Hosted by Alex Thor, Director of Digital Galaxy Research, and featuring Mike Novogratz, founder and CEO of Galaxy, this episode of Galaxy Brains discusses the latest developments in the cryptocurrency market. Following Galaxy’s Q1 earnings call, the conversation delves into the performance of different departments within Galaxy, including record-breaking achievements in mining and asset management. Mike shares his insights on broader market trends, including the impact of ETF approvals and his predictions for Bitcoin’s trajectory in volatile market conditions. Alex and Mike explore the intersection of finance, technology, and regulatory environments from a unique perspective, shaping the future of digital assets.
Summary:
Alex notes that Bitcoin prices rebounded last week and the positive market response was due to lower-than-expected inflation data.
The interview covers Galaxy’s Q1 earnings, cryptocurrencies, the mainstream adoption of Bitcoin, and macroeconomics. It also touches on the topic of Japan and some political issues.
Mike highlights the strong performance of Galaxy in Q1, with earnings of $400 million. The mining business, in particular, achieved its best quarter ever, and the asset management and trading businesses also performed exceptionally well.
The importance of cryptocurrencies in US politics is growing, becoming impossible to ignore.
Mike believes that while prices may not rise every month or quarter, he is confident that more institutions will participate in the cryptocurrency space in the next 12 to 24 months. He believes the next move in Bitcoin’s price could be upwards, especially with the possibility of a rate cut by the Federal Reserve nearing the election.
Mike sees the cryptocurrency space as a narrative-driven industry that requires use cases and conceptual validation to drive development. Over the past six to nine months, confidence among institutional investors in the cryptocurrency industry has significantly increased with the approval of ETFs. The narrative of Bitcoin halving has also had a positive impact on the market.
Alex highlights the importance of cryptocurrencies in US politics, particularly among swing state voters. More than 20% of voters in swing states such as Ohio, Michigan, and Arizona consider cryptocurrencies a key issue, according to a Harris Poll conducted by DCG and the Blockchain Association. This shows widespread attention to the cryptocurrency issue among voters, without a clear partisan bias between Republican and Democratic voters.
Mike and Alex both believe that in the current USD-based world, the cryptocurrency market is somewhat similar to the commodities industry, such as oil companies, whose revenue and activity levels also depend on price fluctuations in underlying commodities.
Mike is deeply concerned about national debt and fiscal policy. He expresses concern over two major issues: cryptocurrency regulation and national debt. If the US government (whether it is Biden or Trump) can address the 26% federal budget deficit (should be 20%) as a percentage of GDP, it would be unfavorable for Bitcoin. Therefore, the incompetence of policymakers in Washington and excessive spending is actually beneficial for Bitcoin.
The rise in both Bitcoin and gold prices is due to the same reason – economic uncertainty. Bitcoin is rising faster because it is a new technology and commodity with a faster adoption cycle.
Despite net outflows in gold ETFs this year, the spot price of gold is rising. Individuals have purchased $200 billion worth of gold, including companies like Costco.
Mike notes that foreign central banks are buying gold at a record pace, especially China. Part of the reason is US sanctions on Russia following the Ukraine conflict, which has led other countries to fear that the US might freeze their USD reserves, increasing their purchases of gold.
Alex also believes that despite net outflows in gold ETFs, demand for physical gold remains strong. Individual investors and foreign central banks are buying gold in large quantities.
Regarding the US dollar, Alex believes that young people are more inclined to see Bitcoin as a hedge against the dollar, rather than gold. They value Bitcoin’s growth potential and its faster adoption, especially in times of economic uncertainty.
Mike states that although the US dollar is stronger than other currencies, it is currently showing signs of weakness. The US faces coordination issues between fiscal and monetary policies, creating an illusion of stability in the fixed income market. Treasury Secretary Janet Yellen has been criticized as the worst Treasury Secretary in history during her term, as she supports large-scale deficit spending without balanced reductions.
Mike believes that the yield curve and market stability are controlled through hidden yield curve manipulation, creating an illusion of stability in the fixed income market. This artificial market stability is reflected in the rise in gold and silver prices, which is also beneficial for Bitcoin. Additionally, every stock market downturn is an opportunity to buy stocks because this policy leads to nominal growth rates higher than inflation, masking the expansion of debt.
Mike believes in long-term asset allocation. In the current policy environment, hard assets like stocks, real estate, Bitcoin, silver, and gold will have long-term investment value. Debt issues.
Alex points out the struggles of the American middle class and working class. Middle-class and working-class Americans are facing economic difficulties as they do not have enough income to purchase assets like real estate.
Mike believes that if the US debt-to-GDP ratio reaches 250% in the next 20 years, as estimated conservatively by the Congressional Budget Office (CBO), it would be unsustainable. The next Treasury Secretary will face the most important challenge of addressing the US deficit problem, otherwise the country will fall into a vicious cycle.
Mike hopes that Bitcoin will gradually and steadily become more mainstream rather than quickly skyrocketing to a million dollars, as that would signify societal collapse.
He points out that some countries like Nigeria and Turkey are facing difficulties due to their irresponsible monetary and fiscal policies, highlighting the instability in the global economy.
Alex believes that if the debt problem is not controlled, the US will face severe inflation or other serious economic problems, leading to societal collapse. Trump’s candidacy.
Mike believes that if Trump is re-elected, he will plan to exert more control over the Federal Reserve, which is a bad signal. The complexity of Trump lies in his personal ethics, which have caused social divisions, and his policies lack consistency. For example, he may claim to deport 20 million immigrants but may actually only deport 2 million. Such policies could lead to an increase in inflation due to labor shortages.
Mike points out that although Trump was not initially friendly towards cryptocurrencies during his presidency, he now sees the political opportunity to use cryptocurrencies to counter the Democratic Party. On the same day Joe Biden expressed his intention to veto the SAB 121 bill, Trump announced his support for cryptocurrencies to attract supporters. However, cryptocurrency needs bipartisan support to thrive in the US.
Senator and Bill Impact.
Mike believes that although cryptocurrencies should be a bipartisan issue, currently in Washington, some Democrats, influenced by senators like Elizabeth Warren, hold a negative stance towards cryptocurrencies. Warren wields significant influence in the cryptocurrency space.
He also highlights the duality of cryptocurrencies, which benefit both libertarians because they represent freedom of choice and progressives because they can remove intermediaries and achieve fairness.
Mike mentions the SAB 121 bill, which affects the accounting rules for public companies holding cryptocurrencies, requiring them to record them on their balance sheets. This rule has a greater impact on banks than cryptocurrency companies, as it significantly inflates banks’ balance sheets. If Democrats refuse to repeal the SAB 121 bill, it would be like expressing dislike for cryptocurrencies, similar to disliking dogs, which would be a serious mistake. The US has a significant number of single-issue voters on cryptocurrencies, especially young people, who may turn to support other political parties if Democrats continue to oppose cryptocurrencies.
The Japanese economy.
Mike starts by discussing the economic situation in Japan. Japan faces challenges of an aging population and low birth rates, and it is a conservative country that is unwelcoming to immigration. They are the world’s largest savers, and their economy has been in deflation for many years until recently, when inflation started to pick up, making the economy more active. Japan hopes for a rate cut by the Federal Reserve to ease the pressure, as US rates are higher.
Bitcoin and ETFs.
Mike points out that Bitcoin still performs well in risk-adjusted returns, second only to Nvidia and European stocks. Despite not going through the traditional “Bitcoin, Ethereum, and altcoin cycle,” Bitcoin continues to attract investors as it is seen as digital gold and performs well in the current macro environment.
He also highlights new market trends, such as the launch of ETFs and the opening of wealth management channels, driving the adoption of Bitcoin. The concept of Bitcoin as digital gold has become ingrained, and wealth management firms are starting to recommend Bitcoin to clients. With the potential approval of ETFs, other cryptocurrencies like Ethereum are expected to gain greater recognition and investment in the market.
Imagine if the Bitcoin ETF had been rejected on January 11th, it would have been very detrimental to the price of Bitcoin as the market expected its approval. However, currently, it is widely believed that Ethereum ETFs will not be approved, so the risk is biased towards an upside.
Mike believes that the current price of Bitcoin fluctuates between $73,000 and $57,000. The market volatility is low, and many people are selling call options. If there is positive news, such as the Federal Reserve deciding to cut interest rates, the price of Bitcoin could break $73,000 and experience parabolic growth. The rise in Bitcoin’s price requires less capital inflow as the price is determined marginally. If future inflation data (CPI and PCE) decreases and employment data declines, the Federal Reserve may cut interest rates in July, thus driving the price of Bitcoin up.
Mike believes that most new ETF buyers are not short-term speculators; they are first-time or second-time Bitcoin buyers who typically do not sell within a week. Usually, options markets emerge one to two weeks after the launch of an ETF, but there is no options market for Bitcoin ETFs yet due to SEC restrictions. Once the options market opens, it will attract a large number of retail investors, increasing market activity and trading volume.
Mike mentions the trading volume of MicroStrategy and Marathon. The trading volume of MicroStrategy and Marathon exceeds that of all Bitcoin ETFs, mainly because they have options markets, attracting many short-term traders and day traders. Michael Saylor of MicroStrategy seized market opportunities by issuing stocks to purchase Bitcoin, increasing the volatility and trading volume of the company’s stock. However, he has been selling stocks every day in recent months, which may cause concerns among investors, although there is still strong trust in him in the market. MicroStrategy’s stock is currently trading at a premium to Bitcoin, but this premium may not be sustained. Over time, the premium may narrow or even turn negative.
SEC.
Mike expresses dissatisfaction with the limited cryptocurrency investment opportunities in the US, primarily due to the SEC not approving many cryptocurrency companies for listing. For example, companies like Bullish and eToro are waiting for approval, but investment opportunities are extremely limited due to SEC restrictions.
Mike also mentions mining companies and stock dilution. Many mining companies raise funds by selling stocks to purchase mining equipment, and these stocks trade at a premium to their book value as they are seen as momentum stocks. CEOs of Riot, CleanSpark, and Marathon have cleverly capitalized on this premium by selling stocks and purchasing more equipment.
Mike questions the approval of Trump’s stocks by the SEC, as these stocks have no actual income but receive high valuations. He believes this behavior by the SEC is detrimental to retail investors.
Mike also discusses whether the phenomenon of meme stocks will exist in the long term. He believes meme stocks have their unique appeal and skill requirements, and although speculative in nature, they may continue to exist. Roaring Kitty and GameStop.
Mike mentions the GameStop frenzy triggered by Roaring Kitty (Keith Gill) three years ago. He posted a picture in his basement, sparking a three-day frenzy that led to a $17 billion market cap for GameStop. Mike appreciates Roaring Kitty’s performance in the GameStop stock event, believing he beat the system.
Mike mentions the movie “Dumb Money,” which reflects the events of the GameStop stock frenzy and portrays the event’s true depiction and entertainment value.
Mike is concerned that many people suffered heavy losses after buying GameStop stocks at high prices, although early buyers may have profited.
Mike believes that low interest rates and massive government spending have fueled the rise of cryptocurrencies and meme stocks, representing financial nihilism.
Mike strongly criticizes the current government for exploiting the younger generation, citing Scott Galloway’s TED Talk, highlighting the struggles of young people in terms of income, education, and housing costs, and their anger at the current situation.
