Hashed People: Mike Novogratz, CEO at Galaxy Digital


Mike Novogratz is an ex-hedge fund manager and was ranked a billionaire by Forbes in 2007 and 2008. Hashed Post had a depth interview with Galaxy Digital's CEO, Mike Novogratz, while he was in Korea. In this interview, Mike talked about how he got into the cryptocurrency industry and shared the four business principles from his experience. Mike Novogratz answered all below questions for Hashed Post.






Are we going to wait for your beer or are we just going to start? So we’re going to keep it casual. Mike Novogratz, thank you for coming to Korea. I think it's your first time in Korea, so before we dive too deeply in, can you give us some background?

It's not my first time in Korea. I was here in 1992 for my bachelor party in Itaewon, and then I came back a lot. I was a major currency trader at Goldman Sachs, and I traded a lot of Korean won right through the financial crisis in 1997. And at Fortress, at one point I was I think the largest KOSPI trader in the world. I would stay up at night because it was the perfect hours--12 hour difference-- and I would buy and sell KOSPI almost like an addict, buy sell, buy sell. Between the KOSPI and the won… and I was also here 5 years ago. I gave a speech with the Finance Minister and he was--I forgot his name but whoever was finance minister 5 years ago--spectacularly talented, very smart, gave a nuanced speech on the history of the labor market in Korea, and I thought man, we need more of these guys in public service. That was the last time I was in Korea--5 years ago, but this is the first time I have seen the blockchain and crypto phenomenon that is Korea. 




And at Fortress, at one point I was I think the largest KOSPI trader in the world. I would stay up at night because it was the perfect hours--12 hour difference-- and I would buy and sell KOSPI almost like an addict, buy sell, buy sell.


KOSPI 



Super Cool. Can we dial back though? how did you first get into bitcoin and cryptocurrency?

So I was a macro trader. I was working at Fortress, and I got a phone call from my partner, who was a complete, nontechnical Luddite. He was a distressed debt investor--he used to say he was the world’s best garbage man. And he had moved his family and part of our business to San Francisco because his wife lived there and she didn't want him to stay in New York any longer. And in his his YPO (Young Presidents’ Organization) group, there was a guy named Wences Casares. And Wences is probably responsible for getting more people into Bitcoin than anybody else. He has a company called Xapo, which is a custody company, which we were day 1 investors of. And Wences was telling him about this, and Pete called me up and said, can you look into Bitcoin? And macro guys are very fast. I Googled it and I started thinking about this, and it had a lot of things that would be a perfect speculative asset. It was this really cool new technology in cryptography.

At that point it was about 2012 and we were right in the middle of the European financial crisis. We had the US and global financial crisis in 2008, and now the European financial crisis, and all the central banks were cutting their interest rates down to zero. People thought that was crazy. They thought it was going to hyper-inflate the world away. Really smart people thought it was going to create hyperinflation--not just the crazy people. And I thought, we have people who don't trust central banks, and we have the cypherpunks that don't trust anyone anyway, we have libertarians that love this--guys that want to live off the grid-- and most importantly the Chinese had started buying, and I thought this is a perfect speculative bubble. And so we bought a bunch [of Bitcoin].




At that point it was about 2012 and we were right in the middle of the European financial crisis. We had the US and global financial crisis in 2008, and now the European financial crisis, and all the central banks were cutting their interest rates down to zero.



European Financial Crisis 2012






And this is before Galaxy right?

This was when I was at Fortress. This was 2012. Bitcoin was trading at about $95. And we decided as a company not to do it as a company, to do it individually, and not to talk about it. And because I have a big mouth, I was at a small conference, and someone had asked me about frontier currencies. They were asking about African currencies, and the Vietnam dong, and I said “Screw those frontier currencies. If you want a real ‘frontier currency’, you should buy Bitcoin for these four reasons--1 2 3 4. It's going to go from a hundred to a thousand”. And the next day I was on the cover of the Financial Times: “Fortress’ Novogratz says that Bitcoin should go to a thousand”. And ever since then I've been like the Fortress Gump of Bitcoin. So people call me and ask me about Bitcoin, and to be fair it has gone from a hundred to a thousand. And we had bought a lot--we had been rich guys already, so we bought not even 1% of our net worth. But it was still a lot notionally. So when it went up, it was a whole lot of money and then of course it did go back down, but that's how I started

And one of the things I think important is whenever you start buying something and making money, you pay a lot more attention. When you're forced to get on stage and speak. So I got invited to speak at Oxford, and that was pretty cool. Oxford has the oldest business society in the world and I thought s***, I better start learning how this works. So I started reading papers and Marc Andreessen had made a speech and I kind of hacked his speech a little bit. I didn't feel bad because he had hacked his speech from a Stanford professor named Susan Athey. But that's how I started getting into it.





They were asking about African currencies, and the Vietnam dong, and I said “Screw those frontier currencies. If you want a real ‘frontier currency’, you should buy Bitcoin for these four reasons--1 2 3 4. It's going to go from a hundred to a thousand”. And the next day I was on the cover of the Financial Times: “Fortress’ Novogratz says that Bitcoin should go to a thousand”.







Galaxy Digital Logo





Okay. Where did you go from there? There’s some time between Fortress and Galaxy.

If you remember, Bitcoin kind of went up and then it went down and it went to 200, and then it sort of stayed there for about 18 months. The dead time. And luckily I had a lot of other stuff to do so I wasn't paying a lot of attention at the time. We had funded a company called Pantera. Dan Morehead was a college friend, and I had funded his hedge-fund once before. So I called him up and said, look into this, and two weeks later, to his credit, he called back, and said it was going to change the world. And one of the reasons Pete and I bought as much Bitcoin as we did was because Dan was buying it for us. We asked “how much are you buying?” and he said “I’m buying this much”. And we said “we've got to buy at least as much as him because we're a lot richer”. And we didn't want to be embarrassed. So we probably bought three or four times more than we would have just because Morehead bought so much.

So the three of us were in a partnership. And so when Bitcoin went dead, Dan was working at this company, and we weren't paying attention. And I left Fortress in November 2015 and after brushing off the dirt and glass I said I better look at my portfolio. Now I don't have a job, my wife spends a lot of money, how am I going to pay for this big lifestyle? I gave money to charity, and I got very nervous and I said cancel the flowers!

And I had a friend, another classmate named Joe Lubin who runs a company called ConsenSys . He's Princeton ‘87 as well--me, Morehead, and Lubin are all classmates and Joe was my roommate. And Joe’s is an interesting story as is, but when I had gone on TV to talk about Bitcoin, I got a Facebook message from Joe, and I hadn't seen him in 18 months. He was in Barbados and he was coding on the Ethereum project. And he was telling me that Bitcoin is good but there's going to be something great called Ethereum. And this was before Ethereum even existed, and I was like yeah yeah yeah yeah yeah but then when I left Fortress, I remembered, and who knows better about this stuff than Joe Lubin? So I called him up, and he had moved to Brooklyn. And I thought if I went to go find him it would be a computer, a dog, and maybe a cat. And I walked in and there were 25 people--smart young computer guys, older guys that had been derivative salesman and lawyers. And they had TVs and there were people in Israel and Argentina and they were calling in and I was like how did Joe Lubin do this? He had never actually had a business. He had always been kind of a drifter, one job, another job. Always very smart, always very nice, a great friend, but he has never really been a business guy. And now he had this beehive, a lot like the Hashed office: good energy, lots of people walking around, not nearly as nice, though. It was kind of a s******* in a funny neighborhood, and I was like this building looks like going to fall down. ConsenSys is still in the same building. 




And I had a friend, another classmate named Joe Lubin who runs a company called ConsenSys . And he was telling me that Bitcoin is good but there's going to be something great called Ethereum. And this was before Ethereum even existed. And I walked in and there were 25 people--smart young computer guys, older guys that had been derivative salesman and lawyers.


Joseph Lubin, a co-founder of Ethereum and ConsenSys


And I looked and I said there's something more to this. It's not just a financial speculation. This is a revolution by people who think that the world is unfair and that there's a better way to set this up, a more decentralized version of the world. Web 3.0 could be a lot better than Web 2.0. And they were plotting this revolution and so I immediately said to Joe, “Hey what does it cost to run this business?” And he told me how much it cost and I said that if I give you 10 million dollars-- I’ll buy a piece of your business, and Joe said “That's a great idea”. I asked “Can you write what your business is on a piece of paper?” So the real purists in this world, the decentralized ownership. Decentralized everything. Distributed trust, distributed energy. So he started writing it down and said, “Well this is a new company. It’s going to take me about a month.” I always think that a CEO should be able to write down what his company is on a piece of paper, really simple. He said “It's not as simple as that--I own a piece of this and this guy owns another piece, really setting it up”. He really believes in the decentralized world. And I was lucky enough to have been a macro trader all my life and you always learn this lesson: if you have this idea, and you say, “Okay I'm going to fly to Indonesia to do due diligence on the Indonesian rupiah.” By the time you go there and do the due diligence, the damn thing’s already moved!

And so I thought when you smell it, when it feels right, buy something. If you have to pay the higher price at least you'll have the low price. And so I said I wasn't leaving until I buy some Ethereum, and Joe wasn't going to sell me his Ethereum. And in New York, it wasn't legal if you didn't have a bit license to buy and sell Ethereum. The only legal exchange was Gemini and they weren't doing Ethereum yet. And the guys there said, just set up an account in New Jersey. And I learned that if you're a rich guy, you don't break the rules. But I could buy OTC and I ended up calling Vitalik. I had met him once. And I said, hey. And I bought Ethereum from Vitalik.




I wasn't leaving until I buy some Ethereum, and Joe wasn't going to sell me his Ethereum. And in New York, it wasn't legal if you didn't have a bit license to buy and sell Ethereum. I could buy OTC and I ended up calling Vitalik. I had met him once. And I said, hey. And I bought Ethereum from Vitalik at 96 cents.



You OTC’ed ETH from Vitalik?

At 96 cents. I'm not going to tell you how much, but it's not an insignificant amount. Now I own a lot of Ethereum at--call it at $1.50. A lot. And I went to India and I came back. Two weeks later it was trading at 5 or 6, and it started going up. And I realized Joe no longer needed my money because he owned a lot of Ethereum. You know you don't want to arbitrage your friends. And I was thinking how would I contribute? We have a very similar--I mean he has a much more technical skill set than I do, but he's a good leader and a good speaker. And I said I'll just cheer for him and I'll be a private investor. And I hired a young kid, a guy named John West. And he was great. He actually pretty much lived at the ConsenSys office. And I said you could go live with those guys, and it was fun to get a bird's-eye view of pretty much the beginning. Even during the DAO hack, I was on the conference call listening as the old wise guy, just listening and trading. I have trading in my blood, so I’d buy and sell. Ether went to 20 and I sold and bought back at 8. 



Vitalik Buterin, a co-founder of Ethereum


And it wasn't until a year later, about April, Ether was 40 when it really started to move that I started thinking about doing a business rather than being just an investor. And that was for a couple of reasons. I had one conversation with a brilliant guy and he was telling me about all these investors and I got jealous I said, “Wait a minute I know all these guys. I should get those.” And so that got me going. Joe told me do him a favor and come speak on a panel, and he had always done me lots of favors, so I thought I would do him one.

And the same thing happened. I didn't know the press would be there and I said, I have 20% of my net worth in crypto. And that went on from Nigeria to Japan. It got picked up all over the place. And so now everyone knew I was doing crypto, and then Bloomberg did this interview, Eric Schachter and I did this interview for 40 minutes. And it got watched by thousands and thousands of people. I started thinking, this is such an interesting space. I'm 52, I have another chapter or two left in life. Being a private investor is fun, but you're not really in the middle of something. Being in the middle of something is really rewarding if you have something to offer, and you can't do it as a family office.

You can hire one or two smart people but you can't hire an army because you've got to make them feel like it's their company. And so we had this idea for a company, and my brother named it Galaxy because we love Star Wars. Anything Star Wars goes well in my family. But we also wanted to be at the center, this exploding center of this new world, and since then we’ve been running, not as fast as this guy, but very fast. Hiring, investing, and talking a lot. I talk so much that sometimes I get bored of hearing myself.




I didn't know any of the background story. This is really good. What about explaining Galaxy in a nutshell?

So we’re trying to build a merchant bank, or an investment bank, The primary purpose of an investment bank is to raise capital for other people. We want to be the credentialize. So if it’s a big company that wants to raise 200 million for an ICO or an SCO, we want to be the bank that vets them, helps them structure their deal, and helps them place it. I think in order to raise money, you have to be willing to invest. So side by side with the investment banking arm is the direct investing arm. Our best business is the direct investment arm because we’ve been working in it for a long time. So that’s in infrastructure, wallets, custody, in ICOs, protocols, DApps, and funds, if we think we should sponsor a fund. So we have a big broad portfolio--we’re building a banking business. I used to be such an active trader that I used to be the biggest customer for Circle and I said wait a minute--why are we paying the bit so we built an OTC trading business and an electric trading business to compete with Cumberland, Circle, and Octagon and all those guys.

And then we’ve got an asset management business, which is really only going to be for things that are very scalable, that we don’t want to put on our balance sheet, so we have like a beta product with Bloomberg, which is the Bloomberg-Galaxy crypto index, which is the ten biggest coins capped at 30%, rebalanced monthly. It’s a wonderful index product, mostly because Bloomberg is doing it. Bloomberg has 300 people in their index group, they are wildly professional, so they scrape the data, they make sure the prices are real, they print the index, so it was our name and we helped consult, but they do all the work. That’s good because people then trust. Coinbase has its own index and you’re like, wait a minute, it’s setting the prices on its own index. That doesn’t really fly institutionally. And so those are the four businesses. Two of them are strong because we’ve been doing it for a long time--our investment business and our proprietary trading--sell coins buy coins sell coins buy coins--and the rest of them are works in progress. Building businesses is hard. It takes time, you’ve got to get the regulatory framework right, you’ve got to hire the right people, and so on. But we’re pretty excited.

We’ve got four business principles, which I think are interesting. One is be invested. This is a secular bull market, so being invested is important. Two is be diversified. Bitcoin maximalism is a wrong way to think about this. I tell this story. In 1999, about a month before the collapse, my mother called me up. I grew up a middle class kid. Now I become a partner at Goldman Sachs, I was very proud of myself. Then she was like all my neighbors bought Amazon, and I don’t own any Amazon. She was like, how could you be so stupid? You didn’t tell me to buy Amazon. And her neighbors bought like a hundred dollars of Amazon, and I was like mom...and anyway of course the market crashed. It was in my head though, when I said, you know what? I’m not going to miss the Chinese internet. And I had a friend who brought me a guy, he was a white guy with very thick glasses, and he had a company called madeforchina.com, and I gave him almost of my liquidity. I was like this is my Chinese internet bet. If it works, I’m going to be rich. And of course it went to zero. And looking back, if I had just made ten bets--Baidu, Tencent, Alibaba… I worked at Goldman Sachs. They saw everything. I would have just done so much better. I threw the dart at the only zero on the board. And so when I started crypto, I said, we’re not going to be so arrogant. We don’t know how blockchain’s going to work. 




I had a friend who brought me a guy and he had a company called madeforchina.com, and I gave him almost of my liquidity. I was like this is my Chinese internet bet. If it works, I’m going to be rich. And of course it went to zero. And looking back, if I had just made ten bets--Baidu, Tencent, Alibaba… I would have just done so much better. I threw the dart at the only zero on the board.


Mike Novogratz Hashed Post Interview


Third, be in the center. Be in the center for lots of reasons--so you see a lot of the ideas flow, so you can get in at a good price, so you see the information flow. This business, more than almost any, helps to be in the center. Why I flew to Korea--it’s a long flight--is I met this guy. He seems to be in the center out here. I said, okay. If we can piggyback off his connection, I’ll understand this business much quicker. We’re doing the same all over the world.

And the last piece is a little different than most people. It’s be disciplined. And what do I mean by discipline? The laws of markets didn’t change just because it’s crypto. And so a lot of people say it’s a whole new market, but it’s market still. So when things get to stupid prices, we sell them. And I don’t regret it. When we realize we’re in a crummy investment, we get out of it. And so use the same trading rules that I’ve used my whole life to keep the portfolio management moving in the right direction. So this idea of hodl--there are some investments that you want to make and hold for a long time, and there are some investments that make no sense to hodl. If some protocol or DApp starts trading at a stupid valuation where you’re never going to be able to grow into it, sell it. Or get shorted. And so you know when XRP traded into $3.20, I looked into it, and they had 60 billion coins on their balance sheet, so a 180 billion dollars--it made them the seventh biggest company in the world or something. And I was like that’s really stupid and I actually said that on Twitter and I sold a lot of XRP short. I shorted it. I like the company. I own a very big chunk of Ripple equity but the token got to a stupid price.




Do you know why? Because it was the Korean market.

Yes. Because the Koreans were buying it. One of the reasons the regulators in the US and Japan and Korea got involved is because you had a lot of new players to markets that didn’t really understand what they were doing. They didn’t understand that you had to be disciplined, how the law of gravity works, and so regulators are there to protect the little guy. And I think they’re doing a good job of resetting the rule, and you’ll see what comes out of it, but I don't think we’ll see another year like 2017 where things will go that insane. I do think once institutions start buying, you’ll see the same phenomena of FOMO. Institutions have the same FOMO that retail did. But the infrastructure and regulation around the space will be more mature, the risk management systems will be more mature, and the valuation metrics will be more mature. No one even understood how tokens worked. I bought some ICOs. Embarrassingly enough, I didn't understand the token economy. Someone told me something and it turned out not to be the right one. And so I think it’s really important to understand token economics--how it works--and to use your businessman's head. Forget crypto. Just a businessman’s, hey does that make sense? And so I’m very bullish on the maturity of the industry.




And so we’re running out of time. I have one final question that everyone always asks. You mentioned that Bitcoin might be going to 50k. Are you still bullish?

What I said is that we’re going to have a hard time taking out 10,000 until we have institutional custody solution. And what I mean by institutional custody solution is a name that institutional investors trust. Goldman Sachs or State Street or Sumitomo Bank or Hong Kong Shanghai Bank or something that they trust. Then I think we can retest the highs. Until then, I think we’ve put in the lows for the year, but I don't see an explosion up because there’s no new buyers. Retail got hurt. I do think Japan is going to turn back on in about two months. And so we’ll see some excitement that will push the price up. But there's a lot of bad longs trapped above 10,000, so when you go above 10,000 it’s going to hit the ceiling and come back down. So you really need the institutions to take that next leg. But I think within 12 months we’ll have that, and we’ll retest that 20,000 high. And then when you break that, that’s when the institutions come in, and then it’s a whole new game.

Hashed Post interview with Mike Novogratz


Can you comment on any other token/crypto that you’re bullish on?

Sure. I like EOS token. I think that the blockchain just started on EOS. It’s about a month old. Blockchains are governments. They’re constitutions in lots of ways, it wasn’t perfect when it started, and there’s changes being made, and I think over the next few months, you'll see that community settle into something that feels right and vibrant. It’s going to operate much faster than the other blockchains, and so part of the thesis there is that some portion of the community is going to choose convenience over the purest, really more nodes. EOS has a delegated proof of stake model where they have 20 nodes. Ethereum, when it moves to proof of stake, is going to have a lot of nodes. And so I think EOS is a very interesting one. And on the DAPP thing i’ve talked about this before--we have a big bet on WAX. It’s the intersection between gaming and crypto. There are 90 times more gamers than crypto people, so it’s an interesting onramp for gamers to be able to buy into crypto. So it should be synergistic both ways. I like that. I like the whole idea of gaming in crypto. I’m looking for more ideas in that space. We have a bet on a project called Cosmos. It’s not a token yet. It’s an interoperability protocol. Again, I haven’t spent a ton of time on it, but i’m fascinated with the idea of how interoperability protocols will work with these blockchains. We don’t need a hundred blockchains, so how are we going to go from a hundred to five or three? Are they going to just die, or is there going to be--i need to find someone smart enough to explain that to me, but it’s something we’re looking at. We’re trying to understand. I don’t think anyone understands it yet and that’s why you talk to the smart guys.

I like EOS token. I think that the blockchain just started on EOS. They’re constitutions in lots of ways, it wasn’t perfect when it started, and there’s changes being made, and I think over the next few months, you'll see that community settle into something that feels right and vibrant.



Do you have anything to share with the Korean community?

A, I've been treated wonderfully here, so thank you. B, I think this is a really interesting place. I had a fascinating meeting. One of the problems that we’ll see in the US is.. I think about Uber, and I always think about this idea of a decentralized Uber. I met the CEO of Uber, we got into an argument and didn’t end well, but he told me I was dead wrong and that it may be theoretically correct, but it’s really difficult to build a business and Uber owns those customers. So we’ll decentralize and we’ll be able to steal Uber’s customers for two good reasons: it’ll be cheaper and it’ll be private. Is that enough? One of the problems in the US is that there’s stickiness. What’s fascinating about Korea--and i’m just learning about this--I just met a guy with a big established business in Korea, and he wants to move some to a decentralized platform. He said it’s because it’s going to happen anyway so I’d like to get ahead of the game. And it was an industry that, in the US, no one’s even worried about crypto. There’s companies doing it, but people are like, there's no way it’ll get penetration. And what was interesting was that I was asking him how fast the Korean consumer is to adapt. It’s four to five times faster than the American customers. So in a lot of ways, this will be a wonderful laboratory for DApps. Once there’s a wonderful music DApp or a ride sharing app, we can see if people will quickly leave the Korean version of Spotify or Uber to go to the decentralized version.I think in some ways, Korea's got a better chance of succeeding than the rest of the world, and could become a leader.

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Hashed People: Mike Novogratz, CEO at Galaxy Digital

Mike Novogratz is an ex-hedge fund manager and was ranked a billionaire by Forbes in 2007 and 2008. Hashed Post had a depth interview wit...

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