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Crypto winter ‘could last longer than people think’: Mike Novogratz

Galaxy Digital Founder & CEO Mike Novogratz joins Yahoo Finance Live to discuss what a Fed pivot would mean for bitcoin, crypto regulation, U.S. inflation, crypto sustainability, and the outlook for assets in a bear market.

Video Transcript

[AUDIO LOGO]

BRIAN SOZZI: Bitcoin in a vulnerable position, currently above the 19,000 mark ahead of Thursday's inflation print as the Federal Reserve looks to continue its hawkish tightening cycle. Joining us now to weigh in on the crypto space is Galaxy Digital Founder and CEO Mike Novogratz joined by Yahoo Finance's crypto reporter David Hollerith.

Mike, great to get some time with you. It's been a while here. Talk to us about prices here. How much-- what would happen to Bitcoin if we did, in fact, get that Fed pivot?

MIKE NOVOGRATZ: Listen, I think once the Fed pivots, you're going to see assets in general rally, right. You've had a tremendous sell-off across the board based on Chairman Powell being really hawkish in the Fed, and rightfully so. People always ask me, well, Bitcoin didn't work as an inflation hedge. And I'm like, are you guys crazy? It went from $10,000 to $70,000 when the Fed was producing inflation.

Since the Fed has decided to try to smash inflation by raising rates aggressively, the most aggressive rate raising in our lifetime, Bitcoin sold off with other assets. It's actually done better than most. And I think if you finally get the pause, you'll start seeing Bitcoin pick back up, pick up on all cryptocurrencies.

Listen, are we going to get the pause? At one point, yes. We've priced in a lot. But the inflation data is still lagging and hot. And the employment data we just got was pretty darn strong. And so this normally works.

You'll have to see the ISM, or the manufacturing data, plunge first, go from 50 to 48 to 40. What will follow that will be earnings, inflation, and employment, which is a lagging indicator. And so the bear case is we've got two to six months left of this pain. The bull case is the market starts breaking, and we're seeing a lot of breakage, not in necessarily crypto, but in the rest of the world.

I mean, crypto is interesting in that three months ago after the big sell-off and the deleveraging, most people that needed to sell sold. And so you've seen price-- prices much more muted. You know, things take off when there's a good story, and they sell right back off when the story goes away. And so a lot less activity in crypto, a lot less for sellers, but also a lot less new buyers.

BRAD SMITH: Mike, typically during some of the crypto winters is when we see the most innovation, especially within the underlying technology in blockchain as well. But we know that there are even more bills within Congress that have moved forward as well over the course of this year. That regulation is set to still go full steam ahead in some of the discussions. And so with regard to that, the bills giving validation, but does that also, to your perspective, pump the value of crypto? And are there some cryptos that are not created equal, perhaps, in that sense?

MIKE NOVOGRATZ: It's a great question. Listen, I think two things are happening, and you can't deny they're happening. One is institutions across the board are putting big resources into building for the next crypto spring. That's guys like Citadel and their exchange. It's people like BlackRock with Aladdin. It's hedge funds. It's Citibanks and Goldman Sachs getting ready for a tokenization revolution that's coming, I don't know, in two years, in three years, four years, whenever.

And so there's almost a sense of inevitability that this is going to be a big industry. It's a shocking difference than last crypto winter. That said, buying the coins right now, there's just less enthusiasm until the macro changes. I do think Congress has done a good job of getting educated. I was just down in DC for three days and met with, I don't know, 14 different congressmen and senators and was pleasantly surprised at how up to speed they were.

I got my fingers crossed that the AG bill gets put into committee and potentially voted on in the lame duck session. That would be a great first step in starting some crypto regulation. You know, my fear is nothing happens until post-election, and then you're going to-- then you're going to-- then we'll see what happens. Maybe the-- depending how the election goes, the cards change. We do need some regulation to get things moving.

DAVID HOLLERITH: Mike, there's over 500 crypto exchanges in trading venues worldwide. And I was just thinking in the context of what sounds like a prolonged bear market, and then also these much larger traditional institutions coming in, what's sort of your expectation for what happens to those 500 exchanges?

MIKE NOVOGRATZ: You know, it's interesting. So some of the exchanges cause very little run, right. These were basically code. And as you got closer to a regulated world-- you look what Coinbase costs, and you're building services, and you're building KYC, and they cost more and more.

And so I think, as you look at what I'll call regulated exchanges, or exchanges that have some regulator, you probably see a consolidation, and they probably still need to cut costs. And so-- but exchange is a funny word. Most of these exchanges should be thought of as broker dealers, right. Coinbase is closer to fidelity than it is to the New York Stock Exchange.

It has tens of millions of customers that it deals with, that use its app, that keep things on its-- in its system, right. New York Stock Exchange does it. You go to it, and you trade, and you have a broker dealer that trades with it. And so calling them all exchanges is a misnomer. They have matching indices, and they have exchanges. But their primary business is really that of collecting customers. And I think you see consolidation there.

DAVID HOLLERITH: Right. Turning to this sustainability report that Galaxy put out this morning, it's sort of a benchmark for the industry in a sense of transparency. But I was just curious, you know, in the report, you revealed that 68% of the company's carbon footprint comes from its Bitcoin mining operations and that long term, you're aiming for making the energy sources for those operations, about 80% coming from renewable energy. And so I was just curious what is the timeline for where you-- when the company plans to hit that 80% mark?

MIKE NOVOGRATZ: I think we're pretty close already. And so I would-- without actually talking to the mining team this morning, I don't want to give you a bad-- bad data point, but we're pretty close to 80% already. Listen, one of the unfortunate things that happened in the last two years of crypto is this narrative that Bitcoin uses too much electricity showed up. Reality, total Bitcoin mining uses less electricity than hairdryers or Christmas lights. It's not zero. It's certainly a significant amount. But it's a fraction of global power supply.

And so when you think about if you were the master of the galaxy, you would allocate electricity to things you think are valuable-- like, YouTube uses a lot more electricity than Bitcoin mining. Listen, I think YouTube is an unbelievable innovation, and it deserves some electricity budget.

And so it's-- Bitcoin, because it can exactly specify how much electricity it uses and it produces those reports on a monthly basis, the community says this is what has gone into mining, it's an easy target. But it shouldn't be a target. And so, listen, we are moving towards a greener footprint because I think all companies should. But I don't want to, in essence, condone the fact that I feel like Bitcoin is being singled out as an industry because a few people pointed at it and said, oh, this is an easy scapegoat.

BRAD SMITH: Thanks for giving me a viable reason not to put up Christmas lights this year, Mike. I definitely appreciate that. An alternative, perhaps. Also, while we have here, though, considering a lot of companies' CEOs, executives, they're implementing their recession playbooks and kind of dusting that off right now, given that you've seen this before, you've seen this in the past, but for crypto this time and the amount of holdings that you do have, do you plan on kind of selling any of that, liquidating any of that in order to just shore up the coffers of cash in order to make sure that your businesses can also navigate?

MIKE NOVOGRATZ: Listen, we luckily sold over a billion dollars of stuff last year at better prices and certainly don't want to get into the business of burning the furniture to run the business. And so we're going to try to manage our business towards what we think are rational revenue targets. Listen, revenue is coming down in the industry.

Volumes are down. Excitement is down. And this winter could last longer than people think. It might be shorter. It's hard-- it's hard to predict when these crypto winters-- how long they go.

You know, we're a couple of years from a halving cycle. I do think the Fed flinching creates some enthusiasm around Bitcoin as a store of value, Bitcoin as a recession-- as an inflation hedge, as a hard money when the rest of the world keeps printing money. But we're going to manage our business to what we think is a rational revenue stream for our five operating businesses and try to keep the balance sheet separate.

DAVID HOLLERITH: And, Mike, if we sort of think of the 19th-- period in the 1960s to 1980 for the stock market is sort of a worst-case scenario for what this bear market could look like across the equities, market, and crypto, I was sort of curious, you know, how do you think a crypto investor should operate in this environment? That period of time is sort of likened as sort of excellent for stock pickers. What do you think? How are you evaluating cryptocurrencies at this point?

MIKE NOVOGRATZ: Yeah, listen, in some ways, this is the most challenging macro environment for any investor. And if you had all the foresight of the sages, you would have just been in US dollar cash all year long, right, when the whole world was saying cash is trash, cash is trash was time to just go long one-week T-bills and wait or go short markets.

We're in a mess globally. Japan has got a monster imbalance intervening in their currency market while supporting an interest rate market as inflation slowly creeps higher. That is a potential real problem. You saw what happened in the UK, and they're trying to get this genie back in the box. But once confidence breaks down, it's really hard to get it back. And so what the Fed is doing is trying to preserve confidence in the US system.

Now, what they need-- and we'll see if you get it-- is a Congress that is willing to take some pain. Politicians are not normally coded to take pain, right. So you already see in France, hey, we're going to do $100 billion subsidy because energy prices are too high, and hence that's driving inflation, so we're going to give more money to the system.

Like, that's counterintuitive. I understand where it comes from. People are suffering. But as you use printed dollars, or printed euros in this case, you know, it creates this inflation cycle. And so it's a really treacherous market. Could the S&P-- what's it-- 30-- whatever-- 3,600 today, could it end the year at 3,300? 3,000? 3,300 kind of looks like where the chart would go.

What's hard about these environments is they don't get there in a straight line, right. There is a tremendous amount of fear in the market right now. And so like on Monday, we already saw a 6% rally, and it got reversed. It doesn't feel to me that the stock market low is in, that we're going to have more pain before we see clear sailing. And there is a chance that even when the Fed thinks it's finished, they pause.

If the federal government doesn't tighten its belt and starts feeling this populism surge, the cycle picks up again. And so I would say for now until the next-- until further notice, at least 12 months, these are going to be really complicated markets to trade and complicated markets to make money in. And in some ways, just preserving your wealth is a huge win, right. Not actually having monster gains, but not losing money could be a huge win.

BRAD SMITH: Right. I'm going to need to grab my Parker and a Build-A-Bear Teddy here. Mike, appreciate it. Thanks so much for--

MIKE NOVOGRATZ: Maybe-- maybe I'll mark the low for you guys.

[LAUGHTER]

BRAD SMITH: Good stuff there. Galaxy Digital Founder and CEO Mike Novogratz. Mike, got to have you back here sometime soon, appreciate the conversation, as well as Yahoo Finance's own David Hollerith. Thank you both.