Can Mike Novogratz’s Comeback Narrative Survive the Crypto Crash?
By the time Michael Novogratz began his first-quarter earnings call with investors of Galaxy Digital Holdings — the company he founded in 2018 with the goal of creating the Goldman Sachs of cryptocurrencies — the price of Luna, one of his favorite coins, was already plunging. It was the morning of May 9, and the crypto world was headed for its biggest reckoning ever.
TerraUSD, the stablecoin whose parent Galaxy had backed through its venture capital arm, had fallen below its $1 peg over the prior weekend, causing a run on the bank as traders shorted Luna, the sister coin that was supposed to help TerraUSD restore its peg.
Stablecoins are said to be the backbone of crypto, facilitating the trading of these risky assets. While most stablecoins — like Tether or Circle — use cash, Treasury securities, or commercial paper as a reserve, TerraUSD (also referred to as UST) was known as an algorithmic stablecoin. Its protocol involved swapping UST for Luna in an arbitrage trade used to stabilize the peg. UST also bought some Bitcoin as an additional backup.
The concept of using one crypto coin to act as a reserve currency for another had BMO Capital Markets analyst Deepak Kaushal scratching his head, as he said on that call. “How can a stablecoin use Bitcoin as a reserve when Bitcoin is still a risk asset base?” he asked Novogratz.
That may seem a logical question. But Novogratz sidestepped it. “Listen, UST has risk, but you are paid 18 percent yield on it. And so anyone who went in knew there was some risk — you don’t get 18 percent for nothing, right?” he said. Novogratz argued that Luna had grown so fast “because people were hungry for yield.”
As it turned out, what had actually pumped Luna’s price up 20-fold over the prior year was leverage: A lending program called Anchor, which promised those mouthwatering yields on UST deposits, was attached to the enterprise. Some said it looked like a fraud. “Luna is at best the WeWork of crypto; at worst, the Theranos of crypto,” tweeted Galois Capital founder Kevin Zhou, one of the most outspoken critics of Terra and Luna, on April 25 — just weeks ahead of the crash.
On the May 9 call, Novogratz told investors that whatever happened to Terra would be “a really big test of that whole model of algorithmic stablecoins.” What happened was that the stablecoin and its sister Luna collapsed days later, destroying some $40 billion of market value. And then came the deluge.
With cryptocurrencies already tumbling alongside a stock market downturn, higher interest rates, and skyrocketing inflation, the Terra/Luna demise led to a cascade of disasters. First came Three Arrows Capital, one of the most prominent crypto hedge funds, whose implosion has already triggered $2.8 billion in creditor claims, including $10 million from Galaxy. Three Arrows had bet big on Luna, and when Three Arrows filed for bankruptcy in July, it also brought down crypto lender Voyager Digital (also a minor Galaxy investment). Like so many dominoes, others also tumbled, including Celsius Network. Other crypto firms were forced to halt withdrawals and lay off staff.
Novogratz was soon mocked for the wolf-howling-at-the-moon Luna tattoo on his left bicep that he had boasted about on Twitter — with accompanying photo — in January, when the price of the coin hit $100. “I’m officially a Lunatic,” he had said then, referring to the name Luna investors called themselves.
Over the past year, Novogratz had been one of Luna’s biggest boosters. He had gone on Twitter to talk up the coin at least 30 times, saying it was “a horse to ride.” At one point, he said he had sold some of his Luna to buy his wife a Korean Pomeranian pooch, posting a photo of the tiny dog on Twitter — and suggesting that other investors also take some gains.
“To be clear, I think the $Terra ecosystem that @d0h0k1 is building is one of the most interesting things to follow and invest in globally,” he tweeted on April 21, 2021.
But a little more than a year later, he was offering something of a mea culpa.
TerraUSD “was a big idea that failed,” he wrote in a letter addressed to Galaxy investors and the crypto community on May 18.
Galaxy had already taken a lot of money off the table. Before the collapse, sales of some of its Luna position were the biggest contributor to its $355 million in net realized gains during the first quarter, although unrealized net losses on Luna and other coins ended up leaving Galaxy in the red by $111.7 million as of March 31.
The firm won’t say whether it ended up making or losing money overall on its big Terra/Luna bet. During the second quarter, the firm posted losses of more than a half billion dollars, bringing its total loss to $666.4 million for the first six months of the year. In addition to losses in its trading unit, Galaxy also wrote down its substantial venture-capital portfolio investments in about 100 private blockchain companies. One of those was Terraform Labs, which created UST and Luna.
Novogratz’s personal wealth — most of it tied up in Galaxy Digital, which he owns 65 percent of — also imploded. Worth $8.5 billion at crypto’s peak last November, Novogratz is now down to $2.1 billion, according to the Bloomberg Billionaires Index. (He does not trade crypto outside of the firm.) Galaxy’s stock has crashed too; it has fallen about 70 percent this year, with a current market cap of a little more than $2 billion.
The Galaxy CEO has largely quit talking about Luna or Terra. They weren’t mentioned at all during his second-quarter call on August 9, and he has been silent about them on Twitter. Although he is still speaking at crypto conferences and is normally chatty with the media, he declined an interview for this profile. Still, Novogratz remains bullish — predicting, for example, that Bitcoin will go to $500,000. It’s now trading below $20,000, down about 70 percent from its near-$70,000 peak last year.
And with losses of about $2 trillion in the entire crypto market this year, Novogratz won’t soon forget the Terra/Luna debacle. As he wrote in his letter, “My tattoo will be a constant reminder that venture investing requires humility.”
It isn’t the first time the former Goldman Sachs trader-turned-hedge-fund billionaire has been humbled by the markets. And once again, he’s not letting it stop him. As he wrote to Galaxy’s investors, “I think now the industry needs new energy, right?” And in the crypto world, he said, “energy comes from narrative.”
Cryptocurrency’s narrative is a story of outsiders burned by the global financial system. The white paper creating Bitcoin, written by the mysterious Satoshi Nakamoto — whose real identity is unknown — was published following the financial crash of 2008, when faith in central banks and governments was at a low ebb.
“It’s about a new type of finance,” says Mike Green, a former hedge fund manager who is also a friend of Novogratz. The financial system “has become incredibly complex and confusing for the vast majority of people who also simultaneously understand that their retirement by and large depends upon their participating in the system,” says Green, chief strategist at Simplify Asset Management. “The younger generation in particular, in the same way in the 1960s they said, ‘Screw the Man’ and ‘The system is broken’ — that’s what they’re saying again today.”
Green, a well-known crypto skeptic, calls it “the Green New Deal for finance.” The revolutionary aspect about cryptocurrency was that it would not be not controlled by governments, central banks, or big financial institutions but by users themselves on decentralized and transparent software known as the blockchain, thus avoiding the devaluation and inflation that can occur with fiat currency.
Recent events have seriously dented that thesis. Still, according to Novogratz, the mood that nourished crypto is not going away — if anything, it’s become even more pronounced. “If you think about why people got into crypto, it was this breakdown in confidence in institutions,” he told his investors on a recent call. But just look around at the political divisions in the U.S. and global tensions with China and Russia. “There’s nothing in the world that says, ‘Hey, this is the Great Moderation again, we’re going back to the good old times,’” he said.
If there is anyone capable of rebuilding the energy of crypto’s narrative, it may be Novogratz, whose sturdy build, piercing blue eyes, and balding pate give him the formidable look of the wrestling champion he was while at Princeton University. As Green explains, “Wrestling is all about getting in there and being immediate and responsive and proactive in your behavior.”
And while Novogratz is not the wealthiest crypto billionaire — Bloomberg ranks him tied for third place with Coinbase CEO Brian Armstrong — Novogratz is one with an institutional background who seems comfortable straddling both the retail and institutional worlds. He has deep contacts all over Wall Street and has hired a number of Goldman execs for Galaxy Digital. “He really helped the space get its footing and serves as a bridge to the old guard of institutional finance,” says Mike Ciklin, an early hedge fund investor in crypto.
Yet Novogratz’s quirky behavior (note the tattoos) and sartorial extravagance (he wore a purple flowered jacket and torn white jeans to Anthony Scaramucci’s SALT conference last year) set him apart from the typical Wall Street suit. “He’s very youthful. I think that’s the look he’s going for,” says a friend. Novogratz has called it “peacocking.”
He also has a well-tuned empathy for the underdog, making him the perfect pitchman for a crypto world born out of the ashes of the financial crisis.
Outside of his cryptocurrency life, Novogratz is perhaps best known as the person who put the Bail Project — a nonprofit that provides cash bail for those who can’t afford it — on the map. Novogratz, who says his politics are between center left and progressive, embraced the nonprofit when it was proposed to the Audacious Project, a funding initiative set up by the TED nonprofit. TED is something of a family affair: Chris Anderson, who heads TED, is married to Jacqueline Novogratz, founder of the Acumen impact fund. She is Mike’s sister and the eldest of seven Novogratz siblings in a Catholic family whose role model was the Kennedys. (Mike’s mother told New Yorker writer Gary Shteyngart that she had thought her son could have been president.)
“Mike was our champion,” says Robin Steinberg, founder and CEO of the Bail Project. Not only was he the largest investor in the Audacious Project, but he also wanted to chair the Bail Project and help make it a national organization.
“When Mike immerses himself in wanting to understand something and learn something, he goes at it completely and fully,” says Steinberg. She calls Novogratz “somebody who is innovative and fearless around investing in things that are outside the mainstream — like crypto.” Criminal justice reform also fits that definition: “It’s not the easy pick,” she says. (Another offbeat interest he has championed is the use of psychedelics for mental health care.)
Novogratz’s involvement in the Bail Project began in 2017 — the same time he planned to launch a new company around the fledgling cryptocurrency universe. During the pandemic summer of 2020, just as crypto started to take off, so did the Bail Project, which helped many people post bail during the George Floyd protests that swept the country and landed thousands of young people behind bars.
The organization’s high profile led Fox News host Tucker Carlson to go on the attack against both Novogratz and the Bail Project that summer. Novogratz and other board members all received death threats, but Novogratz did not back down. “He’s not afraid to be involved in things that are contentious. I admire that,” says Bail Project board member Liz Luckett, who is also managing partner of The Social Entrepreneurs’ Fund. “This work is not for the meek. You don’t go out there to bail people out of jail when people are blaming you for crime.” (The Bail Project has posted cash bail for 25,000 people, and cases have been dropped against half of them, according to Steinberg.)
Novogratz’s dedication to the Bail Project also seems deeply personal. “He is somebody who recognizes that humans are flawed, and he’s flawed,” says Steinberg. “Mike’s not fearful of failure; he sees it as an opportunity to learn.”
That perspective appears to have been hard won through a series of missteps in his own life.
A billionaire Wall Street veteran like Novogratz can’t exactly be called an outsider, but he has lost and rebuilt two fortunes, first at Goldman Sachs, then at Fortress Investment Group. Small wonder he is a believer in second chances; cryptocurrency is his third act.
Goldman was Novogratz’s first finance gig after Princeton, which he attended on an ROTC scholarship. After spending a year as an Army helicopter pilot, he joined Goldman in 1989 as a money market salesman and was soon sent to Tokyo, where he sold bonds. Eventually, he made it to Goldman’s fabled trading desk, in the pre-Dodd–Frank era, when its proprietary trading often made the lion’s share of the firm’s profits. Today, people argue whether he’s more of a salesman or a trader at heart. He appears to be a combination of both.
“I think he is a gut-based actor,” says one friend. “He puts a lot of value on the story of what’s being told and how it comes across, how it hits you.”
By the mid-1990s, Novogratz was running the Goldman trading desk in Hong Kong. He made money for the bank during the 1997 Asian crisis and was named a partner in 1998. But shortly before he was set to become president of Goldman Sachs Latin America, he left the firm under a cloud. “Lifestyle issues” is the way the media described the personal issues that tanked his Goldman career, according to a 2018 New Yorker profile of his comeback. Novogratz admitted he had been “partying like a rock star.” These days, he often invites real rock stars, as well as jazz musicians and emerging artists, to perform at events at his home. Novogratz is also a board member of the Jazz Foundation of America.
Soon after leaving Goldman, he bounced back to become a partner at Fortress, which had former Goldman colleague Peter Briger among those at its helm. At Fortress, Novogratz ran the firm’s Drawbridge Global Macro fund. In 2007, when Fortress became the first alternative asset management firm to go public, its partners were instant billionaires. At the peak, Novogratz was reportedly worth $2.3 billion. But the billionaire status was short-lived, as the financial crisis and its aftermath pummeled macro traders. In 2015, his hedge fund, by then known as Fortress Macro, was finally shut down after it lost money due to a series of bad bets Novogratz had made on the Swiss franc and Brazilian interest rates.
The failed hedge fund manager did not leave empty-handed. Fortress bought out his shares in the company for about $250 million.
By then, he and a number of his Fortress colleagues had already begun investing in Bitcoin as a macro bet. His colleagues had introduced him to Wences Casares, an Argentinian entrepreneur who portrayed Bitcoin as a way to avoid the type of hyperinflation that had enveloped his home country. Post-financial crisis, that message found a sympathetic ear in many hedge fund managers who thought the Federal Reserve’s monetary policies would lead to such inflation, although the U.S. remained mired in a near-zero-inflation economy for more than a decade. (When inflation did come back over the past year, Bitcoin was no hedge for it. Instead, it collapsed along with other risk assets.)
Novogratz has called himself the Forrest Gump of Bitcoin — meaning he was in the right place at the right time. His first Bitcoin purchase was in 2013, when it traded around $100 per coin. By 2017, when Bitcoin peaked at $19,650, a $7 million investment in cryptocurrencies had turned him into a billionaire again.
That year, Novogratz loudly proclaimed that cryptocurrencies would be “the biggest bubble of our lifetimes” — and one he planned to profit from. While he abandoned a plan to start a hedge fund dedicated to cryptocurrencies, he moved on to the idea of a merchant bank made in the image of Goldman — and Galaxy Digital was born.
By some calculations, the timing couldn’t have been worse, as Bitcoin soon entered a long crypto winter. But when the Fed opened the money spigots during the pandemic, cryptocurrencies took off. And even in this year’s bear market, Bitcoin is trading at nearly 200 times the price it fetched when Novogratz first bought it. A $7 million investment in Bitcoin in 2013 would be worth around $1.3 billion today.
Cryptocurrency definitely filled a void for more than a few financiers. Novogratz was not the only famous macro hedge fund manager to hit hard times. That helps explain the lure of crypto. “The environment was ripe for many people who found their skills in trading volatile instruments worth less: They went out and found volatile instruments,” explains Green.
Prop trading had disappeared at traditional banks, and the traditional investment banking and brokerage business had also become more competitive and less profitable, adds Green. “There were just not that many places for people to make money,” he says. “And then you have crypto emerge, and the bid-ask spreads were very wide. The volume of dollars that were being spent on commissions were very high. The fees that could be earned from listing new tokens were incredibly robust.”
In its few years of existence, Galaxy has built its business into a full-scale investment bank: It has a trading desk, an asset management business, a venture capital group, investment banking, and mining. It employs 375 people, with plans to bring that to 400 by year-end.
“Two years ago, you were taking a lot of career risks, like this whole thing might not work out,” Novogratz said at the SALT conference during peak crypto fever last year. “Now, I tell my employees we have execution risks. The competition that’s coming, we’ve got to work our butts off. Everyone’s getting into this space. Do we have a lead or not? I don’t even know, but we better keep working because it’s all about execution.”
Despite the drastically different market environment, that sentiment likely still holds true. Galaxy touts its distinguishing features of $2 billion in assets under management, a balance sheet that includes $1 billion in cash, and heavy collateralization requirements for counterparties. The lessons from the Terra/Luna crash — which Novogratz says Galaxy heeded — are the need for diversification and risk management in a macro framework. Galaxy sold $1 billion before the second-quarter crash.
Galaxy also claims to be a role model of self-regulation at a time when distrust in crypto has grown from those who’ve lost their life savings on the bet.
“We’ll pull our skirt back and show our balance sheet and then we do it every quarter,” Novogratz told investors on Galaxy’s most recent call, saying other crypto firms are “either going to get regulated or they’ve got to operate with a lot more transparency.”
Galaxy’s business is with what it calls TradFi — which is crypto shorthand for traditional finance, including hedge funds, family offices, and high-net-worth individuals. Galaxy is known as the shop where hedge funds go to place their short bets on crypto, and the current volatility in the space is encouraging more hedge funds to get into the market. Novogratz, however, has predicted that about two-thirds of crypto hedge funds will go under, and he acknowledges that huge institutional flows into the space have been slow to materialize.
“For the industry to kind of take that next big leg up, we’re going to need to see this institutional money come in,” he told Galaxy investors. “We’re going to need to see that narrative. And again, is it going to happen in the next two months? I cross my fingers and say a few Hail Marys, but we’re taking a much more sanguine view that over the next 18 months, 24 months, all the stuff will happen.”
The crash has no doubt clipped Galaxy’s wings. In August, Galaxy canceled its long-delayed $1 billion acquisition of crypto custodian BitGo — which had been heralded as the biggest merger in the space — saying BitGo had failed to provide Galaxy an audited financial statement as required by the Securities and Exchange Commission and which was needed to complete the registration process for Galaxy’s U.S. stock listing. (BitGo has threatened to sue Galaxy over the deal’s cancellation.) Galaxy’s prospective U.S. listing is another long-delayed effort. The firm went public via a reverse merger in Canada, with its looser regulations, in 2018. Novogratz had predicted the U.S. listing by early 2022, but the timing is now uncertain.
The big question is how quickly crypto will recover — and that may depend on what type of regulations are forthcoming and how much systemic fraud is found in the system. Luring back retail investors is likely to be a slow process, as even Novogratz admits.
The freewheeling cryptocurrency industry Novogratz heralded on just about every forum imaginable now looks like its own worst enemy — or, as Novogratz put it at this summer’s Bloomberg Crypto Summit, “A bunch of idiots.”
Last summer, the critics — notably Scion Capital’s Michael Burry of The Big Short fame — tried to warn that the excessive leverage in the system could take it down, likening the mania to the dot-com bubble of 1999 and the 2007 housing market. Boosters would have none of it, and Three Arrows Capital founder Su Zhu taunted Burry, suggesting that he was just too old understand.
Novogratz — who at 57 is even older than 51-year-old Burry — now says he was “darn wrong” about that problem. “I didn’t realize the magnitude of leverage in the system,” he said at the Bloomberg event. The crypto lending platforms that failed were neither decentralized nor transparent, and some of them had leverage up to 125 percent, according to Novogratz. However, Terra’s Anchor platform was DeFi — decentralized finance, where everything was on the blockchain — but that didn’t keep it from going under.
Last year, like many in the industry, Novogratz seemed primarily worried about “bad” regulation. “What could go wrong with crypto? Well, what could go wrong is we could have some really crappy regulation, which will slow things,” he said at the SALT conference.
At that time, the crypto industry was so flush with cash that lobbying skyrocketed, with $9 million spent to influence Washington lawmakers. One main regulatory worry has been that the SEC would regulate the industry under the tough scrutiny of Chairman Gary Gensler. To date, regulators have not been able to rein in the crypto world — or even agree which agency should have oversight of the near-trillion-dollar industry (down from $3.2 trillion in November).
The Commodity Futures Trading Commission now appears likely to become Bitcoin’s regulator, which has relieved industry players. “The nice part of the CFTC is it’s got a pretty straightforward regulatory mission” — it’s not consumer-focused like the SEC, which has “a much bigger mandate,” Novogratz told Galaxy investors in August.
But with little oversight and next to no self-regulation, the crypto universe has instead been replete with bankruptcy filings, enforcement actions, and ongoing investigations by both the SEC and the Department of Justice.
One of those under investigation by the SEC is Terraform Labs founder Do Kwon, who has been unsuccessful in dodging an SEC subpoena about another crypto protocol of his that failed. The SEC is now also looking to see if Kwon violated federal investor protection regulations in the marketing of the TerraUSD stablecoin, according to Bloomberg. Terraform Labs has said it is unaware of the latter probe. Novogratz, through a spokesman, declined to comment.
The Terra/Luna debacle is also renewing questions about stablecoins, which regulators have long worried about for their potential of setting off contagion events like the one that just occurred. While there has been much talk of regulating them like banks, it still hasn’t happened. Following Terra’s collapse, however, Treasury Secretary Janet Yellen promised stablecoin regulation by year-end.
Stablecoins remain controversial. Investors say using them to trade crypto assets is cheaper and easier than going through a bank. But others look at it differently. “The only reason you need some sort of ‘stable coin’ is because people didn’t have full faith in some specific asset,” says Josh Wolfe, co-founder of VC firm Lux Capital. “Whereas the U.S. dollar is backed by the full faith of the United States government and its military, and its power and leverage in the world, if you’re buying some other token or coin and you say, ‘What is this backed by?’ — most of these things are backed by only one thing, which is belief.”
So what is left to believe? It’s something that Novogratz — and many others — seem to be grappling with. When asked about how to rebuild faith in crypto at the recent Christie’s Art and Tech Summit, Novogratz quickly segued to the future of nonfungible tokens, or NFTs, and talked about building a community. As for Bitcoin, he admits it’s a belief system whose adoption comes from more storytellers getting the message out. He’s also pushing the upcoming Ethereum merge, a new system that will require less electricity, as a new narrative that could invigorate the crypto space.
Novogratz is a powerful storyteller. “This idea of identity and actually having it have value is a new idea. It’s a radical idea. And it shouldn’t be dismissed,” he said at SALT last year, as he argued that NFTs, like art, are simply worth what people say they are. This year, of course, people think they are worth a lot less than before.
As a crypto pioneer and evangelist, Novogratz is optimistic about the future and open to the new. That may have blindsided him in the case of Luna. “Mike is, in general, a very enthusiastic and outgoing individual, and so I’m not surprised that he became a cheerleader [for Luna],” says Green, who, like others interviewed, sees Novogratz as a survivor in the crypto hunger games.
“He’s made and lost his own money, and he’s gotten a tattoo of Luna,” says Wolfe. “When people say you have skin in the game, I can’t think of somebody that has more literal skin in the game than this guy.”