Joe Biden, government spending surged, particularly evident in the spending frenzy before the COVID-19 pandemic under Trump. The federal government consumed about 25% of GDP, and this normalization of excessive spending marks a significant departure from historical norms. Reflecting on my experience in the Office of Management and Budget during the Reagan administration, I recall adhering to a set of fiscal rules, including a 20% target for government spending and revenue. However, the current situation sees government spending exceeding 25% of GDP, while tax revenues lag, leading to a ballooning budget deficit.

Despite the urgent fiscal crisis facing the U.S., there seems to be a lack of political will to address it. Calls for measures similar to the Simpson-Bowles plan aimed at addressing the budget deficit and restoring fiscal responsibility appear to have been shelved. This neglect of fiscal discipline poses an urgent challenge that requires the attention and action of policymakers. I believe addressing the ever-expanding budget deficit and restoring fiscal balance must become a priority on the political agenda. Failing to do so risks exacerbating the fiscal crisis, undermining economic stability, and harming future generations.

Forbes: Why are these issues not on the agenda?

Mike Novogratz: We have experienced a prolonged period of low interest rates, with money seemingly abundant, reminiscent of the principles advocated by modern monetary theory. This era of seemingly limitless liquidity appeared to function well, with low inflation and sustained economic growth. However, the devastating impact of inflation on ordinary Americans is often overlooked. While attendees at meetings like this may have the means to cope with inflationary pressures, the reality is starkly different for many Americans. Over the past decade, we have witnessed a significant rise in the cost of living, particularly in housing prices. For example, the average home price in 2010 was $289,000, while by 2024, it has skyrocketed to $400,000, effectively doubling in just ten years. So, imagine today you are a young person just graduating from college, realizing that your salary as a Goldman analyst has not doubled, let alone blue-collar jobs and other ordinary white-collar positions.

The rapid inflation of assets and commodities has left many Americans feeling economically disenfranchised, fueling the rise of populism in recent years. They strongly believe that everything is stacked against them and hold Washington, D.C., and elite institutions in complete disdain. As we grapple with this round of economic challenges, the prospect of finding solutions seems daunting. While some may hope for revolutionary breakthroughs in technology, such as widespread adoption of artificial intelligence leading to unprecedented productivity gains, the likelihood of such occurrences remains uncertain.

Forbes: Let's talk about Bitcoin and its role as a store of value. We have just launched a spot Bitcoin ETF, one from your company. What kind of demand do you think these products will have?

Mike Novogratz: The reality is that Bitcoin adoption has undergone a generational shift, with the younger generation viewing it as a means to rebalance the economic scale inherited from the baby boomer generation. As registered investment advisors cater to this demographic shift, the emergence of ETFs tailored to their preferences marks a significant milestone in Bitcoin's journey toward mainstream adoption.

While some may argue that Bitcoin's value is merely a social construct, it is crucial to recognize its importance as a store of value akin to gold. Despite skepticism from traditional investors like Ray Dalio, the increasing acceptance of Bitcoin among RIAs and retail investors indicates its enduring relevance in the financial landscape.

Looking ahead, I expect the allocation of Bitcoin in portfolios to gradually increase as RIAs recognize its potential for diversification and wealth preservation. The influx of capital from traditional finance represents the next phase of Bitcoin's development and is expected to be a significant catalyst for its continued growth.

Forbes: Let's talk about the issue of capital outflows. What have you observed, including what happened with Grayscale?

Mike Novogratz: Grayscale's Bitcoin products have faced scrutiny and criticism from the SEC due to their high fees and structural flaws, leading to losses for investors trading at fund premiums. As arbitrage opportunities diminished, investors turned to ETFs offered by industry giants like Invesco, BlackRock, and Fidelity to reduce costs and enhance transparency. This shift underscores the importance of trust and cost-effectiveness in investment choices, as Grayscale's products have lost their appeal.

Forbes: This is a competitive market, and you mentioned there will be two or three winners. You mentioned BlackRock; who else do you see as winners?

Mike Novogratz: We have initiated our own plan with Invesco, but the adoption speed has been slower than expected. We are optimistic that in the next six months, after entering platforms like Salesforce and gaining approvals from institutions like Morgan Stanley, we will see significant progress. BlackRock and Fidelity are also preparing to join this space.

As for why to invest now, it's worth noting that while these businesses are crucial for asset gathering, their profits are not high due to low fees. Nevertheless, they represent excellent products with tremendous potential in scalability and brand recognition.

Forbes: Do you think the new ETFs will drive more retail demand? Which regions do you think will see the strongest growth in the next 12 months?

Mike Novogratz: Yes. ETFs, as stock-like products, not only provide more capital-efficient trading options but also open the door to increased leverage. We expect institutions to gradually enter the market, starting with IRAs and expanding to pension funds and endowments. The integration of cryptocurrencies into the financial realm is inevitable, and the anticipated legislation in the next 18 months will further promote investment.

Politically, bipartisan support for crypto legislation (as evidenced by conversations with figures like Hakeem Jeffries and Tom Emmer) will lead to broader acceptance of digital assets. The clarity of such legislation will encourage more investors to enter the market.

While growth may not be as explosive as in the past, we are observing steady growth in capital and clients within the asset management sector. In the coming 12 months, we expect significant retail demand growth as awareness of the long-term potential of crypto assets continues to rise.

Forbes: Do you think the SEC will approve an Ethereum ETF next? What do you think the outcome of the Coinbase lawsuit will be?

Mike Novogratz: Recent legal disputes regarding Bitcoin ETFs have highlighted the discrepancies in the SEC's approach to regulating crypto assets. The court criticized the SEC for rejecting spot Bitcoin ETF trading while allowing futures ETF trading, pointing out the illogical reasoning behind that decision.

Moreover, the current political landscape, characterized by a conservative tilt in the Supreme Court, is resisting government overreach. This sentiment extends to the SEC's regulatory actions, which are under scrutiny for being perceived as overreach.

Looking ahead, regardless of the political affiliation of the next SEC chair, many lawsuits initiated during Gensler's tenure may be withdrawn. This reflects a growing recognition of the inevitability of cryptocurrencies integrating into the financial system.

However, the regulatory uncertainty surrounding the classification of digital assets as securities or commodities remains a significant challenge. The outdated Howey test designed for traditional securities does not adequately address the complexities of blockchain-based technologies. This ambiguity not only hinders industry development but also imposes financial burdens on businesses navigating the regulatory landscape. There is an urgent need for Congress and the White House to establish clear guidelines to provide certainty and foster innovation within the industry.

Forbes: On this point, you have mentioned that due to regulatory challenges in the U.S., you will be moving a significant amount of business overseas. Can you discuss what you will be doing while waiting for the regulatory environment to stabilize?

Mike Novogratz: The regulatory uncertainty plaguing the cryptocurrency industry is deeply frustrating, especially for conservative companies like ours that prioritize compliance. While some companies may take a more rebellious stance, we understand the importance of adhering to regulatory standards to protect our clients and maintain integrity.

However, this commitment to compliance comes at a significant cost, exacerbated by the lack of clarity in regulatory guidelines. This uncertainty forces us to allocate substantial resources to legal and accounting fees, undermining our ability to innovate and compete effectively.

Particularly concerning is the regulatory environment in New York, where stringent requirements add extra complexity and costs to crypto businesses. This additional burden further hampers our ability to thrive and stifles the growth of the entire industry.

Ultimately, we urgently need a clear and comprehensive regulatory framework at both the federal and state levels to create a fair competitive environment and achieve sustainable growth within the industry. Only then can we fully realize the potential of cryptocurrency innovation in the U.S. and ensure its continued success on the global stage.

Forbes: Finally, returning to the topic of the macroeconomic outlook. What are your thoughts on a soft landing? What do you foresee for 2024?

Mike Novogratz: The discussions around the Fed potentially cutting rates amid easing inflation warrant a closer examination of the broader economic landscape. While there is speculation about a rate cut in March, current data does not conclusively support such a move, indicating a degree of uncertainty regarding the timing and necessity of monetary policy adjustments.

The potential resilience of the economy can be attributed to several factors. First, unprecedented levels of government spending, particularly in infrastructure, provide substantial stimulus and are not directly affected by interest rate fluctuations. The ongoing infusion of funds into the economy helps bolster growth and offset potential headwinds from monetary tightening.

Additionally, despite facing broader economic challenges, certain sectors like housing and automotive continue to perform strongly. The persistent shortage of housing units, coupled with robust demand, keeps the construction industry active and contributes to overall economic activity. Similarly, the automotive industry's ability to withstand worker strikes and maintain production levels underscores its importance as a major job creator and economic driver.

It is noteworthy that while these sectors remain resilient, there are ongoing concerns about the overall pace of economic growth and the potential for persistent inflationary pressures. The Fed's decision-making process may hinge on a nuanced assessment of these various factors, with a focus on maintaining price stability and supporting sustainable economic expansion.

Forbes: Can you discuss the current political landscape and your views on the 2024 election?

Mike Novogratz: Over the past 35 years, the U.S. debt-to-GDP ratio has skyrocketed from 50% to 125%, and it is projected to reach an astonishing 250%. Additionally, significant social changes have occurred in the U.S., with the average American now weighing 35 pounds more and life expectancy declining for the first time in history.

Clearly, the baby boomer generation, which has dominated politics for decades, has failed to address critical issues, leaving a legacy of economic disparity and social challenges. When they were in power, 16% of American seniors lived below the poverty line, while today, that figure for American children has reached a shocking 70%. This disparity highlights the intergenerational injustice of prioritizing short-term gains over long-term sustainability.

It is time for a change in leadership, moving away from entrenched politicians like Nancy Pelosi, Mitch McConnell, and Chuck Schumer. We need new faces with fresh perspectives, like Dean Phillips, who prioritize the greater good over personal interests. The current political gridlock and embarrassment on the global stage require a new approach, one that transcends the divisive rhetoric of Trump and Biden.

While the outcome of the upcoming election remains uncertain, it is clear that our political landscape needs a significant transformation. Whether through new leadership or a renewed commitment to change, we must break free from the status quo and pave the way for a brighter future for all Americans.

Forbes: Thank you.