Photo-Illustration: Intelligencer; Photo: Jeenah Moon/Bloomberg via Getty Images
A little over a year ago, when I interviewed Mike Novogratz, a veteran hedge-fund manager and crypto billionaire, I asked him what he was excited about. The CEO of Galaxy Digital, a blockchain-focused investing firm, had a short list to tout that included “luna, my new favorite coin.” By January of this year, after luna’s price soared to $100, Novogratz had celebrated the cryptocurrency with a tattoo on his shoulder, depicting a wolf howling at the moon:
When I spoke with Novogratz this week — in the wake of the stunning $50 billion collapse of the luna cryptocurrency and its blockchain ecosystem — I reminded him of that earlier conversation and his plug of luna. “Yeah, erase that one,” he said ruefully. (To be fair, in our last conversation, around cryptocurrency’s peak last year, he did advise newly rich crypto investors to “be prudent, take some chips and buy yourself a house if you can afford it.”) The crypto crash, in luna and the industry more broadly, has burned Galaxy’s portfolio and, presumably, a chunk of Novogratz’s net worth. (In recent days, the price of bitcoin fell below $20,000 from a high of nearly $70,000, while ethereum — the second-largest cryptocurrency — fell under $1,000 after topping out at almost $5,000.) The wipeout led to mass casualties in crypto funds, spreading a dangerous contagion throughout the industry akin to what the financial crisis did to Wall Street in 2008. The pain is particularly severe in some decentralized finance, or DeFi, companies, such as Celsius, which lent out their crypto assets only to have to freeze withdrawals as investors came rushing back to pull out their money. Novogratz has been on Wall Street long enough to know how this happens, yet he admits even he took on too much risk. In an interview, he reflected on what happened this time around and what he might do differently ahead of the next crypto bubble and crash — because in crypto, there is always a next one not too far away.
A lot of people are saying, “We told you crypto was a scam.” Were they right?
You have to put things in perspective. If I told you at the beginning of the pandemic you could buy Zoom stock or bitcoin — today you would have doubled your money on bitcoin and you’d have made nothing on Zoom. So that’s what I think is hard for people to get their heads around. This has been a complete and total old-school ass-beating. But it’s important not to throw the baby out with the bathwater because we had a speculative mania in lots of asset classes. Bitcoin is not going away as a macro asset. Web3 is not going away. We’ll spend more time in the metaverse, therefore companies will sell digital assets, and for digital assets to have value, they have to be unique, and to be unique, they have to live in a blockchain.
Now, is crypto criticizable? Well of course it is because it’s such an amazing mechanism that if you own a token in an ecosystem, you benefit by more people buying into your ecosystem. And so it gets very tribal. I was loved by some ecosystems and literally despised by others. Because I’d say “Hey, I think this is overvalued,” and just making that comment was like a declaration of war against their mother. And so, to this day, I get trolled just for making what seemed like rational statements. And I don’t think tribalism leads to great investing decisions long term.
Does this crypto collapse feel different from what we’ve seen in the past — for instance, in 2018 or 2014? How are you making sense of this?
It’s like in Beauty and the Beast — “Tale as old as time.” In an asset bubble, which we obviously had, when it crashes, you always find far more and bizarre pockets of leverage than you had expected. And even though you kind of know there’s leverage in the system, when it breaks apart, you’re like, “Oh, there was gambling going on here?”
I’m hoping we saw the worst last weekend. I’d be more confident of that if I knew where inflation was going to be in the next two quarters. But if you had a sell order, you most likely sold — ethereum went down to $890, bitcoin went down to $17,900. And so I think now you’re going to see the triage you see after big crashes, where people are a little less risky or a lot less risky. And so in all likelihood, we have a big recession coming. And that’s not terrible for crypto, but it’s terrible for the economy. And it’s not good for the stock market.
You don’t think it’s terrible for crypto? Why not?
It’s not great for crypto, but crypto also needs a pause. The lead horse that pulls the sled in crypto is bitcoin. And bitcoin is one of the only scarce things we have on the frigging planet. If the Fed is going to have to pause its rate hikes because the economy slows down, and we know there are still inflationary pressures, crypto takes back off or bitcoin takes back off. And that fuels the rest of the industry.
Is there anything in crypto that you’re still worried about right now? We keep learning about new casualties of this contagion in crypto, like the hedge fund Three Arrows Capital, which seems to have imploded and created various cascading effects.
I think people have their arms around the worst situations, at least understanding where things stand. It will take a while for these things to be either put into bankruptcy or sold off. Just like after ’08, there was a whole industry of Lehman claims and buying broken hedge funds or the assets of broken hedge funds. That’s going to happen. But the biggest worry everyone had was that the largest stablecoin, tether, would collapse. And the best I can tell is that it doesn’t feel like it’s a category-five worry right now. Those guys, for lots of different reasons, seem pretty stable (though there’s not transparency there as much as we’d like — we’d love more transparency). But I’m hoping that we’re somewhere between 90 and 100 percent through the forced-liquidation game. It doesn’t mean you won’t have liquidations, but it’s forced liquidations that cause that sheer fear in markets, and that’s what we saw last weekend.
People been worrying about the specter of a potential Coinbase bankruptcy after a warning the company made recently. Do you see that as a threat?
They have a bunch of cash on their balance sheet. They have a burn rate that’s way too high. And so my guess is CEO Brian Armstrong will cut that burn rate over the next quarter or two pretty immensely. They have a great brand. I think their worst-case scenario is some big traditional finance guy comes and partners up or buys them. I think Coinbase is a foundational asset for the space. And so I’d be very surprised to see Coinbase not exist in some form. They’re going to most likely try to run it on their own. But if they can’t pull that off because the crypto winter gets too grim, I’m sure someone would step in and buy them.
What seems scary about this crash is that some of these companies or protocols that have collapsed were highly regarded in the industry. Luna, of course, but also Celsius, a multibillion-dollar company that offered consumers relatively generous interest payments in exchange for taking custody of their bitcoin or other cryptocurrencies. Did you see this coming in any way?
I was worried about the macro environment. But I was hoping bitcoin would stay in the $30,000 to $50,000 range. We weren’t invested in any of the credit shops like Celsius. We had been invested in their competitor BlockFi, but we exited that over a year ago because I worried about that business model. We had at times been big investors. And in terra, we scaled back our holdings — that’s what we do with most positions when things kind of go to the sky. With hindsight, looking at luna, you can’t offer people 18 percent interest, as they did with Anchor, and not have the world all run into yours. And so they grew their ecosystem too fast — before they grew the rest of the use cases. And I think that’s one of the lessons of crypto. With this bull run, with the money printer goes brr — everything kind of went up. And the speculative mania that took place in baseball cards and fine wines and watches and tech stocks also happened in crypto. I think the speculative frenzy part is over for the time being. So it becomes a much more sober business of having to build shit that people use.
Is it over for DeFi, a decentralized financial system on the blockchain? Has the crash raised too many doubts?
In some ways, the regulators are going to lick their chops and say, “Oh my goodness.” But DeFi, for the most part, has worked. It just is worth a lot less. Where the big losses are, it’s really in this weird combination of CeFi (centralized finance) and DeFi. Celsius and BlockFi were black boxes that investors put their money in and then they did whatever they wanted with it. It wasn’t on-chain. You didn’t know what the leverage was unless you got under the hood. You didn’t know what their asset-liability mismatch was. They borrowed short and they lent long. Those are the two ways you die a sudden death in markets. You see financial services companies like the European banks in 2008, like Lehman Brothers, like Merrill Lynch, in bull markets take a bizarre amount of leverage and think they’re geniuses. And that’s what happened.
Luna and terra are a little different because it was completely transparent. So that was a combination of greed by the investors, and it was a very charismatic founder. The stablecoin was a peg based on bullishness, and when the market turned, the mechanisms to create that peg just didn’t withstand the pressure. But that was the biggest black eye because it was transparent. You’re going to have failures, but broadly, DeFi lending systems have worked — projects like Compound, Aave, MakerDAO, and Uniswap. But they’re going to have a whole lot fewer assets on them.
So is your experience with luna and this collapse going to change the way that you invest in the future?
The market will grade me. We did some things very, very well. If you look back on the last year, we sold crypto, we sold some private equity and some of our venture stuff. We took a lot of chips off the table, but we left a lot of chips on the table. And if I was that smart, I would have sold more. As a trader, it’s tough to not be tough on yourself. If you’re in the job I’m in for 30 years, you don’t like to lose. I think we get a good grade on having taken a lot of chips off the table, thinking that the Fed was going to get aggressive and that some valuations didn’t make sense. And I wish we’d done that more aggressively.
If you were to short crypto, it seems like this would have been a good time to make money. Did you short at all, or did you consider shorting?
We never got net short, or I would have a much bigger smile on my face. Our investors bought us to be long crypto. They also bought us to be good risk managers. And so there’s that tension. Like I said earlier, I wish I had been less long even though we did sell a lot. I’m positive there are some people out there and they will stay very quiet and make lots and lots of money being short crypto. You could have shorted Coinbase, you could have shorted futures — there are plenty of ways to do it. But we only use those tools to hedge our business. For companies like ours, it’s Let’s just make sure we have runway to survive and thrive over the next 18 months.
Is there anything you’re completely avoiding, like staked ether — a derivative of ethereum tokens that traded in ways people didn’t expect — or algorithmic stable coins, like the terra tokens that are now worth basically zero?
Well, so to be fair, we never really participated in algorithmic stable coins. We looked at them and we didn’t participate. We’re not in staked ETH. But I do think staked ETH is going to be a big business. And so my sense is we will be in that business. The mistake we made is we were still too long crypto assets — you’re never happy when you lose money. The mistake other companies in the space made is they took more credit risk than they should have.
You can look at the “GDP” of the crypto space as the total value of the coins plus the value of the public companies plus the value of private companies — it’s about a trillion dollars. I think the industry was built for at least a $2 trillion GDP, and so we’ll get back to $2 trillion. It’s going to take a while and then, in time, will be far, far higher than the old high.
So it’s kind of a crypto recession right now.
Yes, crypto is in a recession. The rest of the economy is also going to get a recession.
How severe do you think it will be and how long will it last?
I wish I had that crystal ball. My instinct is 18 months, maybe even a little shorter because I think the Fed is going to have to pause hiking rates by the fall, and I think that’ll get people comfortable to start building again.
Who do you blame for this crypto crisis we’re in?
You could blame the Fed. You could blame COVID, and you can blame the Russian war. I say all that kind of tongue in cheek. You put all those together and it just forced a much faster unwinding of the bubble. There are lots of people that took too much leverage, and they’re suffering immensely. BlockFi raised money at a $5 billion valuation last year; it basically just sold for zero. Celsius was valued at more than $3 billion and it’s in all likelihood going bankrupt. And so people that took too much leverage have paid the price already.
Is there a lesson in all of this?
But I do think it’s important for people to understand that the investments they make change in character; they change in valuation. Buying Tesla when it was $100 is a far different bet than buying it when it’s $1,300. And so we have too many people that kind of think, Oh, you buy a stock or you buy a coin, and it’s yours forever. They’re cheap at some levels, and they’re rich at some levels.