University of Arkansas

Walton College

The Sam M. Walton College of Business

Episode 70: Mike Novogratz

Mike Novogratz is the CEO and Investor at Galaxy Digital, a diversified financial services firm dedicated to the digital asset, cryptocurrency and blockchain technology industry. Before his role at Galaxy Digital, Mike served as a partner at Goldman Sachs and CIO of Fortress Investment Group.

Walton Productions Be EPIC Podcast · Mike Novogratz explains how COVID-19 is accelerating digitalization and innovation



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Episode Transcript

00:06 Matt Waller: Hi. I'm Matt Waller, Dean of the Sam M. Walton College of Business. Welcome to Be EPIC, the podcast where we explore excellence, professionalism, innovation and collegiality, and what those values mean in business, education and your life today. I have with me today Mike Novogratz, CEO of Galaxy Digital. Mike, you were a partner at Goldman Sachs, you were with Goldman Sachs for 11 years. You were a successful executive at Fortress Investment Group, and you have pivoted to Crypto in a big way, you're now an investor and CEO at Galaxy Digital. From what I understand, Galaxy Digital is dedicated to digital assets and blockchain technology. So, this was a big pivot for you. Would you mind just telling us a little bit about the back story for that?

01:11 Mike Novogratz: Sure. My real focus or specialty is what you'd call macroeconomic investing. So, macroeconomic investors take politics and economics and trends, and try to predict where the world goes. And so we bet on interest rates or commodities, equity markets. And when a friend of mine first called me and asked me what I knew about Bitcoin, and I knew nothing, I started researching it. And Bitcoin, being really the first digital asset, or cryptocurrency, had all the properties of a great macro story. It is a scarce asset. It was a beautiful new technology and a great narrative at a time when people were losing faith in Central Banks and traditional institutions. Bitcoin was born in 2008, 2009, right on the tail end of the financial crisis. And if you remember the financial crisis in '08, people worried that JP Morgan was sold, and then Goldman Sachs was sold, and then it was this distrust of centralized authority that came up with Satoshi Nakamoto's whitepaper. And it just made logical sense to me that there were groups of people that this would appeal to. Those were libertarians, those were people that didn't trust the government, cypherpunks.

02:39 Mike Novogratz: And what was interesting at that point is that Chinese were buying it, and I realized here's a story that is universal. Crypto was really the first global speculative mania, and even today, Bitcoin is at 184 countries owned by over 100 million people. It's probably 11 years later, the single greatest example of building a brand within 10 years with something that's literally a line of code, and so it really caught the imagination. By 2017, the story was so powerful, we had this cryptocurrency bubble, and at that point, being a macroeconomic investor, it kind of played right into my hands. I understood the psychology. Great bubbles, great manias happen around ideas that are really powerful, and they usually happen on ideas that are true, that do change the way the world works. So, if you think of the railroad bubble or the internet bubble in 2000/'99, was unbelievably powerful and fantastic, and the Nasdaq traded to bizarre levels. And then it crashed, yet the internet more than lived up to the stories we were telling in the late '90s, right? The internet changed everything about the way we live lives, the way we find our spouses, the way we vote, to the way we communicate, to even us doing this podcast.

04:04 Mike Novogratz: And so when I saw the Crypto bubble, I really realized, listen, this is gonna crash at one point because it's happening too fast. And everybody and their brother was launching their own cryptocurrency, from Floyd Mayweather, to Paris Hilton, and that doesn't make any sense. But underlying this idea of blockchain technology providing a new trust layer for businesses and institutions to build on top of, and having digital assets as the world goes digital is gonna change the way the world works. And so I started Galaxy with this idea that we would be a bridge between this kind of crazy cypherpunk crypto world, which was mostly retail, and the more traditional institutional investors, that we would be both teaching the institution investors about this new technology, but also hopefully helping the crypto companies understand how the world operates.

05:06 Matt Waller: So, Mike, what years... I know, when I first learned about cryptocurrency and Bitcoin in particular, I heard people talking about it, and I often didn't know what it was about. And so I found this podcast by a guy with a name of Russ Roberts, and he has something called EconTalk. He interviewed someone who had written a book about cryptocurrency. But this is still a huge pivot for you. A lot of times people like that, with those kinds of pedigrees, don't make pivots like that. What do you think it is about you that made you want to get into something as bleeding edge as this?

05:45 Mike Novogratz: Well, I laugh, I often make the big pivots of my life after I screw up, and out of the ashes you figure out how to reinvent yourself. And I had left Golden Sachs to Fortress, and that had been kind of a personal drama I went through. In Fortress, we had an amazing run and an amazing company. I was kind of ready to leave, running a big hedge fund. My last year, we had some return troubles, not horrific, but it felt like it was the right time to leave Fortress, and I thought I'd start just a family office. I was lucky enough to have made a fortune. I get a lot of credit for how much money I made in crypto, but to be honest, we made a pretty big bet in Bitcoin in 2011-2012 when Bitcoin was $95, $100. But it was not a large bet as a percentage of my net worth, and so I was lucky enough to have money to be able to put a big bet in and sit with it. Where I know, if I had been younger, I didn't have as much money, you buy something at one and it goes to four, and you're ready to sell the whole thing because you've just quadrupled your money.

06:48 Mike Novogratz: And so our genius, which was part luck, was actually not feeling we needed to sell it. I did the same thing with Ethereum, which is, I think, a very interesting crypto as well, maybe the future of the public blockchain. And I bought that at one. Again, lucky I had a college roommate that was involved in the project, I went over to CM, and I was very inspired by what I saw. At that point, I realized that this blockchain revolution was actually a revolution, that it was fueled by people that wanted to change the way the world operated. And so I bought a bunch of Ethereum and it went up. And again, I made a whole lot of money on Ethereum, and Ethereum went up a thousand times. And so I got lucky in a lot of ways. What I've learned in life is, when you start making money in something, it really gets your attention.

07:41 Mike Novogratz: And so I started digging in. And the more I dug, the more I realized that this really does have potential to make the world a more equitable place to create systems that make sense to protect our privacy. I've lived in places like Hong Kong and China, and I'd seen the Donald Trump administration come in and do things that I would never imagine would happen in America. Part of me says we do need systems that allow us privacy and protection from governments run amok. And so I was at a time of my life where I didn't think I was gonna start up another business, I was 52 years old, I made a whole bunch of money, and though I saw this opportunity to work with young people and to have a role in the community, I'm like an unofficial spokesman for Bitcoin, going on TV, explaining it to people, and so I figured there was a need, there was a purpose, and I got to be around young people with new technology.

08:39 Matt Waller: So, within business schools, we have a certain percentage that are really into Bitcoins and cryptocurrency, trading them and things like that, small percentage. We have a pretty high percentage that are aware. Every year we have a hackathon through our Blockchain Center of Excellence that our partners, companies like Walmart, JB Hunt, Tyson, ArcBest, etcetera, will bring problems, challenges to the students. And the students in this hackathon work on blockchain solutions to those problems. And then we've got experts in blockchain technology, professors and staff, where they'll walk around and assist the students, 'cause there's a real tendency to go back to things that we're really familiar with and start using that kind of a paradigm in solving a problem. But what do you think business students should be studying with respect to crypto assets, cryptocurrency, and even blockchain?

09:48 Mike Novogratz: When I think about blockchain, I think 15 years in the future, it will be ubiquitous. You'll see it everywhere and you would notice it. In some ways, I'm a better storyteller up top, and when I get into the weeds, I'm like, "Damn it, we're building the back of the TV." And blockchain really is rebuilding what I call the back of the TV. In a perfect sense, a public blockchain is a giant distributed supercomputer that processes and authenticates data, and there's hundreds... All the blockchains you've talked about most likely are private blockchains, right? Corporations or trade groups saying, "Together, we're gonna put our data up on this blockchain that we have access to, but the whole world doesn't have access to." And so you've got private blockchains and public blockchains. And I think, as a database technology and as a system of how we think about verifying data, holding privacy, showing what you need to show, every single company and every single system is gonna be using some form of it. And so at least students should have an idea what blockchains are.

10:55 Mike Novogratz: Cryptocurrencies are a separate matter. There was a time that thought that all blockchains will get powered by cryptocurrencies, and you will have these tons of cryptocurrencies for each and every idea that you could have. So, you could have a cryptocurrency for your DNA. I don't think that's gonna be the way it plays out. I do think you're gonna have Bitcoin, which is gonna be like digital gold, and if economies are nervous like they are today, more people will wanna own something like gold or some scarce asset. I think you'll have one or two of these other protocols which will build that base level of trust. And then I think central banks are either gonna have their own digital currency, or they're going to allow people to create them but they back them. In China, China is coming out with their own crypto renminbi. And in the US, I think the fed is gonna allow companies like Libra, the Facebook subsidiary, and others to build these crypto-US dollars where they're backed by the US dollar and held at the fed.

12:04 Mike Novogratz: And so we'll go in a world, three, four, five years in the future, where less and less cash gets used. It's just more efficient, easier for taxes, quite frankly easier for stopping money laundering and illicit things. We're heading that way. And so our company, we invest in the infrastructure of that. And it would seem that every business school student should at least understand the story and understand where that technology is going. It's almost like if you are a business school student in 2000, you'd be kind of foolish not to understand the power of the internet. I think you have to understand that this is Web 3.0. Me and you talked a little bit about putting resumes on a blockchain, and so it's a verified resume. You can see something as simple as identity. When your 21-year-old student goes to a bar and they get carded, and the bartender gets their ID and it tells them how much they weigh, and their eye color, and their dress. Well, what if you don't wanna give some scary-looking bartender or bouncer your address because you're a 102-pound young girl that's nervous about giving the guy your address? You shouldn't have to. All that guy needs to know is that something certifies that you're old enough to drink. So, even something as basic as identity is all gonna get put on a blockchain relatively soon.

13:29 Matt Waller: It seems like all of the regulators want to regulate it. They all have different reasons for wanting to regulate it. Do you have any views on how that might shake out?

13:41 Mike Novogratz: One of the things... And I was on the Fed, Federal Reserve of New York's Markets Committee, and so I've been around regulatory bodies a lot. I would tell you that regulators, in general, come from Wall Street. And what was interesting about crypto is it didn't come from Wall Street. It came from outside. And so regulators were really, really late to crypto. And they allowed all kinds of things that they shouldn't have allowed. A regulator's job is to protect the little guy. And we had a bubble in 2017 with lots of fraud, lots of fluff. Regulators get a D minus, if you were gonna give them a report card. And so then they say, "Okay, shit, now we gotta regulate." And I think they've all been working very hard the last two to three years catching up and trying to understand this. They have no problem with blockchains. None, zero problem, quite frankly. And with crypto, they are learning. So they have a lot... Very little problem with bitcoin anymore. Their one worry there is money laundering.

14:43 Mike Novogratz: We were down at the Treasury with the Secretary of Treasury recently, and the Treasury is now understanding, "Hey, with the right tools, having things on a blockchain is actually better for us, not worse for us." You're seeing the chill really thaw around crypto. Crypto's a big word, it encapsulates a lot of things. A lot of the fraud in 2017 and the innovation was that allowed venture companies to raise money like that, and to raise non-diluted money. And that's where the SEC really cracked down and said, "No, no, no, no, you can't do that. If you're gonna raise capital from the non-sophisticated investors, you've gotta have some registration process." And most of the agenda from the regulators was around the ICO market, and rightfully so. And so we're slowly starting to see crypto regimes be a little more friendly and come together. And I think every single smart regulator knows, "This is part of the future so we need to help shape it, as opposed to try to stomp it out."

15:47 Matt Waller: Well, as we're recording this, we're in the midst of the COVID crisis. And, Mike, as you know, there's lots of innovation going on right now as a result of this crisis, not only in healthcare, but in food delivery and all kinds of different areas. What do you think the biggest effect of this crisis is in terms of crypto assets, in terms of innovation, new use discovery, etcetera?

16:17 Mike Novogratz: I think this is going to accelerate the digitalization of everything, including paper money, which is dirty and passes germs. "Why should we get paper money when I can just wave my phone?" And so this is gonna accelerate that movement. We've also seen interesting sidelights like digital assets, a digital baseball card being... The blockchain allows you to know that it's a unique thing 'cause it's uniqueness that gives things value. If there were 500,000 Picassos, they wouldn't be worth that much, but since they're only a few, they're worth a lot. In the old days, you couldn't guarantee that electronic signatures couldn't be counterfeited. They all could. And so one of the great breakthroughs of Satoshi's paper was this was the first electronic signature that you couldn't counterfeit. And so you can have digital art or digital representations of a baseball card that's one of the most rare baseball cards, and now they're being sold in fractions. And so we're seeing fractionalization accelerate because people are sitting at home and they're more nostalgia, and they wanna watch the old Michael Jordan videos. You probably could sell 1/100th of Michael Jordan's jersey. And that didn't exist a few years ago. You're seeing these trends that accelerate a little bit, but the big one is digitalization of everything.

17:44 Matt Waller: Mike, for the students who are listening who are interested in getting involved, what would you recommend?

17:51 Mike Novogratz: I think there are two ways to get involved in the cryptocurrency business. One is, if you're a coder or a computer science guy or an engineer, you're gonna help build the back of the TV set. I love that expression 'cause it feels to me like I like watching TV, but I don't really understand how the damn thing works. That doesn't mean you can't participate in the television industry or the crypto industry. The second piece is being in the front of it, understanding how to use the tools to help shape new businesses. And so I think almost every one of your guys, as they apply to a company, that company is gonna have some crypto strategy, some blockchain strategy. There's not a Fortune 100 company out there, Fortune 500 company out here that doesn't have a blockchain strategy. And so it's trying to keep whatever they learned from being on the Internet, from your classes, from lectures in their mind as they look at what looks like an old school job, because there are no old school jobs. Listen, there are also... There are some smaller companies that are dedicated to this space, places like Coinbase or our own company, Galaxy. But mostly, I think, your students are gonna get jobs at "normal companies," and you're gonna realize that all these companies have a crypto and a blockchain angle.

19:05 Matt Waller: Well, Mike, thank you so much for visiting with us today. That was really interesting. I deeply appreciate it.

19:05 Mike Novogratz: I enjoyed myself, and good luck down there in Arkansas.

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19:05 Matt Waller: Thanks for listening to today's episode of the Be EPIC Podcast from the Walton College. You can find us on Google, SoundCloud, iTunes, or look for us wherever you find your podcasts. Be sure to subscribe and rate us. You can find current and past episodes by searching beepicpodcast, one word. That's B-E E-P-I-C podcast. And now, be EPIC.