Good morning, and welcome to Galaxy Digital's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to turn the conference over to Galaxy's investor relations team. Please go ahead.
Good morning, and welcome to Galaxy Digital's second quarter earnings call. Before we begin, please note that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors, including those identified in our filings with the Canadian Securities Administrators on SEDAR and available on our website or in future filings we make with other securities regulators. Forward-looking statements speak only as of today and will not be updated. In addition, none of the information on this call constitutes a recommendation, solicitation, or offer by Galaxy Digital or its affiliates to buy or sell any securities, including Galaxy Digital securities. With that, I'll now turn it over to Mike Novogratz, Founder and CEO of Galaxy Digital.
Good morning, everyone. It's actually beautiful day here in New York. We're gonna do this a little differently than we've done in the past. In the past, you know, I've read a script, Damian and Chris and Alex have all chimed in. Today we thought we'd take a different tack. I'm gonna kinda put you in the quarterback's helmet and try to give you some sense of how I'm seeing the world, how I saw the first half of this year, the opportunity set, and how I think about our company. Listen, no one likes to look at a red $550 million number and try to feel good about it. I wanna put this in context of the journey we've been on or the journey we're going.
You know, January 2020, partners' equity in the firm or our book capital was roughly $350 million. At the end of, you know, Q2, we were over $1.8 billion. What goes into that number? That's gains we've made in our portfolio, less expenses we paid, rent, salaries, bonuses, taxes. It's a hard number to grow that quickly. In some respects, I feel pretty awesome about the stewardship of that capital. Listen, I don't take a salary. I don't get options. I don't get shares. For me, I'm a big shareholder. The focus is our book equity and our stock price.
You're gonna hear today a lot about risk management and how we're gonna drive book equity higher, and we're gonna drive our stock price higher because that's where my real focus is. You know, put the year in perspective, we're if you took our losses this year plus our gains last year, we still made over $1 billion in a growth business where we're while we're investing a ton. You know, the big picture, I feel pretty good about things. When I break our business into the two halves, right, we have four operating businesses or really eight operating businesses if you wanna take the intermediation business, distribution business and break it up a little bit. Then we have a balance sheet that we manage.
I look at the operating businesses, and I've got a grin on my face. I am proud of how they operated. I think in each of the businesses, and I'll get to them, we did really well. You know, we didn't make the same mistakes some of our competitors did. Our risk management, both from security selection, our token selection to counterparty selection to credit management, all was top-notch, and we think should be a model for how this industry, you know, self-regulates. I feel pretty great about that. On the balance sheet side, you know, high to low this year, we're down 29%. You know, luckily, July and beginning of August have been much better months, and so that number is smaller today than that month, that quarter end print.
That's in context with the crypto market down 65%. The good news is last year, we sold over $1 billion of stuff or last year in the beginning of this year. I guess the bad news is we should have sold more. You know, managing a big balance sheet's tricky. Some of it's big illiquid positions in the private side, those have been marked down. Some of it was liquid positions that we either didn't hedge fast enough or held on to too long or had the wrong market call. You know, the great thing about trading or investing is the numbers are the numbers. You see them there. You can compare them to our peers.
I feel like, listen, we're sitting here at the end of the quarter with over $1 billion in cash, $1.5 billion in liquidity and operating businesses that I feel pretty good about. What else happens in big bull markets? Your cost structure gets a little bit heavier than you'd like, and that's just, I think, a natural in any, you know, bull market. What we've done in the last eight weeks has been to take a really serious look at each of our businesses, in essence, re-underwrite each business and look at our cost structure. We've taken out over 20% of vendor costs. That's from marketing and tech spend.
That's just going through 500 line items on our sheet and making smart decisions. The biggest cost in this business is people. Luckily for us, we've got a variable comp structure, right? A lot of our comp comes in bonuses. In a year where we make $1.7 billion, those bonuses are pretty high. In a year where we're losing money, those bonuses are less high. Adjusting the comp pool down, we took some selective shrinking of our team. Those are usually in areas where we had underperformers or where we thought we could find synergies by combining a few businesses. We took a few people off the field, but we're adding people.
You know, we started the year less than 300 people, and we're about 375 right now, and I think we'll finish the year over 400. While the crypto landscape is less certain than it was, my confidence of where it's going in the medium term hasn't waned a bit. We are a growth company. We are investing in people, in products, in engineering teams, you know, for not the next six months, but for the next six years. I think that's a message I really want you to hear today. Listen, we've taken our cost structure.
If I look at a normalized twelve-month go-forward cash outlay down to roughly $175 million-$177 million, and if you add the equity comp that would go along with that, it's about a $200 million number. I feel very confident that our operating businesses will make that much in revenue. I'm looking at a company that should be cash flow positive and have a very big and well-managed balance sheet and an opportunity to be offensive. As bad as that $553 million headline number feels, I don't fear nearly as bad as I thought I would. I hope it's the worst quarter this firm ever has. Listen, let me really quickly touch on each of the businesses.
When I think about our Sales, Trading, Credit, Derivative business, like I said, I feel pretty great. In Credit, you've probably seen the competitors monster losses in lots of places, from retail credit to institutional credit. We've had a unbelievably well-managed business. Chris Ferraro, you know, came from a credit background. Luca, who runs our credit business, they've been conservative. They've been over-collateralized. We did have our first loss in credit in the firm's history this year. It's filed. It's public. We put a claim into the Three Arrows, that's in their filing. It was, within the context of our balance sheet, small. It was hedged, so the losses were mitigated. It was frustrating, right? You don't like to lose money in anything.
To lose $8 million-$9 million relative to the hole that it created on other people's balance sheets was something we swallowed. The business was still profitable on the quarter. We liquidated lots of other or shrunk our balance sheet in a really managed way with lots of other counterparties. I think we've got market share to gain there, as most of our competitors have been wounded, and we're not. Our Derivative business continued to make money. Hats off to Rob Mackey and his team there. It's a business that we think, again, we've got the right to earn more market share as competitors got wounded. Our OTC businesses, our quantitative trading business run by Andrew Karas, used to be called Blue Fire, all continue to be profitable.
I flipped Asset Management. You know, we are raising capital in a tough environment. We've launched a good product. We have an alpha fund that is just getting launched, run by Chris Rhine, that I think is gonna be a wonderful product. The interactive fund is doing their second close. You know, we got AUM back to $2.1 billion at the end of this month. We think that's a business we should do well in. We finally have got, I think, the right product. That's a pretty easy one for us. Mining is a business that we had invested a lot in. You're gonna see our mining revenues start to grow pretty rapidly. There's no magic to that. We had invested.
We finally are plugging in our mines that we bought at low power places. That's gonna add to the revenue going forward. Our Investment Banking business, you know, run by Michael Ashe, is just doing a great job. We're in the middle of a ton of activity. We're benefiting from a couple-year investment in developing domain expertise in that space. Again, when I look at those businesses, I'm pretty optimistic on each one of them. You know, in the balance sheet, like I said, we've marked down our private positions pretty aggressively. We are liquid. In our liquid positions, we have less diversity. We've got bigger bets in the more liquid tokens that we think will go higher. You know, we feel pretty good about where we sit.
Listen, with BitGo, we're in constant contact with Mike and his team. We're evaluating what's best for both businesses. It's been frustrating that it has taken as long as it has. With the listing in the U.S., we continue to plow ahead. You know, there's a long queue of other firms that are with the SEC. We remain hopeful and, you know, doing the best we can there. I wanna stop before we go to questions and, you know, just talk a little bit about crypto. Crypto is not going away. As much as it feels when the whole market went down 80% that people got really nervous, I didn't, and there were a few different reasons.
One is I look at the 15 analysts that we just hired, and I scratch my head and say, "Geez, I couldn't get a job at my own firm if I was 22 years old." You know, from great universities, diverse group all over the place who know more about crypto than a lot of our more senior people, right? These are young people who believe in this revolution. When I look at our meetings with institutions, you know, while retail really got hurt in this, you know, institutions were just starting to get in, and so we see nothing but forward progress there. There was a big announcement this week with BlackRock opening up their Aladdin platform to crypto for the first time.
That is actually a monumental shift, and it just tells me that more and more access to crypto is coming, right? The Total Addressable Market, the TAM of crypto, is much bigger than people think it is. We're gonna invest accordingly. With that, I think I'm gonna leave it for questions. You know, I want you to. Oh, no, not questions. I'm gonna bring in Alex Ioffe to just run you real quick through the facts of our numbers. I want this to be interactive. I want this to you guys to ask as many questions as you want. Alex?
Yeah. Thank you, Mike. Good morning. We'll keep this short. In the tough market conditions of the second quarter, our business performed well. We ended the quarter with $1 billion in cash on the balance sheet and $1.8 billion in equity capital, after reporting a loss of $555 million, most of it from unrealized marks to market. In the quarter, we marked down our principal investments from $1 billion to $750 million, and unrealized marks on digital assets were negative $230 million. Our total liquidity was $1.5 billion at the end of the quarter, consisting of $1 billion in cash, $220 million in net liquid digital assets, and $250 million of stablecoins we use for exchange settlements, predominantly USDC issued by Circle.
With that, I will hand over the call to the operator to take questions. Thank you.
Thank you very much. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Participants are requested to use handsets when asking a question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. We have our first question from the line of Chase White with Compass Point. Please go ahead.
Thanks. Good morning, guys. Couple of questions. In general, do you guys see your prudent risk management in the face of the recent crypto market events kind of leading to Galaxy taking additional market share going forward? You know, when could we start really seeing that coming into force?
Yeah, I'll take that one, Chase. Welcome, it's great to have you covering the company. Let me hit on a few fundamental components of our risk management of credit, and then I'll get to your market share question. You know, as we think about our overall portfolio, the key things that we are very focused on are concentration risk. If you think about our concentration limits that Chris and Luca and the team manage our book towards, no counterparty concentration is above 1% of partner capital. You can reverse engineer that the largest loan that we have out there is $40 million.
Some other key things for you to know are, you know, over 60% of our loan book is directly to TradFi service players. Think about family offices, traditional hedge funds, high net worth individuals. You know, the book itself offers a lot of diversification benefits at different market segment levels across both TradFi and crypto players. Our ability to manage our asset liability components extends well outside of the crypto-native environment, and I think that's an important component to think about to answer your question around market share.
As you can probably appreciate, in the back end of 2021, our sales force were giving Chris, Mike, myself, and others a pretty hard time about our conservative, you know, loan agreements that we wanted to put in place, and some of our competitors stepped in and took that market share. That lending market share, often like it does on Wall Street, comes with trading market share. We took a back seat, and we felt a lot of pressure. That's reversed.
Substantially as we've come out of the other side of this tradable bottom in crypto, and a lot of those customers that were choosing our competitors in the back end of 2021 are now doing business with us. The terms of these loans, not only are they at higher collateralization levels than we had implemented throughout 2021, they're at slightly higher NIMs. We anticipate being able to enjoy you know an environment that has both of those things, safer loans at higher NIMs you know for the relatively near term and potentially the medium term.
One thing I'd add is, listen, I think the credit business can be a big business. The cost of capital for the overall space has gone up. We are working really hard to figure out ways to be a, you know, better borrower, right? I mean, if we could borrow cheap and lend expensive, we've got a pretty good business ad infinitum. That will be the real governor to how fast this business can grow, will be access to good financing.
By the way, we are borrowing cheap. We have half a billion dollars at 3% five-year term on the balance sheet.
Makes sense. Thank you for that color. And then, you mentioned in the release that there was a prominent shift towards M&A in the market right now. Can you help us kinda size that opportunity up? And how quickly could this kinda M&A shift take place? Like, is it happening very quickly, and then it'll be over quickly? Or is it kind of a prolonged environment, do you think?
Yeah. Let me give you a little bit of color around that and some data. The answer is we don't know. A lot of the contributing variables to the answer to that question are linked to capital and whether or not it will continue to flow into the sector. If you look at the data that we use in our advisory business, you know, M&A in 2021, where you look at at least one company in the crypto sector being part of that transaction, we saw 180 transactions. You know, in the first half of this year, that pace exceeded last year with 92 deals, looking at the same metric.
You know, if you look at what Sam and the FTX team have done in the very recent past, they've been extremely active in this down market. You know, reference BlockFi, Bithumb, Bitvo, Embed just in the last two months alone. If you look at assets raised or capital raised by companies in the sector, you know, in July alone, $1.3 billion continued to get raised. That was across 89 deals. Year-to-date capital raised is just over $21 billion. You know, the capital raising side in terms of financing has slowed a little bit. That's reflected in what our bankers are working on. We have been very active on the buy side for some of our customers. That continues to be the case.
I think you're gonna see a lot more M&A than the run rate suggested in 2021 in the back end of this year and the first half of 2023. You know, I think that's gonna be. The increase will be largely led by TradFi players who are able to participate now in the sector at valuation ranges that are a lot more digestible than they have been in 2021 and the first part of this year. You know, the activity that we're working on reflects that type of dynamic.
Got it. Very helpful. Thanks, guys.
Thank you. We have next question from the line of Deepak Kaushal with BMO Capital Markets. Please go ahead.
Oh, hi. Good morning, guys. Thanks for taking my questions. I've got three. I'll try to make them brief. First, just on the U.S. listing process, I know, you know, it's hard for you guys to talk about it. Any other color that you can give us, Mike? I mean, is there still some back and forth going on, or is there a stall, or is there a bit of a summer, you know, pause here, until we get back in the fall? What's kind of the activity level, and how is that changing
You know, I would, I guess, point you to the other companies that are in the same process, right? If you think about Bullish and Circle and eToro and, you know, there's a bunch that have been in the same queue. Just looking at those, it doesn't seem to be great progress. I think, you know, when the market sold off as aggressively as it did, it probably took a lot of resources, you know, and a sense of caution. We're hitting a new equilibrium. Things have kind of balanced out. The players that needed to be washed out were getting washed out. I'm hoping it gets back to normal and we make progress. I can only tell you what we're seeing, and it's things continue to be slow.
Okay. Got it. We can leave that at that then. Just on the competitive side, you know, obviously, you know, BlackRock and Coinbase have their partnership, and that helped Coinbase's, you know, stock a bit. Are you finding, you know, that you're handcuffed from a prime brokerage perspective, you know, now, you know, that you haven't been able to close BitGo yet? Is that affecting you guys competitively at all? How's that side of the market shaping up?
Yeah. Let me give you some color around that. I think it's really important to ask the question of, what does prime brokerage mean? It's a term that gets thrown around a lot, both in TradFi and in our sector. I think when you dig into different providers and different clients, what they really mean by it can be different. The layer of services that we're building at Galaxy that are very important to our institutional clients are execution, liquidity, margin lending and netting, and leveraging all of the additional services and products. It's ultimately gonna be critical for us to be able to stake Eth when that comes online. We're gonna have to rehypothecate Bitcoin for customers that need that.
All of the things that we have become expert in for our own principal activity, we're gonna roll out to our customers, and that will happen agnostic to the downstream custody provision. Galaxy today, in our asset management business and in our balance sheet, leverages several different custodians to provide the back-end solutions that we need, depending on what the coin is that we need custodied and the services attached to that. We can plug in the downstream custody services to our prime, from a number of different providers if needed. Of course, we're hopeful that BitGo will be one of those. Really from a prime services product delivery perspective to our institutional clients, that front-end service solution is what we're good at and what we're continuing to build.
That will not limit us in any way to providing services to our institutional clients.
Okay. It doesn't sound like it's a competitive handcuff at the moment. But is it delaying opportunities that you haven't been able to close the deal yet?
I would say no, for the reasons I highlighted.
Yeah. Listen, we are investing a lot in our technology build out here. You know, it's building product that will service those institutional clients. I mean, the interesting thing is when you think of it something like Aladdin, it's an agnostic platform. They will have lots of people that plug in once their product to plug in. Our race is to get that product built, you know, sooner rather than later.
Okay. Thanks. Then my last question, just on the M&A front, again, related to competition. I think the prior question around M&A, I think a lot of the answer was related to your investment banking side of the business. How about Galaxy's M&A activities? You know, you mentioned FTX, you know, buying a lot of companies. What's your approach to the market like? You haven't seen enough blood on the street yet, Mike, to take a run at things, or?
Oh, you know, I was really focused on cleaning our house, getting our understanding of how we spend money and where we spend money, getting our eight businesses, our eight operating businesses, you know, really mission-driven and steely-eyed and focused. It's kind of stage one, clean our own house up and get set, and stage two, look for the offense. We've been going through lots of opportunities during stage one as well and haven't found the exact fit yet. It would've been a huge mistake to have gone through this full cycle and not done something offensively. Listen, we have $1 billion in cash and we feel. We think we're on a cash flow positive operating run rate at this point.
I wanna be offensive. We're looking.
Okay. That makes a lot of sense. I mean, a certain tumultuous quarter. I mean, you guys are on the right side of the regulations. When do you think you start getting credit for that?
You know, listen, I used to, you know, sit at conferences and tell the space, especially when it was much smaller, that we need to self-regulate as a space or, you know, the regulators are gonna regulate us. When I look around at some of the behavior of our industry, there was not a whole lot of self-regulation going, right? There was asset liability mismatch, there was excessive leverage. There was all kinds of, you know, crap behavior in our space. We are hoping to be a model of, you know, what regulation should look like. That's been our play. I do think the regulatory landscape in D.C. is still at a bit of a standstill, right?
There was some great legislation, bipartisan push, you know, through the AG committee recently to move Bitcoin and Ether to the CFTC. We'll see if that gets any traction, probably not until after the election. My sense is we're not gonna see much movement till after the election. You know, that is gonna be one of these frustrations. Our plan is to stay in contact w ith everybody, to try to be a role model, and hopefully you will see. You know, when markets crash, everyone gets scared, the first reaction is everyone kind of running for the hills. I think what you're gonna see next is companies realizing, "Hey, I've got a sustainable business model, or I don't." This is where we talk about the M&A activity picking up.
I think you'll see some people go out of business, others grow. You're seeing TradFi guys deciding to get in at this opportunity. I think the next six months will be pretty interesting for us. Hopefully, you know, our framework on how we do business leaves us in a good position, both with regulators and helping set the new rules, but also with customers.
Okay. Well, look, I'll leave it at that. I mean, it looks a lot better than it did back in 2018, so and $1 billion in cash is great. Thanks for taking my questions, and I'll pass the line.
Thank you. We have next question from the line of Kenneth Worthington with JPMorgan. Please go ahead.
Hi. Good morning, and thanks for taking the questions. Maybe first higher level, is the contagion from Terra and Luna over? If we're gonna see more fallout, where does it come from, and what drives it?
Yeah, listen, I think what you saw was a big deleveraging of a whole group of players that, you know, had in many ways borrowed, you know, customer deposits in these lending platforms, if it was Celsius or Voyager or BlockFi or many of the exchanges, and then lent them out into less liquid and longer duration assets. I think that deleveraging happened. That was the wash down to, you know, $850 in Ethereum and $1,800 in Bitcoin. We've seen a bounce from there as, you know, the fear went away. Those companies still are gonna be absorbed or liquidated, and so there'll be some pressure on, you know, asset sales that happen over time. But it becomes a smaller and smaller portion of the market.
I don't think there's another shoe to fall in terms of bad credit or someone who needs to be liquidated. I think now the industry needs new energy, right? Energy comes from narrative in our industry, and so we're seeing it in Ethereum with the merge. Ethereum is outperforming because there's a story to tell, and there's a really exciting, you know, shift in the supply-demand equation of Ethereum, right? You're gonna have a less inflationary currency. You're gonna have people who are incented and paid to HODL or to stake their Ethereum. You know, prices are set on the margin. That's a story that you know Ethereum is shifting into a new chapter. The Bitcoin story continues to just slowly gain traction and adoption.
We'll see what the macro environment is, you know, if the Fed flinches, if we have inflation reaccelerate. You know, I think that story is less exciting than it was certainly, when central banks were pumping in tons of liquidity. The third part of our business, which is really the long-lasting part of, like, building out Web3, that just keeps grinding away, and it takes time, right? If that's the NFT space, that's the DeFi space, that's not going away. There's a lot of venture money funding that. Again, I think for the industry to kind of take that next big leg up, we're gonna need to see this institutional money come in. We're gonna need to see that narrative. You know, again, is it gonna happen in the next two months?
I cross my fingers and say a few Hail Marys. You know, we're taking a much more sanguine view that over the next 18 months, 24 months, all this stuff will happen.
Okay, great. Following up on M&A, which seems like the topic du jour. You talked about comp getting outsized from the bull market, and I guess my opinion is a bull market can also support maybe too many companies. Is the crypto ecosystem in need of some consolidation? If so, what parts of the ecosystem seem to be more ripe? I think you mentioned the lenders might be ripe. You also mentioned that TradFi buying into crypto. What parts of the crypto ecosystem do you see TradFi firms most interested in?
What's interesting is, like, who were the big winners in crypto? They were the exchanges, and exchanges really weren't even exchanges, right? They were broker-dealers in lots of ways. You know, some, like Voyager, was a broker, you know, a broker shop. Others, Blockchain.com or, you know, Coinbase, you know, they collected customers who were playing in this new world. They were high-margin businesses, and the customers were really resilient and really sticky, and so pretty good business. I think you'll see some consolidation there. We've seen that with Sam at FTX already with both Voyager and BlockFi. I think you're gonna continue to see some consolidation there.
When you think of things like custody, you're gonna need a lot more custodians, if you really believe that we're gonna start having tokenization at one point in the future of other assets and that the crypto economy is gonna continue to grow. I think you'll see. You know, we already have big traditional players investing lots in custody. They don't have the regulatory framework to do it yet, but they're investing in advance. That'll be an interesting space. You know, what we do, there's not a ton of competition in. You know, we have competition in each of our segments. You know, in the derivative business, lending, you know, institutional lending business, you know, Genesis is a big competitor. They've had their own issues recently. I think they'll continue.
They're not going away. But we don't have a lot of kind of institutional level broker-dealer, you know, derivative businesses to compete against or even, you know, credit businesses, right? The big credit business that had suffered so much were places that were taking in retail dollars and then lending them back out. I think that game is probably over for a while.
Can I just add a couple of things to help answer your question in addition to Mike's comments? I think every sub-sector of digital assets has a group of firms that are larger, and in many cases, they were able to raise capital in the 2021 and Q1 of 2022 period. A lot of these subscale smaller firms weren't as able or inclined to do so. I do think you're gonna see a natural runway-driven M&A cycle in almost every subsector. You know, Mike mentioned a bunch of them. That's gonna be something that we're right in the middle of in our advisory business.
You know, we take a lot of cues from that through our venture investing business, where you know, Chris and the team really monitor very carefully all of our portfolio companies, which now total 100. To give you a sense, I think an interesting stat for our portfolio, the average runway across the majority of those companies is just over 33 months. That informs a lot, I think, when you look at the sector through that lens and where runway is. It really is more prevalent in some of the larger firms, and that's why you'll see a driver of roll-up in M&A.
The last thing I'd say and flip my hat for a second. The one area that I think needs capital and got off sides in this space was mining, right? I think the mining space, it just looked like it was such a good business that people were raising capital, instantly committing it to buy chips and shelf space in the future. That space we find pretty interesting. We think we've got a role to play in both lending and in potential consolidation in that space. If you think about kind of the one sector that's probably got the weakest legs right now or the most challenges, it could be the mining space.
Okay, great. Thank you very much.
Thank you. We have next question from the line of George Sutton with Craig-Hallum. Please go ahead.
Thank you. Just one question. Mike, I appreciate the bifurcation you made relative to retail versus institutional. In past calls, you've talked about a mountain of institutional capital teeing up to invest in crypto. Obviously, the world has changed a bit, but where does that stand today in terms of potential in your view?
That mountain looks more like a hill for 2022, but the momentum is still headed that direction, right? Even one of the publicly big funds that said they were gonna put a whole bunch of money in, you know, they're gonna put some money in this year and a lot more next year. I think this sell-off slowed people. You know, if you just think of the process of investment committees of more conservative institutions, they don't like to put themselves in harm's way in the middle of a perceived crisis. I think as this space bottoms out and starts rebuilding both narrative and price, you're gonna see those institutions come in and you know, Damien has been on tons of calls, as has Steve Kurz, as has Michael Ashe.
You know, our team is out there talking to people, and we don't see a retreat. We see a pause, but just kind of a slow march forward. I read something this morning about Morgan Stanley hiring more people. I don't have the full story. We're seeing that consistently. What was refreshing is I didn't have to, in my conversations, relitigate the basics of why we were doing this. People still get it and still believe in Web3, still believe that Bitcoin is gonna be a macro asset for a long period of time, and still believe that we're gonna build a more decentralized blockchain, you know, a public blockchain ecosystem that things will be built on in the future.
After you know 80% sell-off, sometimes you worry like, "Oh, are we starting over?" We absolutely weren't starting over. In that respect, you know, we don't have the mountain of capital coming in this year, but I still feel like there's a put almost, in terms of time, and capital marching towards our space.
That's great. Actually, one other question while I'm thinking about it. You did mention the Senate Committee On Agriculture proposed bill. They're suggesting the CFTC be the regulator. Could you just give us your thoughts on the CFTC? Obviously, I understand it's sensitive role with the SEC right now, but curious your thoughts there.
You know, we just want clarity. What has been so frustrating, you know, as a guy who's been in this space since 2013, is the lack of clarity. Once you tell us the rules, we'll play within the rules. When they constantly ask the players to figure out what the rules are when the rules aren't clear, it really makes things complicated. The nice part of the CFTC is it's got a pretty straightforward, you know, regulatory mission. It's not consumer. You know, the SEC has got a much bigger workforce, a much bigger mandate. I just want them to make a decision. Perfect. Thank you.
Thank you. We have next question from the line of Rich Repetto with Piper Sandler. Please go ahead.
Yeah, good morning, Mike. I guess the first question is just looking at or listening to a lot of your comments, you know, as you describe yourself sanguine. Would you compare, like looking at the length of a potential, you know, correction here, is it comparable to the Internet for a few of us that were around the Internet bubble bursting, which went for probably three years? Have you done any comparisons or any clues that you have into the length of the correction time here?
You know, I've looked at all those analogs. I looked at them in 2017. You know, when we crashed in 2018, that was the first thought I had is like, how long is this gonna take? What has been refreshing and surprising to me is just the resilience of this community, right? I think it's because this is a purpose-driven community. It's like a revolution in lots of ways. Like, the young people still believe this is their right. If you think about why people got into crypto, it was this breakdown in confidence in institutions. If you look around the world at our institutions, right? If you look at a potential election between Trump and Biden, you know, people are looking at politics and economics and the whole system.
I mean, Nancy Pelosi is going to Taiwan and almost creating a, you know, World War III. You know, the frail state of relations with China, with Russia, like, there's nothing in the world that says, "Hey, this is the Great Moderation. Again, we're going back to the good old times." Right? We have this breakdown of trust, which is really the fuel for the crypto revolution. What's interesting is how resilient it is, even retail. I mean, you can beat the heck out of retail, and they still keep coming back. You know, it surprises me in some ways how strong this community is. I'm more optimistic than I would normally be as just a macro thinker, that things could come back quicker.
We're preparing to be pessimistic and hoping to be optimistic, and so that's how I'm thinking of things. What we're seeing is really promising. My best forward indicator is the smart kids coming into the space. I said this in my remarks. If you look at our 15 analysts, you're like, damn, you know, those guys are as sharp of an analyst class as you're gonna get at any firm, you know, from big tech firms to big Wall Street firms. As long as that youth is pouring into our space, I'm pretty optimistic.
Got it. That's helpful, Mike. Then you talked earlier about M&A, and you talked about, you know, certain sectors you might be more interested that has gotten, you know, more beaten up, like mining or lending. I guess the question is, as you look for your own M&A, you know, how have the guidelines changed? Are you more focused on sustainability and resilience versus valuation or strategic fit with other Galaxy? Like, has anything changed in the lens that you look at M&A given what's gone on here for the last several months?
When I look at our businesses, and if I, you know, keep our balance sheet aside for a second, 'cause in our balance sheet we have lots of future, you know, future hopeful businesses, right? The businesses are gonna change the way things happen. When I look at our businesses, in lots of ways, they're bread and butter businesses that will be here in a year, that will be here in four years, and in five years, right? Lending, derivatives, asset management, advisory. They're kind of core businesses. In some ways, they're the more boring businesses than what the future is gonna hold. When we think about, you know, M&A, is there something that could roll into what we do already and strengthen that position? That's one lane.
The other lane is, do we bolt on something or do we think about acquiring something that plays to where the world is shifting in the next 36 months? We're looking at both. You know, the more decentralized, you know, if it's tokenization, if it's that space appeals to me personally because that's kind of why the people got into this revolution. That's on my radar. It's something I think we can be a little patient with. What I like about the portfolio of businesses we have now is I'm completely certain that in four years they'll be important businesses. You know, the move to a decentralized world is not happening in the next four years when everything is decentralized. I don't think it'll ever get there.
We'll trend that way. Why I felt pretty strong coming into this call is like I look at each of our businesses and I was like, "Hey, we should gain market share in each of them, and we should be profitable, and they're good, solid businesses run by a really strong team." I think if you see us add something, unless it's a fill-in, it'll be stuff that we don't have.
Got it. Just want to squeeze one last quick one on regulation, because you seemed like you had a tilt at the CFTC, where it might be a little bit more user-friendly, I guess. You made, I think you were referring to, like, their principles-based sort of regulatory, you know, what do you call it? Oversight. But I guess the question is, you know, when you look, I think the SEC is certainly gonna get some portion of it, you know, with tokenization, what Chair Gensler thinks is, you know, really securities. Maybe a little bit more on the balance between the CFTC and the SEC. We know how aggressive, I guess Chair Gensler is as a regulator too.
What has frustrated me is I saw a lot of companies or collectives issue tokens, and the token economics were created to kind of get around this archaic, security definition that comes from whatever, 1936 or whenever the Howey Test showed up. That's not the way it really should work. I think token economics needs to do a better job of reflecting what people want to get out of buying those tokens. Some do look like security tokens or should look like security tokens, but maybe the lane that we have existing right now is too restrictive. There hasn't been any good back and forth dialogue of creating kind of a new regulatory framework for this new technology, which is not exactly the same as what an old security used to look like.
Why the CFTC is appealing for something like Bitcoin and Ethereum. It just takes those things off the plate. Okay, we know now that they're not in the mix. You know, yes, the SEC is gonna be in the fold somehow unless they create a new industry. I just want clarity so we start moving forward. Because quite frankly, I think our industry needs to create token economics for lots of things that I can convince my mother, "Hey, this is why you're buying this token," and it's not some, you know, mumbo jumbo, but she can actually understand it. You know, that's not the case in lots of tokens out there.
I think part of that is because the creators of tokens were operating and trying to figure out how to operate in this gray space. Like, let's get out of the gray space.
Richard, just to be clear, we welcome clarity in the rules, and we look forward to working with all regulators.
I fully understand that. Thank you very much.
Thank you. We request participants to limit their questions to one per participant. Your next question from the line of Mark Palmer with BTIG. Please go ahead.
Yes, thank you. Good morning. We are seeing a lot of the crypto institutional trading focus on the derivative space, which, you know, has been huge in the rest of the world for a long time. It's really beginning to gain some traction in the US, or at least it was prior to the recent downturn. Can you talk about Galaxy's derivatives offering, how you are shaping that up to not only fit client needs, but also take into account the competitive environment and the regulatory state of play?
Sure. We think it's one of our best businesses and one of our advantages. Partly that's just the team we have on the field and their knowledge of how to run a derivative book. You know, when I think about our loans to miners, you know, and why we didn't suffer any losses in this big drawdown, it's because we went to most of them and said, "Hey, we think you should collar up your loans. Buy put, sell calls, and, you know, build it into structured notes, you know, or build it in their loan agreements." That's that collaboration between our credit business and our derivative business. I think our clients were happy that when, you know, crypto went down, they didn't have to puke out all their Bitcoin.
We were happy because it made our loan book much safer. I think that structured product actually selling TradFi and crypto hedge funds, you know, volatility products, using it for private equity people that wanna hedge, that business is only gonna grow. Our derivative business is kind of almost a classic TradFi derivative business moved over to crypto. When people talk about crypto derivatives, mostly what they're talking about are the futures that players like FTX and Binance offer, which are, you know, overnight or actually, you know, instant representations of a potential token. We're not in that business yet. We trade them a lot, but that's a business that we're not in. That's...
You know, that word derivative is a little tricky in the crypto sphere. Our derivative business looks more like a TradFi derivative business, in terms of it's a big options book, it's structured products. We think that's only gonna grow.
Thank you. We have next question from the line of Owen Lau with Oppenheimer. Please go ahead.
Good morning, and thank you for taking my questions. Given what the industry has been through over the past few months, and I know, Mike, you just talked about regulations, and we appreciate your color, but what are the top priorities that the industry can do to regain some of the credibility?
In terms of directing your investment dollars into private companies, have you changed any of your philosophy that you would allocate more into certain projects that the industry should do more, and also less on certain projects that you think the industry shouldn't go further? Thank you.
I think the big takeaway from the last quarter was that the on-chain. You know, why do people get into crypto? One of the dominant reasons was transparency. If you think of things that were on-chain, on-chain lending, it was all transparent. No one's bitching about Compound or Aave, you know, these on-chain lending platforms. I just know it's all right there. Where it was the lack of transparency at places like Celsius or other credit shops where, you know, retail depositors left their Bitcoin or their Ethereum or their stablecoins, and next thing you know, had their money levered up 30x, 40x and invested in other projects, and they were taking, you know, lots of risk. I think if there's one lesson, it's the industry needs more transparency.
You know, you could run those same businesses and actually, you know, put the portfolio on-chain. We're somewhere halfway in between, in that we're a public company, we offer transparency quarterly. We run a much more conservative shop. We are still a TradFi company that deals in crypto. I think that push to having certainly those retail-facing clients a lot more transparent, right? They needed to operate like they were regulated entities, and they didn't. Now they're either gonna get regulated or they gotta operate with a lot more transparency.
I think there's probably a lane in there for us to exploit because I think, you know, we'll pull our skirt back and, you know, show our balance sheet, and we do it every quarter.
Got it. That's very helpful. The public market has come back quite a bit so far in the third quarter. Could you please talk about the activity in the private market, maybe including how much capital on the sidelines, fundraising, and valuation over the past few weeks, compared to the second quarter? Thanks.
You know, there's still. If there's a hot deal, it's still trading at, you know. There's a couple deals out there that surprisingly at, you know, the issuer getting terms that we don't think they should. It looked like an old deal. If there's a really hot deal, it feels like lessons weren't learned. There are not a lot of those. Really good teams and really good tech are still attracting money. Everything else seems to be wait and see. Like, I think there's a come to Jesus moment coming where companies that raise at really high valuations have enough cash, but their next round might be a down round, and there's probably a big opportunity in, you know, raising a convert fund or being in that restructuring biz.
Because people had just raised money, if you were lucky enough to have raised money, you can wait and see. The private valuation game changes much slower than the public valuation game. There's still, like, we marked our private book down a lot, and. You know, I'm not sure other people are marking their books down or how companies are thinking about it. I don't think you can expect that gap to close in three months. I think that's a 15-month, you know, wait and see thing. I would tell you that a lot of participants, because it was only a bull market, don't even really understand the mechanics of when money is raised at a high pre-money valuation and gets crammed down, what it does to the other shareholders or quite frankly, the employee stakes.
Got it. Thanks, Mike.
Thank you. We request participants to limit their questions to one per participant. We have next question from the line of Jamie Friedman with Susquehanna. Please go ahead.
Hi. Thank you. Damien, I think in your prepared remarks mentioning, and it says in the press release that you onboarded over 40 new counterparties to the trading platform. This one's about GDT. I was just wondering, how do we think about critical mass? Like, I think you have 850 some odd. You know, is boarding an incremental 40 important? How much concentration is there within the 850 that you have on the counterparty side? Thank you.
Yeah. It's a good question. The answer is it depends on who they are. You know, of the 40 that have been most recent, you know, encouragingly, they are some larger AUM organizations that have taken time for us to get onboarded. You know, the large TradFi asset management groups do, you know, as you would expect, an extra amount of diligence, and the ISDA negotiations just take that much longer, as people have to get comfortable with our credit and a whole host of things. The 40 that have come recently, in a lot of cases have been really significant institutions. We're very excited by that.
The competitive landscape that we've talked about a bunch on this call has allowed us to advance those onboardings and develop those relationships more quickly as services that those clients need are less easily available from some of our competitors than they used to. You know, you should expect to see a continuation of that. I think a lot more of our onboards, as a percentage, are in the TradFi space relative to the asset management groups, of which there are many who are crypto-native and focused on crypto. They are important. The second part of your question, you know, much like in TradFi books, when you look at the Goldman Sachs, Morgan Stanley, JP Morgan distribution of businesses, the 80/20 rule applies here in the same way that it broadly does there.
Got it. Thanks for the color. I'll drop back in the queue.
You know, one last comment I'll make, and you know, I qualify this, so my numbers aren't gonna be perfect. But when I think about, you know, how do we become 400 people, you know, I look at our stock sometimes and where it's trading. I was like, geez, last time it was down there we had $700 million of book, and our operating businesses probably were doing less than $15 million of revenue, and we think they'll do close to $200 million this year. You know, we really had a business plan in late 2019 for great operating businesses, but not a lot of juice flowing through the machine.
You know, in the last two years, we've spent a lot of money, time, and effort building up these franchises, which are starting to hit critical mass. I don't want. You know, sometimes the volatility of our book just, you know, outweighs or obscures the actual business that we're trying to build, right? Which is a long-term sustainable business servicing the institutional clients. That's why we have 400 people, right? If we were just an investing business, we'd have 40 or 50. You know, I. It can frustrate me at times because the way we set this company up, you know, has both businesses under the same roof.
I just wanna keep that focus on really this kinda grinding growth path to building sustainable, you know, profitable businesses on the institutional front.
Thank you. Your next question from the line of Kevin Dede with H.C. Wainwright. Please go ahead.
Good morning, Mike. Thanks for fitting me in at the end. Hey, listen, I'm just kinda curious, as you see sort of, you know, the whole crypto space move through this downturn, which businesses do you think, you know, your eight operating businesses respond most favorably as the environment changes? I mean, you talked about your derivative business being pretty strong in helping manage your lenders, and you're also talking about your mining business, wanting to see more investment there. What do you think is the best way for us to think about, you know, Galaxy rebound here?
Yeah, I guess, listen, mining is just gonna happen because we had invested in it and the miners are coming off online. You will see us going from mining 1.5-2 coins a day towards 10 coins a day over the next, you know, period of time. That's gonna have more revenue. Listen, I think in general, real big opportunity to consolidate mining, but it's a tough business. A lot of money got invested and hash rate continues to stay high. People are having a hard time finding good places to plug in their chips. Being excellent at mining means a lot more than it did in a complete bull market. Being excellent, what do I mean by that? It's having access to low power.
It's having teams that actually know how to keep your chips online and actually having shelf space. The business I think we have the most upside in is from where we are now is our asset management business. Listen, we did a lot of our best investing on balance sheet at the expense of growing asset management in the past. If you look at our balance, you know, our. I talked about it at the start, right? We've turned $350 million into $1.9 billion or whatever we are today. You know, with spending a lot to finance the rest of the growth of our business. That wasn't in asset management. We're now building out, we think, world-class product, right?
Our interactive fund, our venture fund-to-fund business, our alpha fund. I think you'll see that as a continuing theme. Growing that business is, it's a real focus here. We've got great partners. In some ways, that suffered at the expense of our balance sheet growing, right? We had a lot of our best investors on the balance sheet side. As we migrate more of that to the asset management business, I think that should be a big growth opportunity.
Thanks, Mike.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back over to Michael Novogratz for closing remarks. Over to you, sir.
Yeah, guys, I hope you got my enthusiasm for our team. Listen, I didn't tell you, like, we're bullish. We are. We've come out with a new brand. We're rolling out a complete new brand for Galaxy, cool logo and a feel with our website and our brand that our marketing team had worked on for a long time in the next few weeks. We've got our new office remodeled a little bit. We are. We're in this for the long haul. Like I said, I will never be happy losing 29% of my balance sheet in six months. As an investor, it has kept me up at night. I'm really optimistic about the runway for our businesses.
I still think this is a space that over the next two to five years should be a really interesting and bullish place to be. I hope you got those messages and look forward to talking to you next quarter.
Thank you very much, sir. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.