Galaxy Digital - Cryptos future Behemoth?
As promised here is my 2nd of 3 long-term crypto stock investment thesis. If you haven't already, then do check out the 1st one which was on HUT8 Mining here. I will be referencing it a lot to avoid repetition. Also, If you are a regular reader of the newsletter then you can skip the plug and the disclaimer section below but if you are new then welcome and do give it a read so you know what to expect.
Every week I write a free newsletter where I publish the signals generated from my Quant model and all its positions; the Model has successfully signaled the top in Crypto in Nov 2021. Captured 100x moves in Sol & Matic. Exited Luna before its demise. Captured multiple 20x moves in a lot of alts such as doge, and metaverse coins in the last crypto bull cycle. There's no Voodoo magic going on, it's an algorithm based on price action, trend, Momentum & relative strength. I understand if you have a hard time believing. I wouldn't trust an Anon either but FWIW, I went public this May and since then I have consistently posted model positions and its views on BTC, and ETH every week. Since May, the model caught the top in Oil and exited Crypto weeks before the recent carnage began, catching crazy moves in DXY, Interest Rates, and VIX that are happening currently. All my work is available for free for all. Check out the performance page for past performances and the About page to understand how the model works along with some FAQs.
None of what you read here is financial advice but it's safe to assume my personal investments are in line with what I publish.
Now before you, degens go open leverage longs and rekt yourselves remember
- This is a multi-year thesis and NOT a signal from my quant model (yet).
- Galaxy can very well go to ZERO. No, this is not a rhetorical warning to cover my base. Three Arrows Capital (3AC) has proven that if management doesn't manage risk well then going to 0 is a very real possibility.
- You should be able to handle gut-churning volatility. Galaxy is down 87% since the bull market ended in Nov and can drop another 30-50%.
- Don't expect any wall street type complex stock analysis involving DCF, quarterly revenue statements, etc. I am an ExplainLikeIam5, napkin math investor who believes in a big-picture thesis. I will liberally use some assumptions which you might not agree with.
The stock I am talking about is Galaxy Digital Holdings $GLXY / $BRPHF.
One thing I have learned over the years is that there are only 2 things common among super-successful investments. Big Opportunity Size and Smart Management. Rest just takes care of itself.
Opportunity Size
Firstly, I am going to presume you are a believer in the crypto / web3 space and have the conviction that this is going to be a dominant asset class by the 2030s. If you aren't then you are unlikely to believe anything I say let alone the projections.
In the Napkin Math section of the HUT8 thesis, I went over this so I won't repeat it here but in a nutshell, my base case is that crypto/web3 delivers on its promise and will have around a $100 trillion market cap by the 2030s. Raoul Pal of Real Vision has done some really good work on this subject and shared his work for free. Check it out. There are a lot of research reports/studies from the likes of ARK invest/ suggesting similar opportunity sizes.
You could disagree saying it is a lot of hopium, you can pick a number that makes more sense to you (the idea is to have a sense of scale than a precise number). Even then, we are still talking, about many multiples if not 100x opportunity size, from the current sub $1T mcap. Historically, good companies tend to capture a disproportionate share of the market value.
Management
Galaxy is headed by billionaire Michael Novogratz. Even though he's an ex-Goldman, he's not your garden-variety corporate banker, he's more of a Crypto-Native kind. He's known to have bought 30K Bitcoin when it was under $100 and 500K ETH from Vitalik when it was under $1. Talk about being early. But that's probably not how you must have heard of him lately.
So let's first address the LUNA in the room.
Novo was one of the earliest investors of Terra LUNA. And it was one of the mega winners of the last bull run and Galaxy's top 3 holdings. To celebrate his 100x Novo got the now-infamous LUNA tattoo just before its death spiral. Needless to say, he got a lot of ridicule and flack for it.
Getting a tattoo after bagging a 100x is not my thing, but as an investor, here's how I see it.
1. Firstly he had the vision to bet big on LUNA really early just like he did with BTC & ETH. That speaks to his investing acumen.
I have been tracking LUNA since its sub $1 days, If you check Do Kwons early interviews, he was focused on real-life crypto adoption using payments apps such as CHAI. They were big in Asia and had good traction. Only later on during the bull run, did the focus shift toward ponzinomics and pumpamentals. While it is fashionable to ridicule LUNA investors now, it's important to remember that most of the "A-listers" and Giga brains of crypto such as Polychain Capital, Pantera Capital, Delphi Digital (they have my respect), and Coinbase Ventures among others were all backers and were all over the Luna ecosystem. By no means I am defending LUNA here. It's not the first nor the last of crypto's failed experiments but it's important to separate the process from the outcome when we judge Galaxy management.
2. While most are annoyed/cringed about the Novos LUNA tattoo, in my book it speaks to his risk management skills. If your 3rd largest holding which you have publicly been shilling & have a tattoo for (one of the highest forms of commitment), goes to Zero and it still doesn't kill your company, then that's worth paying attention to. Don't you think? Yes, Galaxy had to take losses, everyone in the space had to, entire Crypto market cap is down about 80%. But unlike 3AC, Voyager, or other crypto firms, Galaxy has not only survived but has a strong balance sheet and is flushed with cash during this crypto winter (more on this later).
Next, is the BitGo acquisition controversy.
Here's the short version. Galaxy terminated the $1.2 Billion Bitgo acquisition deal that it had announced last year. Bitgo in turn has filed a lawsuit seeking $100 million in damages for walking away from the merger.
Bitgo is one of the solid players in the digital asset custodian space so this acquisition would've made Galaxy a one-stop shop in the digital assets arena for the institutions. It's unfortunate that the deal is not happening but it's not really the end of the world for Galaxy.
As an investor here's how I am thinking about it
1. The deal was agreed in 2021, during the middle of the bull run so naturally at bull market prices. Everything is down around 80% across the board now. So Galaxy can look to acquire some other solid company and much much cheaper valuations.
2. Lawsuit-wise, the best-case scenario is Galaxy doesn't need to pay anything to Bitgo. Worst case they pay $100mil. If I were to guess, the outcome would be somewhere in the middle and both parties would choose to "settle up" in some sort of a compromise (at least that's how I would do it). If you think from Bitgo's perspective, it makes sense why they really needed to file the lawsuit even if they don't push really hard to get the 100$mil, this way they look clean to the next potential buyer. Perceptions and Optics matter.
In any case, Galaxy currently has over $ 1.5 billion in cash sitting on its balance sheet. So mentally I base my investment thesis on thinking it only has $1.4 billion cash and carries on.
Lastly, the US listing
Currently, Galaxy is listed in Canada and US OTC. They are awaiting approval to get listed on Nasdaq. One of the pet peeves, a lot of retail investors have is, management hasn't taken enough effort to get listed on Nasdaq and it has taken way too long. Many seem to believe the US listing would've saved Galaxy from the share price carnage. I don't think that's accurate. Every crypto stock regardless of being listed in the Nasdaq, Canada, or LSE is down an average of 85%-90%. Even the premier growth stocks are down the same. Also, on the other hand, the Galaxy share price went from the covid lows of $0.5 to bull market highs of $46. That's an 80x move. That's enough evidence for me that when the next bull run resumes Galaxy would do fine regardless.
Also, Galaxy is part of every blockchain ETF's holdings out there so it gets the allocation and the flows from the ETF/ funds industry. Not being on Nasdaq did not affect Galaxy's ability to raise $500milion last year, nor did it negatively impact their ability to conduct any business.
While I would like them to be on Nasdaq as it definitely has benefits, I am not losing sleep over it.
Is Novo's Galaxy a one-man show management-wise?
Not really, Novo has assembled a good mix of Suits and Hoodies in the Galaxy leadership team. Let me explain, Galaxy has positioned itself as a bridge between institutions and the world of crypto. Now, when you talk to these banker types you need to speak their language and gain their confidence by being one of their own. That's where the suits come in. Most of the C-suite in Galaxy comprises of very senior folks from the investment banking and corporate space with credible backgrounds. Look up Neal Katyal, Erin Brown & Alex Ioffe's backgrounds to get an idea.
On the other hand, what I am more excited about is folks like Alex Thorns, Richard Kim, and Steve Kurtz on the team. If you follow their work/interviews you will quickly realize how plugged in these guys are in the crypto/web3 / space. They truly "Get it". Check out the research reports from Galaxy research to get a sense of what I am talking about.
As an investor, it gives me assurance that there are enough folks on the management team who know what they are doing and are well-positioned to capitalize on the crypto opportunity.
Okay, so the opportunity is good, and management is alright, but what makes me so bullish on Galaxy as a business?
If you believe Crypto is here to stay and grow, then Galaxy is a diversified way to bet on it.
In the HUT8 investment thesis, I mentioned how the mining business doesn't really have any moat, but it could still be 50x in the next bull cycle if they play their cards right. But in Galaxy's case, it's got a ton of moat. It's really hard for a competitor to just come in and disrupt them purely with deep capital. It takes time, expertise, and reputation to build the business lines Galaxy are in. So what are they?
They have 5 business lines that feed into each other and create a positive flywheel effect
- Venture - This is the most exciting division of the company for me. Galaxy makes VC-style investments across the Web3 universe (Nft, DeFI, Infrastructure, scaling solutions, etc). It ranges from seed rounds to liquid coins listed on exchanges. This is where they have bagged many many 100x in multiple investments like BTC, ETH, and many others. As per the latest updates, they now hold 141 investments across 100 portfolio companies. Avalanche, Candy Digital (co-founders Michael Rubin & Gary Vaynerchuk) are some of the investments in the portfolio. There's an investor community-led site that tracks all of Galaxy's investments called GLXYarchive. Check them out here. Here's an example of how good Galaxy is in trading, they managed to raise $500million at the end of 2021 just before the whole crypto bear market began. They are now sitting on around $1.5 Billion in Liquidity as of June 30th (BTW Galaxy's market cap is $1.5 billion). That's an extremely strong position to be in at the tail end of the bear market. They can double down their existing investments where they see growth and buy promising new ones at depressed valuations. Lastly, in HUT8 or any BTC miners case, you have an option to buy the stock or BTC directly, whereas an average Joe will never have access to the kind of investments Galaxy makes let alone the valuation they get in seed rounds. And this is assuming Joe even has the expertise to pick winners as Galaxy has. Lastly, Joe doesn't need to worry about custody of his digital assets which is quite a big deal considering the number of hacks that have happened lately.
- Mining - Galaxy has a propitiatory BTC mining capacity of 2.5 EH/s and plans to grow this to 3 EH/s has generated a revenue of about $10 million for the quarter. In terms of size, their mining capacity puts them on par with the likes of Argo blockchain & Hut8 Mining. They have also created custom miner financing (MiFi) products for BTC mining companies. This has allowed Galaxy to position itself as the go-to financier for BTC miners in North America.
- Trading - Galaxy is a leading sell-side trading desk & market maker and is one of the biggest OTC traders in the US. They provide trading, lending, and structured products to their clients ranging from miners to family offices to institutions.
- Asset Management - They have over $ 2 billion in AUM across Bitcoin & Ethereum ETFs in Canada. Also have lots of funds focused on Gaming (Galaxy Interactive), Defi & NFTs. They offer institutional access to the entire range of Web3 space. They have collaborated with Bloomberg and created Bloomberg Galaxy Crypto Index (BGCI). It might not be a money spinner but does a lot in terms of brand recognition and value. Once there's regulatory approval in the US to launch ETFs like in Canada, Galaxy would be a very good place to capture retail flows.
- Investment Banking - Coz of their deep expertise & positioning in both the crypto and banking world they are uniquely positioned to scale their IB arm by providing M&A / Corporate advisory, Capital Raise, and financing. They have done some high-profile deals, details of which can be found in their investor presentation. This arm allows them to build deeper relations with the clients which are sticky revenue in nature and also keeps them sharp as they would constantly be evaluating new opportunities and deals to be able to serve as credible advisors to institutions (this helps them in their Venture business too).
The last 3 business lines aka Trading, IB, and Asset Management are not huge revenue generators YET but it is important to remember that these have high initial fixed costs to set up the necessary infrastructure like the team, software, processes, compliance, approvals, etc in place but add significant revenue disproportionately to the bottom line once they scale. The way to think about it is, if they do revenue of X when the crypto market cap is at $1 Trillion then they would be doing around 20x revenue (just my guesstimate) when the crypto market cap would be at $10Trillion.
Napkin Math
How big can Galaxy get in terms of returns? In HUT8's case, the math was easy. Here it's a bit more nuanced as you can see Galaxy has multiple divisions and each one can be gigantic on its own. So I will list out a few of the mental models of how I am thinking through this.
Taking cues from other industries, usually, good players tend to grow 2x-3x times their average industry growth. So if Crypto Marketcap gets to a $100 Trillion market cap by the 2030s, then Galaxy could do 200-300x from here. Yes, that sounds like a lot, and it's way too out in the future. Let's just talk about 4-5 years time frame which is more palatable.
In the last bull cycle, crypto got to $3T mcap, now If it can get to $30-$40T in the next cycle, Galaxy could do 100x. BTW Galaxy did do 80x in the last cycle so the idea of 100x isn't that far-fetched especially since they have a stronger balance sheet during this crypto winter.
Another way to think about it is, Galaxy has over $1.5 billion war chest and prices are down 80% across the board. They have a past track record of catching 100x home runs. If they were to repeat even half the performance in their Venture business. It could generate a lot of value in terms of market cap. Not to mention their other divisions would be money spinners and cash cows at higher crypto valuations.
A 50x from here would put their mcap around $75B. It's steep but NOT unimaginable. Coinbase listed at mcap of $90B.
Here is the most compelling reason for me to own Galaxy.
It's currently trading at a market cap of $1.5 billion which is less than the Cash/liquidity and the investments made by the company. So at these valuations, I practically get Novo, his team, and all the business lines for free. This should appeal to both traditional value and growth investors alike. Off-course I fully understand that if crypto goes to ZERO or never goes back up again then all of this is worthless. So that will reflect in my portfolio allocation.
So how am I playing this?
I like the current valuations, if there's a dip to under $1B market cap due to a capitulation event then I will allocate my maximum weight to Galaxy. On the other hand, if June was indeed the bottom in crypto and it starts to run up from here then I would rely on my quant model to get optimized Entry/Exits.
Below are the Signals from my Quant model on Galaxy Digital from 2020 to date. As always I will update on the free weekly newsletter when my model flips to Long.
Risks
Lastly, No investment thesis should be complete without highlighting the Risks else you are just another delusional Moonboi.
Stating the obvious but If there's evidence of any of the below risks playing out materially then I would cut positions without any notice. So DYOR.
- Crypto never goes back up again. The entire thesis hinges on crypto doing well. If that were to fail then unlikely that Galaxy will defy gravity.
- Management does a 3AC. Before their spectacular failure, the 3AC boys were the smartest guys in the room. That didn't stop them from making the rookie mistake of letting go of Risk management by over-leveraging themselves and going bust. Thus far Galaxy management has been good, hope they continue to do the same.
- Insider Selling. Some of the senior management team have been selling a lot of Galaxy shares. While it's not a crime but it just doesn't instill confidence among investors. Constant selling sends a signal to the market that insiders know something that the market doesn't. Maybe that is one of the reasons we are getting such lucrative valuations currently. One of the positives is, Galaxy has announced that it would buy back 10% of its outstanding shares. That shows they believe that the current valuations are compelling. and they proved how good they are at market timing.
- Adverse Regulations for US/Canada-based crypto companies - Hard to predict but this can be a very big risk if it plays out.
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