Prof G Markets: Paying for Crypto’s Sins — with Mike Novogratz

This week on Prof G Markets, Scott speaks with Mike Novogratz, the founder and CEO of Galaxy Investment Partners, about crypto sociopaths and what it was like to look Sam Bankman-Fried in the eye just weeks before FTX’s collapse. They also discuss what’s next for Binance, government regulations, and why Mike doesn’t want Bitcoin to go to $1 million any time soon. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 1:29Scott Galloway?

  Welcome to a special episode of Prof G Markets. Today, we're speaking with Mike Novogratz, the founder and CEO of Galaxy Investment Partners, on the state of play in the cryptocurrency market and what's in store. I like Mike. I've known him for a few years now. He strikes me as a high-integrity guy, served his country. Seems to be one of the people that's going to emerge from this fire with dragons under his arm. Anyways, with that, enjoy our conversation with Mike Novogratz.

• 1:55Scott Galloway?

  Mike, where does this podcast find you?

• 1:57Speaker 02

  In New York City, having flown home on the red eye from LA.

• 2:00Scott Galloway?

  Nice. So let's bust right into it. You're a longtime Bitcoin bull and Bitcoin was up 73% in the first quarter of 2023. That's versus the NASDAQ up 17%, gold 9%, I think the S&P was up 7%. Walk us through what you think the underlying dynamics were around this pretty serious recovery.

• 2:21Speaker 02

  Well, I think, you know, we started in the hole. We started in the hole for good reasons, right? Sam Bankman-Fried and FTX really dented people's trust in the whole crypto ecosystem. The Fed raising rates as aggressive as they did. You know, Bitcoin was supposed to come down last year, right? If it's a report card on financial stewardship, Chairman Powell looked like a really serious central banker. And so you put those two things together, probably overshot. And by the end of the year, there was such paranoia and fear around the whole crypto ecosystem and Bitcoin included, that anyone who needed to sold, probably already sold. And there was a lot of leveraged shorts. And so, you know, when markets can't go down,

• 3:05Speaker 02

  they go up. And a combination of the Chinese, there was a big protest when Xi kind of doubled down on COVID zero, and people had that white envelope protest, or maybe it was the manila envelope protest. Xi pivoted away from COVID zero real quickly, but he also backed away from Chinese tech. And so the Chinese crypto people felt a lot more comfortable. So also you started seeing Asian crypto and retail coming back in. It didn't take a lot to start moving prices because people were so bearish. And then we got the real acceleration when...

• 3:44Speaker 02

  You know, you woke up in First Silver Gate, then, you know, Silicon Valley Bank. You know, it's really the Silicon Valley Bank Thursday, Friday weekend where people were like, "Oh, my goodness, here we go again." So, the whole reason for crypto, or for Bitcoin specifically, which was this hard asset hedge against the debasement of fiat, kind of regalvanized. People are like, "Oh, governments, even if they're trying to get out of this debt trap, right, we had this debt orgy, are gonna have a really hard time doing it without printing their way out." And I'd say the last thing, which is counterintuitive but real, is that Bitcoin started as a movement

• 4:29Speaker 02

  where people didn't trust the center, didn't trust governments. And so, when you have what feels like an unfair application of the rules, Signature Bank being closed down and Republic not being closed down because Signature was allegedly a crypto bank, that gets people angry. And so, that anger incites the Bitcoin community. And so, this is really, in lots of ways, the crypto community coming roaring back.

• 4:54Scott Galloway?

  Let's talk about the fiat currency, and I should put my bias up front. I'm on the board of a crypto hardware storage company called Ledger, because I wanted to learn about the space, but I'm a no-coiner. And the thing, one of the phenomena that struck me about the SVB run was that there appears to be, and tell me if you agree with this, but a group of people who have such huge investments, including entire venture capital funds and Web3 and Bitcoin, that they have a vested interest in the decline of the dollar and the decline of the US banking system. And I look at someone like Mike Novogratz, "You've served your country." And the people who are most loyal to the US are its veterans. Do you worry that we have a group of people who are very deep-pocketed, have very large

• 5:39Scott Galloway?

  influential platforms, and go on Twitter and catastrophize around hyperinflation or bank runs because they have large investments and assets that go up? When the US banking system shows that it might fail, in other words, is one of the most exciting asset classes a bet against America and is there a problem with that?

• 6:01Speaker 02

  Yeah, you know, it's a great question. I have probably been quoted 15 times saying, I go to bed every night singing all, you know, two All Fathers and one Hail Mary as an ex Catholic, that the stewardship of the US economy stays strong. Like, you know, I don't want Bitcoin to go to a million anytime soon. I think Bitcoin in particular is a report card about the stewardship of our government. And I think what Satoshi saw originally was populism, right? That you get to a point where you've got populist governments that just can't help themselves by spending more than they they can tax and that they can bring in. And and we might be at the point of a really difficult place

• 6:41Speaker 02

  to return from without at least having some inflating away the debt. And so I always thought Bitcoin was a very good hedge to that portfolio. But as a guy who served the country, the last thing I want is, listen, Bitcoin going a million, we've got instability, we lose civil society, and we're all screwed. And so, yeah, I, you know, when guys like Balaji say, I'll bet you Bitcoins at a million, you know, for effect, it drives me crazy because I think it also really infuriates the people at Treasury, Janet Yellen. While the dollar is under attack elsewhere, it doesn't help. And, you know, when you want the regulators on your side, not in your face, you know, but I do, I do get your point.

• 7:24Speaker 02

  And I've been very careful myself to not be dramatic.

• 7:28Scott Galloway?

  Yeah, it's interesting because, I mean, you mentioned anger, that there's a lot of anger among the crypto community and they kind of came back with a vengeance and pushed these assets higher. And I think of when I think of anger, I think there's got to be a lot of retail investors that came in in the last year because a lot of very smart people with very big platforms were talking about this was going to solve a lot of problems. And there was the mother of all FOMO. And I mean, a lot of these things, and you're involved in a couple of them, or were involved, they didn't go down thirty percent, they went down a hundred percent. And that the anger out there is a lot of people that feel like they were just, they were fooled by people much smarter than them. What are your thoughts?

• 8:09Speaker 02

  Yeah, listen, whenever you have a new asset class, there are shysters involved, there are experiments involved, there are fraudsters involved. And I think twenty twenty-two was a year where it was shocking how much of that happened. It seemed like over half the industry, I'd get a call from a friend, I was like, is there anyone legitimate to deal with? Um, I do think most of that is being washed away. And there were plenty of tokens, right? We were involved with, you know, the Luna ecosystem, which went to zero. Now the guy is under indictment, we'll see what comes of that. That was a, on its face, a blockchain that looked really promising,

• 8:55Speaker 02

  that was getting a lot of usage because they had a, an algorithmic stablecoin on top of it that drew people in because they were getting huge returns, eighteen percent returns, you know, and it was an experiment that failed.

• 9:09Speaker 02

  It was, I think, a wake-up call to people on how fast some of the new token ecosystems can unravel.

• 9:17Scott Galloway?

  I'm just curious to get your, I mean, I kind of want to say, SBF, question mark, your turn, like, what happened there? Did you see this coming? Like, what can be learned from this? What do you think happens to him?

• 9:29Speaker 02

  Yeah, I think he spends a lot of time in jail, and I think it's deserved.

• 9:35Speaker 02

  You know, in lots of ways, he snookered the world with, you know, the, the good education, the parents that were well-educated, working at Jane Street, Jane Street's one of the world's best quantitative trading shops. And so that's like, coming from Goldman Sachs, you get that, you get that credentialization real fast. He was making money in arbitrage, there were lots of people doing it, so you thought that made intuitive sense to people. And he started this thing at the right time and then got You know, Sequoia and Paradigm to give them their improper tour. And then no one did any homework. We didn't invest. I remember Sam in our offices. We looked at that round that ended up being a nine billion dollar round, but we thought it was a should have been a one billion dollar round.

• 10:21Speaker 02

  And so didn't invest, but we were users of his exchange. And I tell you, I was always frustrated that he was able to have a proprietary trading shop and an exchange side by side. And certainly had the suspicion that there was some Swiss cheese walls in between in terms of information flow. It never would have dawned on me that he was stealing my money. And so I thought he was front running me. And that was the cost to pay sometimes because that's where lots of the liquidity was in the derivative market. I couldn't prove it, but it was an intuition. But I never really thought, you know, he'd be stealing the money. And I guess the one thing that I kick myself in the rear for is

• 11:06Speaker 02

  after the Luna thing went down and Sam started bailing everyone out. I kept asking the question, where's he getting all this money? I knew he had spent a billion on mining. I knew he had spent three or four billion or whatever the number was buying his stake back from CZ. And instead of actually digging in, maybe there's a great lesson in life. I think for for males probably do this more than females. I answered the question in my own head. Instead of actually digging and getting the real answer, I was like, oh, he must have owned more Solana than I thought and sold it at the high. He must have made money yield farming. And I just didn't dig in deep enough to have, here's all this spending and where was the revenue coming from?

• 11:51Speaker 02

  And so, you know, we lost, you know, this is public seventy five million dollars on his exchange just because it was the money in our accounts and we traded pretty actively. And so. That was not a pleasant day.

• 12:05Scott Galloway?

  Doesn't it feel like, and I want to be clear, I didn't see it. I remember at one point actually thinking, he's so involved in everything and the entire asset class seems to be imploding and yet he's doing fine. It just seemed almost impossible that he would have his fingers in everything. And while this asset class is going from three trillion to one trillion, he would still be fine. It didn't make any sense to me, but I mean, if you think about obviously hindsight, the red flags, no board of directors, no audited financials, incorporating in the Bahamas, you know, a trading platform and a private equity firm. I mean, it just feels like there were red flags the size of Kansas everywhere.

• 12:43Speaker 02

  There were thousands of them and he really, you know, you don't meet many sociopaths in your life. I was with him three weeks before at the Robinhood.

• 12:52Scott Galloway?

  Yeah.

• 12:53Speaker 02

  Gathering and he was on stage with Larry Fink and I was talking to him and Larry before they went on stage and you know, there was not a bead of sweat on his head.

• 13:03Scott Galloway?

  It's crazy, isn't it?

• 13:04Speaker 02

  Like that's what sociopaths, there's zero empathy. And I think with hindsight, the whole, you know, give all your money away was just a ruse.

• 13:15Scott Galloway?

  Yeah, it was a distraction. So I just, I don't know you well, but I know you. If you end up being one of these sociopaths, I'm going to be blown away. You strike me as a pretty empathetic guy. I've seen you out. I know you're, you have wonderful siblings and value family. How has this been on you like emotionally and mentally? This, I can't imagine you weren't on the wrong end of some of this anger with what happened to Terra and Luna. And I mean, this is, you are right in, you know, you're in the combat zone here. How has this been for you?

• 13:47Speaker 02

  In some ways, you know, I became the unofficial spokesman early on for the institutional part of this business. At one point we had some, you know, analysis that I was 50% of all the, the media, you know, of the whole space. And so it was a life-changing thing and then I would walk around Miami and everyone stops and asks for a selfie. That was weird because even as a hedge fund manager, no one knows who you are. But it comes with some responsibility of trying to, you know, be a sober, measured voice. Luna was a painful one in that you learn lessons about how.

• 14:26Speaker 02

  Immature the market is, right? We bought Luna at twenty-three cents or something.

• 14:30Scott Galloway?

  What did it peak at?

• 14:31Speaker 02

  A hundred and thirty dollars.

• 14:33Scott Galloway?

  Up about six hundred and fifty X?

• 14:35Speaker 02

  Right? All within eighteen months. Like, I've never seen an investment like that. And so the way I have risk managed my whole life is something goes up, you sell a little bit, it goes up more, you sell a little bit, goes up more, which is very non-venture, right? The venture guys never want to sell anything. And so for me, it's a very different investment at fifty than it was at ten. When Luna collapsed, we certainly lost some money on Luna in two thousand and twenty-two. But as a whole, it was a very profitable trade. And the sting of others losing lots was real. My Twitter went from being well-liked to less well-liked.

• 15:19Speaker 02

  And, you know, I'm a little more cautious because of the experience. I would tell you that, again, I did the work on Bitcoin and Ethereum. They literally have been the best risk-adjusted investment almost over any time period. You can pick one when they're on their lows, when they go to their lows. And so like over one year, they don't look as great. But three months, six months, two years, four years, three years, they've been great investments. And so in some ways, you feel good about getting people in. What I've learned is it's easy to get people in, it's hard to get them out. Like even friends, when I said, guys, you've got to sell your stuff, no one ever pays attention.

• 15:58Scott Galloway?

  We'll be right back.

• 16:10Scott Galloway?

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• 18:22Scott Galloway?

  A few weeks ago, the CFTC sued crypto exchange Binance for illegally operating in the US. And within 24 hours of that news, Binance saw almost $2 billion in withdrawals. Do you think Binance is in danger of a liquidity crisis?

• 18:37Speaker 02

  You know, I don't. Listen, we don't know what else is coming from Department of Justice or any of the other regulators in the US. My broad framework is that lots of crypto companies, when they started... The ethos was screw the government. And so there was very, very lax KYC in a lot of these companies. KYC, know your customer. And as they realized they had these very profitable businesses and they needed to operate in the real world, they quickly tried to pivot to a much cleaner operating environment.

• 19:18Speaker 02

  And that either regulators are going to go after them for sins of the past, or they're going to end up paying big fines and saying, okay, that was then, but now we operate compliantly. And I think that's what's at stake here with Binance. Crypto is mostly offshore and Binance, the lion's share of their assets are offshore. And there's kind of an anti-US regulator feel in the offshore crypto community, right? So if you go to Abu Dhabi or Dubai, where Binance is headquartered, CZ walks around like a rock star. He's got a French passport. They've set up regulatory compliance in France.

• 19:59Speaker 02

  And so I kind of think most of the money that was going to come out would have come out after FTX, right? A lot of people thought Binance was next. I actually flew over to Abu Dhabi like two days later and interviewed him because I wanted to meet him actually and understand, like I had money at stake, you know, look him in the eye and make sure there was another sociopath. And again, my sociopath meter isn't perfect, but you know, he felt like a pretty, he's a Canadian, pretty straightforward, answered all my questions. Again, I have no idea how he'll fare in these suits, but if you look, it's mostly stuff done pre-2020. And I'm guessing, it's just kind of Occam's razor, when you're making that much money,

• 20:42Speaker 02

  why would you take any stupid risks unless you really are deranged? And I don't, you know, don't, don't think he is. And so my guess is he's trying to pay for the sins of the past and negotiate himself. You know, that, that exchange is 75% of the liquidity in the market right now. It's a dominant player.

• 20:59Scott Galloway?

  Yeah, I was thinking, again, hindsight, but we look at Sam Bankman-Fried and we look at, at FTX and Do Kwon, at Terra Luna, who my understanding has just been arrested. Like what can be learned about spotting this stuff? It feels like, all right, shouldn't we be smarter the next time? Is it that whenever you have an asset class, it's kind of mostly unregulated and has this sort of mania? You're going to have bad actors?

• 21:23Speaker 02

  Well, again, some of this is risk management in an environment when rates went to zero and no one understood what value was.

• 21:30Scott Galloway?

  I mean, you don't go to jail for poor risk management. I mean, Greg Becker has lost a lot. I don't think he's going to jail.

• 21:35Speaker 02

  Right. Some of it is there were a lot of young guys that got into an unregulated industry. And it's interesting, there are very few Wall Streeters. I think of like, you know, Chad Pascagoula at Paxos that haven't run tight shops. Now, he's, he's gotten a Wells notice from the SEC. My guess is I'd bet on Chad in that, in that case, because I just know the guy. He's just a very straight, you know, ran his business the way you'd want to run a business. Again, I, I, you know, I'm not behind the curtain in any of these places. But it feels like there's a regulatory onslaught. The crypto community has been saying for years, geez, we wish you would tell us what the rules are.

• 22:17Speaker 02

  And the SEC has been saying, uh, just come to us and, and, and register, which is an impossibility because there's no qualified custodians. And so it's this circular game. And so the crypto community broadly said, okay, we don't think these are securities. And, you know, it's been five years, six years, seven years since some of these tokens have been going. And the SEC has been watching them trade. And so it feels quite disingenuous for them to come down and say, oh, by the way, you should have known six, seven years ago. We could have told you what we decided not to tell you. Six, seven years ago, five years ago, four years ago, three years ago, two years ago, one years ago. Right?

• 22:57Speaker 02

  Like, the SEC is in a really weird place here because, again, this is not something that showed up three months ago. Right? And so I, again, I, I think one of the crypto hopes in the US is that the... The judiciary is less political than the SEC and the Biden administration. And, you know, will will be more fair in how they determine right and wrong.

• 23:29Scott Galloway?

  Yeah, it feels as, I mean, again, from someone who's sort of straddling the line mostly as an outsider, that the SEC and regulation, I feel like it's a day late and a dollar short. And what you're saying is they might be over correcting. Is that accurate?

• 23:43Speaker 02

  I think the amount of egg that the Biden administration, and listen, I'm a lifelong Democrat, a supporter of democratic politics, of progressive politics, quite frankly. So I'm in this awkward place that, you know, my team is behaving in a way that I don't feel is rational or fair. Sam was the biggest donor in the midterms to tons of Democrats. Sam was the favorite child at both the CFTC and the SEC. I haven't had one meeting with Gary Gensler at the SEC. And Gary is an ex-partner of mine from Goldman Sachs and a guy that I'm friendly with and that I spoke to right before he took the job and taught one of his

• 24:26Speaker 02

  classes when he taught at MIT. Right? So Sam had this privy position, and then he turns out to be the biggest fraud. And I think they just have so much egg on their face that they're over correcting. You put it together, it's a really bad environment for crypto. I think it's a terrible decision from their perspective. A, there are 50 million Americans that care a lot about crypto. Some religiously care about it, some just like it. They're voters. And so, pre-Sam, there was a bipartisan movement happening. I was in DC and we hosted the Blockchain Alliance or Caucus. And, you know, from Cory Booker

• 25:08Speaker 02

  to Senator Gilderbrand, to you name them, there were plenty of people, Senator Hagerty, that were very pro crypto, that were working on bills to get some rules around this thing. And post-Sam, it just became toxic for Democrats.

• 25:26Scott Galloway?

  So a thesis, you're a tier one VC with a huge global footprint in terms of brand. And you invest in projects and the combination of your brand equity and your capital and your ability to capture the media's attention creates a lot of heat and attention around this project. They launch a coin, they launch a token, it runs up in value because there's very smart people involved in it. And they immediately drop the bag and they don't have to disclose that they're selling because there's a lack of regulation here, including no requirements that insiders disclose sales. Wash, rinse and repeat, making billions of dollars but leaving just a trail of wreckage. I think that's happening among the most famous

• 26:08Scott Galloway?

  VCs, using their brand equity and their capital for the ultimate levered pump and dump. Am I being paranoid?

• 26:16Speaker 02

  I think it's probably happening a lot less than you think it is. I have said this nonstop, that we need disclosure. So much of what happened, even in the retail side here in the US with places like Voyager and BlockFi and Celsius, where people lost a lot of money, they were investing in lending protocols where they thought they were, it felt like you were making a deposit in a bank. Now, if you'd read all the fine print, you realized you were lending to an unsecured company. It was broadly a poorly managed hedge fund you were lending to. I was public about it. I spoke to, quite frankly, I spoke to the SEC chair before he took the job and said, this is important. Like, this is where

• 27:00Speaker 02

  people are going to get burned. And people got burned there. And it was all about disclosure. The industry has done a shit job voluntarily disclosing things that should get disclosed. And it's funny because the industry does well by doing good, right? So like, if you've got decent participants in the Bitcoin community, you don't have these frauds and the price goes up. If you have malicious actors, the price goes down. And so you should self-police, but it certainly didn't happen.

• 27:27Scott Galloway?

  Okay, so you're clearly a spokesperson or someone who's, you know, quite frankly, one of the last men standing, for lack of a better term. If you see or you feel some obligation for both the community and out of just self-preservation to rejuvenate the brand of crypto or Web 3.

• 27:46Scott Galloway?

  It feels like the brand has really taken multiple hits from multiple directions. You've got criminality. You've got a lot of people on Main Street who have lost a lot of money. You've got, quite frankly, the technology, I would argue, that most people would think it hasn't lived up to the hype. And like Bill Gates says, stuff that's supposed to take three years takes 10 and stuff that's supposed to take 10 takes three. This definitely feels like the former. The whole thing feels a little bit, I mean, not a little bit, it feels very sketchy. I think a lot of people think it's just a levered Ponzi scheme. How do you restore faith to the sector such that it becomes an enduring asset class?

• 28:24Speaker 02

  I guess slowly with work, there are a lot of smart people that believe in Bitcoin. You know, from Abby Johnson and Pete Brigger and like guys that run huge investment businesses. Bill Miller from like, you know, Old Leg Basin guy, that it's not like these are all crazy people, right? They see what's happening with global financial systems at finances and say, I want digital gold. And they see their kids spending 12 hours a day on their phone instead of four hours a day. And they say, in the future, we're all going to be digital. And so having a digital store of value makes sense to people.

• 29:03Speaker 02

  Now, it might make sense to everybody, but if you think about Bitcoin Nation, it's already bigger than the country of Russia. Right? It's the seventh largest country on earth that people that care about Bitcoin. It's, it's the most distributed asset literally in history outside of the dollar or, or other currencies. And so this story has connected with people and I don't think that goes away. The technology piece, so Bitcoin is a finished technology. That's what's kind of interesting about it. Ethereum isn't close to a finished technology. It's not fast enough and the world isn't comfortable trusting blockchain yet. But Scott, if you think about data and why our data is important,

• 29:45Speaker 02

  you know, 50 years ago, we didn't have very much digital data, if any, right? And so no one cares so much about your data. Today, our data has become so much more important because it's manipulated, it's digital, and it's only going to get more important. So who controls the data is really important. Listen, blockchains were made for this. And so I think at its core, this technology is going to be really important. It's not ready yet. It's not. We've got things called zero knowledge proofs that are just taking off right now. We don't have digital identity really in a scalable way yet. But I do know it's essential. Will it happen in a time fast enough that my investments make a fortune? I hope so. I don't know.

• 30:30Speaker 02

  But I know the end game is going to happen. So this isn't, this isn't tulips. I know it can feel like it at a time because it got so fluffy both in 2017 and in 21, and stupid projects had, you know, huge valuations. But at its core, they're real technologies. I mean, even if you think about NFTs or how artists can use their creativity and store it digitally, that didn't exist before Satoshi, right? There was no private property on the internet until Satoshi wrote the Bitcoin white paper. And so you had a feudal internet, right? Bitcoin was the first private property on the internet. You don't even have capitalism or freedom without private property. And so in a big picture world, this is a radical and important innovation.

• 31:15Speaker 02

  It's just, it's going to take a while before it figures out how it fits into the current landscape.

• 31:22Scott Galloway?

  Mike Novogratz is the founder and CEO of Galaxy, an investment firm focused on cryptocurrencies, blockchain technology, and digital assets. Before that, he was a partner at Fortress Investment Group and Goldman Sachs and served as a helicopter pilot in the US Army. He's also the chairman of The Bail Project, a nonprofit working to combat racial and economic disparities in the bail system. He joins us from his office in New York City. Mike, we appreciate your time.

• 31:47Speaker 02

  Scott, thanks a ton.

• 31:57Scott Galloway?

  This episode was produced by Claire Miller and engineered by Benjamin Spencer. Jason Stavers and Catherine Dillon are executive producers. Mia Silario is our research lead and Drew Burrows is our technical director. If you like what you heard, please follow, download, subscribe and check us out on YouTube. Thank you for listening to Prophets Markets from the Vox Media Podcast Network. Join us on Wednesday for Office Hours and we'll be back with a fresh take on markets every Monday.

• 32:55Speaker 03

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• 33:04Speaker 04

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• 33:25Speaker 05

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