Good morning, welcome to Galaxy Digital's fourth quarter 2022 earnings call. Today's call is being recorded. Should you need assistance, please signal a conference specialist by pressing Star then zero on your telephone keypad. At this time, I would like to turn the conference over to Elsa Ballard, Head of Investor Relations. You may begin.
Good morning. Welcome to Galaxy Digital's fourth 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 Regulatory Authority 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 turn it over to Mike Novogratz, Founder and CEO of Galaxy.
Good morning, everyone. Last time we did this was November 9th. It was two days after the FTX debacle. Man, it seems like one year, though it hasn't been that long. I thought about my remarks today, and at one point I thought about calling them the Tale of Two Cities because it feels like overseas crypto is really doing really wonderfully, and domestically there seems to be a regulatory onslaught. I changed my pitch to The Good, The Bad, And The Ugly. It was a Clint Eastwood movie for you youngsters. Listen, there is a ton to talk about today. I'm gonna try to focus on high-level stuff, why I'm excited right now, what I see going forward, why I'm excited about Galaxy's opportunities, how I'm framing the world.
I'm gonna have Christopher Ferraro, kind of really take you through our businesses and our strategic opportunities. Alex Ioffe, to really bring you through the numbers. Let's start with the good. I don't wanna bury the lead. This is crypto's moment, right? Crypto was, in lots of ways, created, for this point, right? Satoshi Nakamoto, way back in 2009, worried about the breakdown of the legacy financial system. He worried about populism, infecting our politics and a constant printing of fiat currencies in a debasement of money, and created Bitcoin. Bitcoin really is the first decentralized store of value or money, which then really gave birth to this whole industry of a decentralized revolution.
There is nothing like a banking crisis in the U.S. , where one day Silicon Valley Bank is healthy and three days later it's out of business. Where Signature Bank is a key part of the infrastructure for lawyers in America, for crypto, for real estate in New York, and a week later it's out of business, to remind you that our system is fragile. We have been on a debt orgy, literally gorging ourselves with cheap money for years, really, you know, post-2008, certainly, and have built up a debt to GDP in this country that might be unsustainable.
I always say I go to bed and I say a Hail Mary, hoping that the stewards of our country and our economy can land the plane, can actually maneuver our economy into something that's sustainable without a real disaster. That challenge is real, and the challenge gets worse and worse. Things like this banking crisis are a great reminder. It gives Bitcoin and Bitcoin's community unbelievable resilience, right? It gives the crypto community unbelievable resilience because it literally is like an adrenaline shot of, this is why we got into this. I look right now and say, "What's the good?" You know, Bitcoin's trading over $27,000, Ethereum over $1,700. On a risk-adjusted basis, that's volatility-adjusted, Sharpe ratio-adjusted, Bitcoin and Ethereum have been the two best performing assets in the world this year.
They've been the two best-performing assets in the world over the last two years. They've been the two best-performing assets in the world over the last three years. Whatever Jamie Dimon wants to say, whatever the Biden administration wants to say, they're just wrong. The world knows that, right? Crypto started as a retail phenomena. It started as the little people's revolution, and it continues to be. We got in this business wanting to connect institutions to this market, to this new phenomena, to these new technologies, and continue to see a really interesting lane for Galaxy. You know, we're as resilient, I think, as the crypto community.
You can take shots at us, you can knock us down, but we're gonna be here, we're gonna be coming to work every day, and we're gonna continue to try to build these bridges. Like, I when I say good, it's good in price action, it's good in spirit, it's good in narrative, and it's good, quite frankly, overseas. We see unbelievable adoption, right? If it's the Mid East, if it's Hong Kong's new regulatory regime, we see lots of exciting things happening in Europe. Lots of progress being made. You know, what's the bad? In some ways, the regulatory regime in the U.S. is very tough.
My own narrative on it is it was making lots of progress, until FTX, then the Democrats felt foolish that they were so close to Sam Bankman-Fried from the SEC to the CFTC to the Biden administration, and have used this one example of, you know, horrific fraud and being snookered by a guy in Bermuda shorts, to just say the whole thing is bad. Caitlin Long wrote a great editorial in The Wall Street Journal yesterday. People should read it. She was really articulate about you don't want to throw the baby out with the bathwater, but we see that consistently. If it's the government trying to pressure banks not to be in crypto, there's regulatory enforcement after regulatory enforcement, you know, the SEC seems to be issuing Wells notice weekly.
You know, there's gonna be a huge backlog of judicial proceedings. You know, that's not good for innovation. It's not good for America's chance to lead this industry. It's pushing people offshore. We're fighting back. You know, we've got a guy in D.C. today trying to educate. I've been on the phone plenty with, you know, both Republican and Democratic congressmen and senators trying to make the case that the Biden administration's really attack on crypto is shortsighted. Again, what's good about this is despite all that, despite what you would think are insurmountable odds, crypto prices are higher, activity is moving up, and, you know, we see a pretty promising future. Listen, we have three main focuses this year in each of our businesses, right?
We've broken our businesses up and by next reporting cycle, we're gonna re-segment our earnings, so you can see them more clearly into the markets business, the asset management business, and the infrastructure business. In markets, we are frantically trying to finish and launch our Galaxy Prime, our G1 offering. We think it's gonna be best in class. Chris Ferraro's gonna talk about that. In asset management, we're trying to and I think we'll be successful raising, you know, active, as opposed to passive asset management, active, you know, money to manage for other accounts. You know, higher fees plays into our strength of being able to navigate these markets.
On the infrastructure side, you know, right at the end of the year, we spent a whole bunch of money buying Helios, a big data center, a mining operation in Texas. That is coming online fast, as fast as we hoped it would. You're gonna see our mining revenue and our hosting revenue pick right up. We think that will be a, you know, a positive EBITDA business for us this year and are really excited about it. Things feel good on the Galaxy level. The good, the bad, the ugly. What's ugly? Well, and I feel for you, our stock price has been ugly. Right? I said last earnings call, I cared a lot about the stock price, you know, it's lower, not higher.
It's lower with Bitcoin higher, and it's lower with our company doing better. I looked as of Friday, best estimate for, you know, partners' equity, our book, was roughly $6.60 Canada, with the stock trading, you know, close to four Canada. The way I look at things is we have an operating business that I think will make money or at least break even this year, and if not, should come close. Again, I said by next reporting, we're gonna break that out in a more clear way for people to see it. We've got a book that certainly feels like it's bottomed.
You know, Alex will take you through, you know, the markdowns in 2022 in our private portfolio, losses, you know, the FTX loss and everything else that hit partners' equity. We've cut costs. We took the bonus pool way down last year. We continue to understand that, you know, we need to grow, but at the same time, be very prudent with how we spend our money. The way I look at it is if book has bottomed and is heading up, and our operating businesses should at least break even or come close to it, our stock is just at the wrong price. We had bought stock last year. The Canadian rules, the exchange rules limit how much you can buy per year.
We can't start buying our own stock again until May 15th. You know, hear me loud and clear, if our stock is still anywhere close to here, we will, you know, file with the Canadians to be able to use some of our capital to buy back stock. With that, I wanna close and pass to Chris to kind of come into the detail of Galaxy itself. I would tell you, I'm proud of our team. This has been a trying five months. It was, you know, a all hands on deck.Event just two weeks ago, weekends ago, and I think our team handled it wonderfully. You know, we've got diverse bank and brokerage accounts.
We were ahead of the game on lots of ways, and so I think we're coming out stronger than we were with our peers and lots of our competitors, either out of this business or weakened. I'm optimistic and bullish. I'm gonna pass it to Chris.
Thanks, Mike. I'll now cover some of the more detailed updates for the three strategic priorities that Mike mentioned earlier. First, we have GalaxyOne. On the last earnings call, we highlighted that we began the build of GalaxyOne, our unified technology-first platform for institutional clients to engage with digital assets. Our first product release will be Prime, integrating custody, trading, lending, and derivatives for institutional participants through a unified tech and regulatory compliant platform. We've dedicated a significant team across all areas of the organization focused on the build-out, the majority of which are in our product and engineering teams.
Some specifics on what differentiates our GalaxyOne offering are: a licensed, regulatory compliant, institutional-only platform with a focus on robust risk management and reporting, a multi-custodial model that will include a number of different qualified custodial integrations, a hybrid liquidity model that leverages our best-in-class principal liquidity, powered by our in-house smart order router, integration with our existing financing and derivative offerings in order to provide cross and portfolio margining, access to our in-house research, and a dedicated customer success group to provide white glove client coverage. Given the events of 2022, not just in crypto, but throughout the broader financial system, we believe trust and transparency will be the quintessential factors for early success. We've recently launched a demo of the trading stack and have been giving sneak previews to prospective beta customers.
Initial feedback has been overwhelmingly positive, people have been asking for documentation to onboard. We intend to release our beta to select customers in Q2, fast followed by margin and secured funding capability in the second half of the year. We've also begun the groundwork of the future of GalaxyOne beyond just Prime. We're aiming for it to be the single pane of glass for Galaxy customers to access existing and new products that Galaxy can offer. This includes SaaS-based offerings integrating with GKE for out-of-the-box financial services infrastructure. These capabilities can give rise to future Galaxy offerings for global settlement, payments and commerce, and through a potential SaaS partnership, help elevate the entire ecosystem. We can also expand into private markets and look at issuance, tokenization, and fund management.
This is all still very early. We intend to prove our product and engineering capabilities step by step to meet the market as it evolves. Second priority in the asset management business is an acute focus on launching liquid, active, and alternative investment strategies in order to grow higher fee-paying AUM, while leveraging a growing regional partnership model to expand our passive product reach. One key initiative that is well underway at Galaxy today is the migration of all of our alternative venture investing teams into the asset manager, with a goal of creating a unified venture platform for institutional LPs to access our talent and our products. As a result, soon, you will see previously reported balance sheet investments reflected in the AUM of Galaxy Asset Management. That does not mean shareholders no longer receive the benefit of the venture investments on balance sheet.
On the contrary, Galaxy will continue to own and manage our existing portfolio and is committed to seeding new funds we bring to market, ensuring shareholders retain exposure to venture investing through our stock. However, what this will do is add larger investment buying power to the Galaxy platform, while at the same time generating incremental high margin management fee and carry interest operating revenue streams alongside our already scaled Galaxy Interactive venture product. In addition, we also intend to expand our actively managed liquid product suite to include a long, short fund, providing investors with lower vol risk managed exposure to liquid crypto assets, and expect to launch this fund in the second quarter. We've also added some exciting LPs this year as well. Galaxy Interactive Fund II received a capital commitment from Texas Teachers just this February.
Also in the fourth quarter, we announced a strategic partnership with Itaú Asset Management to develop a comprehensive suite of Brazilian-listed, physically backed digital asset ETFs and are actively exploring regional partnerships in both Europe and Asia. Finally, the third priority Mike mentioned, is integrating and scaling our recent acquisitions in our digital infrastructure business. In terms of our mining strategy, we are focused on significantly growing our capacity for both proprietary and hosted Bitcoin mining, expecting a total targeted hashrate under management of over four exahash by the end of 2023, with an approximate 50/50 split between prop and hosted Bitcoin mining. That's nearly 3x where we were at the end of 2022. This is all while mining Bitcoin well below its fair market value, growing recurring hosting fees, and focusing on our energy management strategy.
We'll get there by integrating the Helios site we acquired in December, which provides access to tax-efficient mining infrastructure and removes any material reliance on third-party hosting providers we've previously had. We expect to energize approximately 200 megawatts of mining capacity at Helios alone by 2023 year end, with incremental investments, the facility has the potential to scale to north of 800 megawatts. Another important element to this operation is how we manage power. While the previous owner was generally unable to enter into fixed price hedges, we do have this capability due to our creditworthiness and have already begun to implement this strategy.
As of today, we have also begun to energize our smaller organically built mining site in Diboll, Texas, with a plan to have over half of the site energized in the next three weeks, with the full 16 megawatts of capacity scheduled to be available by the end of Q2. Finally, we remain committed to our goal to reach an 80% sustainable energy mix and are actively pursuing multiple long-term solutions to achieve this target. Additionally, on February 21, 2023, we acquired the assets of GK8, a secure institutional digital self-custody solution. The transaction accelerates Galaxy's product innovation and development by adding a team of nearly 40 professionals, mostly in technology and R&D roles that include cryptographers and blockchain engineers.
The deal also expands Galaxy's international presence with the addition of an office in Tel Aviv, where just this week we have a team over there working with integration and product roadmap with Lior and Shahar. Galaxy will assume all GK8 clients, a majority of which are net new to the firm. We believe the market opportunity for GK8's custodial technology services is expanding rapidly, particularly as institutional demand in the asset class grows and as the need to safely and securely hold cryptographic key material has become a global focal point for regulators and market participants alike. As such, our primary focus today is to let that talented team there do what they do best, build great cybersecurity tech while we help to invest in GK8 sales footprint and existing product roadmap to begin capturing market share this year.
We also intend to utilize GK8's custody solution as an internal customer in the ongoing development of GalaxyOne. Looking ahead to 2023 and starting with our capital allocation priorities. As Mike shared before, we are positioning our balance sheet in a conservative way with more cash held in U.S. depository accounts and less balances on exchanges. While you can look at our financial statements for results as of December 31st, 2022, I'm more focused on the quarter-to-date preliminary results we published this morning. You'll see our preliminary 2023 year-to-date earnings estimate of approximately $150 million as of Friday, March 24th, bringing our partners' capital back above one and a half billion U.S. Our liquidity position remains intact even after recent dislocations in the commercial banking sector.
In the first three months of the year, we are expecting to show both net profits in our operating businesses as well as positive gains from our balance sheet holdings of liquid coins and investments. Moreover, our trading operating business benefited from heightened market volatility, increased volumes from existing clients and counterparties, as well as market share gains. We remain focused on surviving the downturn in crypto markets by continuing to manage costs, with the goal of running our operating businesses at break even or better.
I was proud to see that in our cost control efforts in 2022, including while our overall cash compensation rose 12% because headcount rose nearly 40% year-over-year, we were laser focused on variable compensation and subsequently reduced 2022 cash bonuses on average 63% per employee from 2021 levels, noting that cash bonus reductions disproportionately impacted the senior team. We also focused on cutting non-personnel costs, with professional fees down almost 50% year-over-year. However, we do expect our audit and legal costs to remain elevated for the time being as a cost of doing business as a highly regulated public company in our industry and in the U.S. in this environment. Turning to capital markets. We continue to remain focused on a U.S. listing and are working diligently through the process, which has remained frustratingly slow.
We also purchased and canceled $55 million worth of the 3% convertible notes we issued in December 2021. We purchased those notes for approximately $30 million, including accrued interest. We will also plan at this time on restarting a share buyback program in May when we are allowed to by the TSX. Before handing over to Alex, I just want to reiterate some of Mike's comments from earlier and share an update on the impacts of the business from the banking crisis earlier this month. We've continued to operate business as usual while helping institutions navigate highly uncertain volatile marketing conditions 24 hours a day. As we previously disclosed, Galaxy has no material exposure to SVB, nor do we bank with them. We continue to have no material impact from additional bank closures, including Signature and Silvergate.
We have a diverse group of U.S. and global banking and brokerage relationships across our business lines as part of our vigorous risk management process. We remain committed to helping clients navigate the ever-changing market environment and ensuring firm and client assets remain secure. Most of our deposits are at a large U.S.-based bank. All company and client assets are currently secure and accessible. Moreover, in the midst of a banking meltdown, our trading desk saw one of its busiest days in terms of client activity and volume in its history with no interruptions. This is even with the loss of the Signet and SEN networks. Our desk continues to settle fiat 24/7. We remain over-allocated to stablecoins in order to ensure our ability to serve our clients. We've seen many market cycles in both crypto and TradFi.
While we continue to use that experience to successfully navigate short-term downturns, we remain committed to ensuring Galaxy is positioned for the inevitable adoption of digital assets. With that, I'll turn the call over to Alex to briefly cover financial results.
Yeah. Thank you. Good morning. Mike and Chris covered a lot of ground. I will stick to essentials. Market conditions for crypto were challenging last year, with a number of adverse events during the year, ending with FTX market failing in the fourth quarter. In light of that, our business performed well. We ended the year in strong balance sheet position, with over half a billion in cash and $1.4 billion in equity capital. We reported a loss of $1 billion for the year and $288 million for the fourth quarter. These losses were primarily attributable to unrealized marks to market on our investment portfolio and on our long digital assets positions. In the first quarter of this year, some of these marks reversed.
Overall, through last Friday, we estimate profit before tax of $150 million, which brought our equity well over $1.5 billion. A good start to the year.
As Chris mentioned, we navigated recent discombobulation in commercial banking without issues. At the end of last year, we held approximately $960 million in liquid assets, consisting of $540 million in cash, $130 million of net liquid digital assets, and $280 million of stablecoins. Back to the operator to take your questions. Thank you.
We will now begin the question and answer session. To ask a question, you may press star than one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star than two. Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. The first question comes from Andrew Bond with Rosenblatt Securities. Please go ahead.
Hey, thanks. Good morning. Just in light of the recent banking crisis, with the most widely used banking off-ramps being shut down in recent weeks, have you seen any impact to your trading business? You know, when you look at the impact of a tighter lending and venture market, can you talk about the opportunity to win share across your businesses and perhaps make more strategic acquisitions where others are capital constrained?
Yeah. Hey, Andrew, and welcome to joining us here at Galaxy and covering us. Really appreciate it. Yeah. You know, as I mentioned in my prepared comments, the banking crisis actually provided a pretty good opportunity for us to prove A, our resilience and the fact that we had multiple providers. We actually operated as a pretty important liquidity center during all that for market participants. We saw some of our best volume days we've ever had in the history of the firm. And we also were here for portfolio companies.
We spent all weekend with portfolio companies working on different, potential, alternative financing solutions for them, for our portfolio companies and companies that weren't in our portfolio, in the instance where those banks ultimately failed, which they didn't. Ultimately, it ended up not being a problem broadly. I think the, you know, that event proved the resilience of the way we built the business, proved our own risk management. Those are the kinds of events where if we've done things right, we can actually act on the front foot and be offensive, which we did, in a way that, you know, as Mike articulated, like, we were all very proud and humbled at from the team side.
Yeah, we think it's. We performed well, we were there for clients. Going forward, I think it is an event that we will look back on historically and it will give us the opportunity to now be one of the main go-to places in the market going forward, who has those relationships that are gonna with major banks that are gonna be scarcer to find going forward. Since we have those, we think it actually positions us quite well as to be an aggregator for the end client points in the industry going forward.
Great. Thank you.
The next question comes from Deepak Kaushal with BMO Capital Markets. Please go ahead.
Oh, hi, guys. Thanks for taking my questions. I've got a lot of them, but I will try and limit it to one. Just big picture, you guys refiled your S-4. What's left to be done between the back and forth with you and regulators, before they consider effectiveness? Is there more on the to-do list, or is it just wait and see how the SEC feels about your filing application? Any thoughts there?
Deepak, maybe you should email Gary.Gensler@SEC.com. I'm teasing.
Dot, dot gov.
Yeah, dot gov. Right. Listen, we are answering the questions they ask us, and we send our answers in, and then we wait for their responses. I am not optimistic that this happens quickly, just given the overall tone of the SEC and the Biden administration towards crypto. I think the people that we deal with at the SEC are, you know, answering our things earnestly, and they're, you know, they take their time to try to dig into these questions. It feels like not one crypto company has made it through that process this year or last year, and so to be optimistic might be a little foolhardy.
That said, you know, from the regulatory environment we get we have lots of touch points with lots of regulators, and we, as Chris mentioned, spend a whole lot of money and time, answering questions, and we will continue to do so. I mean, it's the lane we chose, right? We chose this lane to be a regulated player, trying to bridge this broadly unregulated crypto community with institutions. It's a damn painful lane. I do think there will be light at the end of the tunnel.
I'm just not sure when.
Yeah. Deepak, we cleared roughly 70 questions on the last filing. We'll see what comes back from SEC this time. It's been about two months since we submitted.
Thank you.
The next question comes from Michael Legg with Benchmark. Please go ahead.
Thanks, good morning. On GalaxyOne, you mentioned that you're fully licensed and regulatory compliant, you know, in today's regulatory environment where we really don't know what's coming down the road except, you know, that the government's obviously all over the industry, can you talk how you navigate that regulatory environment when we really aren't set on what we have down the road and how you can assure your clients of that? Second, just on that, you mentioned margin in the second half. Can you talk a little about the leverage allow and the collateral? Thanks.
Sure. Thanks for joining us today. The answer on how we navigate a dynamic and changing regulatory environment is we try to ourselves be dynamic and to evolve as it changes. Today, we already operate through FinCEN a money services business, and we have 30... over 30 state-level MTLs here in the U.S. and growing every day. We have line of sight to getting all 49 except New York. We are also in flight in process with NYDFS for New York BitLicense and Trust.
From our layer, in terms of building the platform through which clients are gonna sort of come in the door and then, and then sit one level above the actual custodial layer, we intend to be US state regulated in all aspects that we understand allow that business to operate. That's not a new regulatory regime necessarily in broader financial services. We sort of fit under the same umbrella. One layer below, we also only work with companies that we believe are qualified custodians that have state-level trust charters here in the US today.
Obviously, we're looking hopefully for the OCC and maybe for the federal side to come through and provide those charters for digital asset custodians as well. As that happens, those groups are gonna be at the front of the line to plug into GalaxyOne. We're really meant to be a regulated, transparent layer for clients to interact with, who then have integrations to other best-in-class regulated participants. It's also important to note we have the ability to operate that platform outside the U.S. through regulatory licenses in I think seven different international jurisdictions today. We're looking to extend that as we see demand show up for it. On the margin side, the.
you know, we're not, we haven't yet finalized exactly what the level of collateralization and the margin trigger levels are gonna be, you should think about it, that as being a white glove institutional platform, but having a lot of technology and a lot of prescriptive automated rule sets around risk and margining and de-leveraging and moving on collateral and things like that. we're gonna operate that business with a lot of tech behind it, but in the same way that we've operated our lending in the past, where I think objectively on the lending business, we've done a pretty good job in terms of risk management, understanding volatility when you're adding a small amount of leverage to these assets.
Great. Thank you.
The next question comes from Chase White with Compass Point Research & Trading. Please go ahead.
Thanks. Good morning, guys. You guys have obviously grown counterparties and continue to do so in the trading business. I'm curious if you're seeing the average counterparty increase its kind of activity in recent weeks given the move in crypto prices. I mean, would you expect in a normalized environment for newer counterparties to be bigger traders than earlier onboarded counterparties, or is the kind of average trading volume per counterparty getting smaller on the margin? Thanks.
You know, it's a good question, and I don't have the exact numbers in front of me, but we can certainly get back to you with what they are. What I've seen anecdotally is, you know, there are some trade fi hedge funds that all had good 2023s... I'm sorry, 2022s, right? If you think of the multi-strats, you think of the macro funds that have all created a crypto sleeve or a crypto pod, and those guys are well-capitalized. There are new participants, or enhanced participants, right, from the kind of traditional hedge fund space, both here and in Europe that are participating, that weren't as big last year, those are bigger tickets.
The crypto hedge fund universe really got kneecapped in 2022. Just started from a much smaller asset base. While they've had, I'm sure, a decent first quarter, it's coming from a smaller asset base, right? If you, if you do the old math, someone who's down 80% and then makes 50At 20 goes to 30 and they're still down They're still down 70% from the high, right? It's when you have losses like people did last year, it takes a while to kind of rebuild that. What's promising and what has driven crypto broadly this year is two things. one, all the selling that needed to get done got done, right?
There was so much bad news if you had to sell between tax law selling and just the nervousness of, "Oh my God, this thing could go to $8,000." You know, people were in sheer panic. You had sellers exhaustion. You've had Asia reopen. You know, China has, you know, post the Xi protests around COVID zero, China took the regulatory boot off the necks of their tech companies, and that includes crypto. You're seeing with Chinese traveling, you're seeing, you know, more activity from Asia, and you're seeing retail who is just resilient. They believe in this space.
It's one of the things that drives me crazy with our politicians who try to be paternalistic and say, "Oh, we need to protect retail." I said again, Bitcoin and Ethereum have been the best risk-adjusted investments over two years, three years, four years, this year to date. Retail gets that. This has been their way of participating in financial markets or one of their ways. A lot of the price appreciation is coming from retail. So, you know, we see that not directly because we don't do retail directly, but we do a lot of, you know, B2B2C, and so we see it through counterparties of ours. But the market feels strong. When I look at it technically on, you know, charts, we've had big weekly closes.
I'm surprised to hear myself say this given where my mindset was in late December, but it would not surprise me if we were substantially higher, three months, six months, nine months from now.
Great. Thanks.
The next question comes from Bill Papanastasiou with Stifel. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my questions. Just wanted to focus on the infrastructure side of the business. The company is now guiding towards a 4.0 exahash hashrate under management by the end of the year, and an increasing portion of that is expected to be derived from self-mining operations or a 50/50 mix with hosted mining. From a mining perspective, was hoping to gain a bit more insight on your outlook and strategy going forward, just given the fact that the halving is expected to occur in about 12-13 months. Thanks.
Yep. You have those numbers right in terms of what we're guided towards to the end of the year this year. The strategy there in the mining business was really solidified at the end of last year when we made the strategic decision to jump in and purchase Helios. Point one on the strategy was vertically integrating ourselves in the business was really something we decided was critically important if we were gonna stay in the business.
Because controlling our own destiny from a counterparty perspective, being able to be the manager of power, the number one input cost in the mining business, was something that we've just seen market participants whiff on over and over again over the last few years and was not something that we were gonna do. We were gonna go forward sort of relying on other parties to do. Owning the data centers vertically was strategic priority number one. What we're focused on there and the reason we chose that asset after looking at many assets was we believe that asset is, one, located in a really attractive regional area that has long-term positive power dynamics for us.
As you point out, as you think about Bitcoin mining going forward, as it relates to the halving over time and competition coming in, what really matters is having a very efficient, low-cost operating site with redundancy that can always have uptime and can drive costs down and maintain low power over time. Those were the key criteria that made us choose to go towards Helios. We've previously invested in ASICs directly in the business, which you've seen grow over the last year and a half. That investment in ASICs is as those is the investment today we're prepared to make in terms of allocating our own capital to the ASIC specifically.
Getting those ASICs online now in our new data centers that we own is gonna be the process in 2023. That's part of the we talk about the ramp up to ultimately being roughly 50/50 self-mined hosting, that's our own ASICs we've already owned sort of, coming in and being energized. We like the idea of having a balanced mix of our own ASICs and having hosted clients.
We think that that is a smart way to balance capital investment in the space to add in clients to the Galaxy platform overall, it plays into the story of having a virtuous cycle here at Galaxy where you can have a client who, for example, hosts a number of ASICs at your data center, but then also is a client of the markets business to manage its liquidity as they mine Bitcoin to hedge exposure, forward production, et cetera. Yeah, our core tenets are we vertically integrated, be in a low-cost center, aggressively manage costs from a power management strategy, and then balance our own capital investment with having clients who have their machines that they've invested capital in come host with us.
We have a balanced mix of capital light and capital intensive profitable streams going forward. That's the plan.
Thank you, Chris. I appreciate the color.
The next question comes from Rich Repetto with Piper Sandler. Please go ahead.
Yeah, good morning, Michael and team, and, you know, thanks for the, I guess, the assessment of regulation you did in the prepared remarks and contrasting, you know, what's going on in the U.S. and overseas. I guess with your title too, you offer some balance, some optimism. I guess my question, Michael, is when it comes to the regulatory environment here in the U.S. and you being a spokesman for the industry, it appears like we're at rock bottom. Like, maybe the best thing is that the only that it is so bad. Then I guess the other part of the question is, you know, you expressed some optimism, but, you know, where are the institutional adoption?
You know, do you think that they're getting, you know, seeing the same things, the balance that you sort of outlined in your title, The Good, Bad and Ugly?
Yeah. It's a great question. Listen, there are, you know, we have checks and balances in our government, and the Republicans own the House. They are certainly more pro-Bitcoin, pro-crypto than the Dems at this point. There are lots of vocal spokespeople. Tom Emmer, if you followed him, he's the, you know, minority whip. I'm sorry, the majority whip right now. You know, he's on the side of fairness for Americans, right? That, you know, if I wanna store some of my hard-earned wealth in Bitcoin, it should be my right. I do think you're gonna see no legislation go through that really harms the industry. Then we've got the courts. We will watch these court cases very carefully. There are a bunch that will come up.
You know, judges, generally, you've got half Republican, half Democrat appointed judges, and most of them are independent thinkers and not that political. There's some political judges on the fringes, but broadly, our judiciary is an independent acting body. While certainly it feels like the Biden administration, and this feels like it comes from Elizabeth Warren, who's been very vocal, you know, on Twitter and in speeches about hating crypto. You know, SEC Chair Gensler is very close to Elizabeth Warren, and so you can kinda at least guesstimate where this comes from, has not been helpful.
You know, there's an election cycle coming up, I think it's a stalemate with constant little punches, but I don't think you push the thing over the edge where it unravels. Partly because the American voter cares a lot about crypto, and politicians get that. It was funny. Before Sam Bankman-Fried, all the Democrats were coming around. I was in D.C., I did the rounds. We did a, we sponsored a Black, big, Black blockchain initiative at Howard University. You know, Cory Booker was there, you know, I met with the, you know, Kirsten Gillibrand. They understand crypto. They get it. They like it. They wanna make sure it's fair for everyone. This is a, I think, a moment in time.
There was a vacuum created with the Sam Bankman-Fried. I mean, it was embarrassing for people, right? He was Biden's biggest donor. He was a huge donor to the Democratic Party. He was very close with the SEC, and then they fired their number two guy at the SEC because of it. He was close with the CFTC. In a lot of ways, the whole, the whole group got egg on their face, you know, all through this one guy, and it just allowed this vacuum. I don't think that lasts forever. As well as, you know, America's competitive at its core, and to see this business going to Hong Kong and Abu Dhabi and Europe, at one point starts pissing people off. You know, the crypto industry...
I remember, give you one metaphor, I was on TV randomly when they decided to try to push wrestling out of the Olympics, and I remember making this quippy line. I was like, "Maybe the stupidest thing I've ever heard is someone wanting to pick a fight with, you know, 400,000 wrestlers around the world." I feel a little bit the same thing, like picking a fight with this community that really believes in the technology that, you know, you've got over 250, 300 million people around the world, 50 million Americans that care desperately about crypto, that care about this new way of potentially, orchestrating their finances in the financial system. Picking a fight, it seems foolhardy, and, I think that, in the long run, wins out.
Thank you, Michael.
The next question comes from Owen Lau with Oppenheimer. Please go ahead.
Good morning, and thank you for taking my question. Just going back to the previous question, could you please talk about how this regulatory regime could potentially impact your priority this year? I think you mentioned the profit in the first quarter, can you also talk about any other potential opportunities for Galaxy Digital this year? Thank you.
Yeah. Listen, I mean, the regulatory regime, while it makes it harder for us, it makes it harder for lots of people. Chris gave one good example of, you know, we have good banking relationships, and some of our competitors didn't. That, in the short run, became a short-run competitive advantage. I think banking will be an issue for lots of people. Without big balance sheets, without reputation, without connectivity, it's just harder for, you know, people to get banked. Us figuring out how we can fill that void. In the long run, what fuels any new industry is capital. One of the real tricks is how do you bring capital into this space, right? If we're gonna lend more capital, how are we gonna get that capital to lend?
I think the first step is going to be from this crypto community itself, and it's tapping, you know, the $1 trillion worth of crypto wealth out there, and doing that in very direct and smart ways. Over time, capital looks for returns, right? With short-term rates at 5%, you know, if it's growth equity or if it's crypto, there's just a higher bar to be able to pull in capital from, you know, people that are used to making that asset allocation decision. I, you know, I think you hit an equilibrium and you start growing from that. Like, I think we kind of bottomed out. That's the real trick. We think, you know, I mean, Christopher Ferraro came from, you know, a cap structure credit background.
We think we understand how capital moves and how you can structure things and better than most of our peers in the crypto space. We think there's just gonna be an advantage of being, you know, thoughtful and having a lot of knowledge and history of how to operate in challenging markets.
Yeah. The only other thing I'll add is, while it's hard to see right now where we're all sitting and where the market is sitting, we think that regulation ultimately long term is gonna be our moat. It's gonna be the thing that really catalyzes all of the headlines that you've seen about institutions coming into crypto, about 90%+ of custodians and custodial bank clients wanting to be in crypto. Regulation coming into the fold in the U.S. is gonna catalyze the real wave of institutional capital's comfort level of operating in the space. We have built our business to fit into whatever regulatory regime comes. Now, that takes a lot, as I said, a lot of planning and then replanning, and then refiling and relicensing, and that's fine.
That's what we're prepared to do. Ultimately, we've built the company with the mindset of that's gonna be our moat because as it comes, we're gonna be the company in the space that has followed the rules and that has built an institutional-grade platform that's able to serve clients when they're ready.
Yeah. I guess let me just last thing to chime in. I don't wanna let off the hook, the crypto participants that were fraudulent, that behaved, you know, with stupid risk management, that created so much of this reputation that the regulators are fighting back against, right? I want them brought to justice. I want them put out of business. They've cost me money. They've cost our investors money. They've cost me unbelievable headaches. You know, I in some ways welcome the sweep of the bad actors. What I don't welcome is this idea that you're gonna throw the baby out with the bathwater. I referenced Katie Haun's editorial. Like, this is a real technology that people care about.
This is a real alternative to a way to save money in a world where it feels like the dollar will be debased or all fiat will be debased. It's a real way of monetizing IP, the NFT space, and lots of other. Like, this isn't tulips in century Holland. This is a real technological breakthrough. When I think about AI, it shocks me that we're talking so much about crypto regulation and nothing about AI regulation. I mean, I think the government's got it completely upside down. In lots of ways, one of the best use cases for crypto is gonna be identity around AI. 'Cause pretty soon you're gonna get fake Mike Novogratzes, hopefully with hair.
you know, like, the deepfake world is gonna be so much more prevalent, how do you prove identity in a world like that? Crypto's gonna have, and blockchains are gonna have a huge role in that. you know, it is dumb to think that we should cash this industry because of Sam Bankman-Fried and the Bermuda Shorts, period.
Thanks a lot.
The next question comes from Joseph Vafi with Canaccord. Please go ahead.
Hey, everyone. Thanks for taking my question here this morning. Just, you know, it'd be interesting, we kind of have talked about it a little bit here and there during this call, but just, you know, what are... You know, if you look at the current environment, it could not be more interesting. You got rates still rising. You know, we've got this regulatory backdrop. We've got a lot of other asset classes not performing as well as ETH and Bitcoin. So we've got kind of, you know, a lot of moving parts all over the place.
What are institutional clients saying, like, right now in real time with Bitcoin where it is and its outperformance, on one side, but, you know, on the other side, we've got, these overhangs on regulatory and, you know, this dynamic interest rate environment? Thanks a lot.
Yeah. I think if you're talking like macro hedge funds, almost every macro hedge fund I know likes gold and likes Bitcoin, right? It's a, it's a, it's a pretty straightforward bet, right? You've got geopolitics. I mean, you literally had the president of Kenya standing in front of his country telling his countrymen to sell the dollar. That's unprecedented. You know, this war between China and the U.S. with Russia as a proxy is gonna push the gold narrative, and the, and the, and the digital version of that is Bitcoin. I think from a macro investor perspective, it's very clear. From a, "I work at the endowment or the pension," that game, everyone's slowed down a little bit. You've got a couple different buckets.
If you invested late in the cycle, you have burned your hands and you feel dumb and you're just watching. If you were just getting started, people are dipping their toes in more. I mean, Chris mentioned, you know, an investment from Texas Teachers in one of our funds. You know, that's a very positive sign. We're not seeing a stampede there by any stretch. The institutional space is still slow. What would change that? An ETF, right? You know, follow the news or follow the judicial news. You know, Grayscale had a pretty significant short-term win in their fight with the SEC about, you know, approval of an ETF, where the judge basically said, "What are you guys talking about?" to the SEC.
You approve a futures ETF and not a cash ETF? That just makes no common sense." The SEC was like. We'll follow that. Like, you could legitimately see, you know, an ETF this year, and that would be a huge game changer in terms of institutional adoption. 'Cause institutions wanna participate. They just don't wanna participate and look dumb. Because, again, you know, so much, Sam Bankman-Fried, may he, may he spend his days staring at his navel. So much was set back by that event, and it just takes time to heal.
Thanks, Mike.
The last question today will come from Kevin Dede with H.C. Wainwright. Please go ahead.
Thanks for taking me last minute here. Mike, when you look a little bit deeper, maybe a little more granularity on where you expect or what you've seen in the form of SEC pushback. I mean, what we've seen, you know, historically in the space is more push on, again, lending and token creation, and I'm just kinda wondering what your big fight is with SEC pushback.
Well, listen, the basic issue that most people have had is, you know, what constitutes a security and what doesn't constitute security. We have this Howey Test, which is a early century rule, that doesn't seem to fit the crypto architecture nearly as well as one would like. The SEC has been very reticent to say, "This is a security. This is not." Gensler at times says that they're all securities, and then at times he's, you know, "Well, Bitcoin's not, and Ethereum's not, but Ethereum might be." There's just been a lack of clarity.
For companies, and you can follow this, you know, live in the Coinbase, I mean, I think it's interesting that Brian Armstrong and Coinbase, it looks like plans to litigate this in the public forum, to say, "Hey, we've gone to the SEC and said, 'Tell us what are securities,' and they won't." There's this kinda Mexican standoff. What we've been asking for all along is just clarity. Like, give us a regulatory framework we can work within. You know, Galaxy has a really detailed process of what we decide to participate in with our clients. You know, there's outside attorneys, there's a whole process that we go through it. We think we're doing the right thing. You know, we'll see.
You know, it's a, it's a bizarre position to be in, where you've been doing this since 2017, 2018, right? It's, it's not like this just happened. There, five, six years people have been going there and saying, "Well, this is our process. What do you think?" Not getting any clarity back from the SEC. It's been disingenuous where they say, "Well, just come and register. You can register online." It's actually not the case. There's lots of nuance about qualified custodians and not qualified custodians.
You know, it's a space where I would have hoped our government and our regulators would have sat down, worked with the industry, understood it's a new industry and there's a lot of nuance to it, and to come up with rules both for custody, for trading, for who regulates what? I mean, one of the issues is if these things aren't security, the SEC has no standing. They're in this, you know, very bizarre position of playing poker in essence with do they have the right to regulate or not? They're not easy answers. You know, politics doesn't do well with nuance.
You know, this has been politicized, which is damn unfortunate, because you need really smart people thinking about how do you take this new industry, create a set of rules that allows legitimate players to forward this industry in the U.S. and grow it, and it just hasn't happened.
Thanks so much for the color, Mike.
This concludes our question and answer session. I would like to turn the conference back over to Galaxy Digital CEO Michael Novogratz for any closing remarks.
Guys, I appreciate all your time this morning. I hope you catch some of our enthusiasm. Again, it's not all wine and roses over here. It is tough sledding, but we're optimistic. We have a 400 person workforce that shows up, you know, excited to work every day and is trying to forge ahead. I do think, like I said, this is a year we will surprisingly have macro tailwinds and big ones that I think allows us time to continue to build. By 2024, hopefully the regulatory regime is starting to shift. More importantly, from a Galaxy perspective, our tech build comes online, our mining comes online fully, and, you know, you start seeing the fruits of all our investments and that we've been working really hard on.
I'll leave it at that. Thanks a ton, and we'll be back.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.