Early Bitcoin and Ethereum investor Mike Novogratz is revealing his insight on where the market is heading and what’s needed to trigger a bull run.
Novogratz runs Galaxy Digital, which invests directly in crypto businesses, from ICOs to infrastructure platforms to wallets and custody solutions. At the recent Beyond Blocks Summit in Seoul, he explained why he believes in the New World Order crypto developers are trying to create, and what got him to widen his involvement in crypto far beyond his initial speculative investment in Bitcoin.
“I looked at my portfolio and I had a lot of Bitcoin and I had a lot of investments. I had an investment in Korbit here in Korea. I had an investment in Bitstamp and Zapo – in all kinds of portfolio companies that I’d made a few years earlier. And I had a college roommate, Joe Lubin, who now runs a big company called ConsenSys. But at that point, it was a very small company. And I decided to go visit him and thought he was a little bit smarter than me and he might be able to tell me about my portfolio.
It so happened I walked into his office and was amazed at the energy. It was a small company, 20 to 25 people. I thought it was going to be two. And I was like, how’d you hire 25 people? And they were literally plotting out a revolution. A decentralized revolution.
And it was the first time I understood that crypto was a lot more than just a speculative asset. That this was a social phenomenon, it was a cultural phenomenon and an economic phenomenon. And that the people that were getting involved in it really cared about changing the world. It’s often easy to think this is just about the money, but when you meet the guys that are at the core of it, when you sit with Vitalik or Alex Morcos who’s a core developer – or any of the guys, they really do care deeply about a new world order. It came out of the breakdown in the financial system in 2008. And then Europe broke down again in 2012. It came as people feared central authority. And so I got inspired and I bought a bunch of Ether, and it was like 96 cents. When you buy something cheap and it goes higher you start paying a lot of attention to it.”
Novogratz says institutional investors with deep pockets are preparing to jump in the market, and are learning as much as they can about how crypto works to ensure their investments are safe before they take the plunge.
“Two years ago if you’d gone to meet with an institutional investor, they’d know nothing. They’d be very interested to hear you talk, and then you’d leave. And now, when I meet with a CEO or CIO, I’m surprised at how much they know. At how much work they’ve done. Most of them haven’t taken the first step in terms of participating, but woah, they’re doing a lot of work…
I went to visit Jeff Sprecher who’s the CEO of ICE, which is the parent company of the New York Stock Exchange and about 30 other exchanges around the world. They’re the biggest exchange company in the world. And I thought I was going to give him my Bitcoin story. And after about two minutes, I just shut up and started listening. He knew so much more about the plumbing and the future of how coins will be traded than I would ever have imagined.”
According to Novogratz, there are a few pieces of the puzzle missing before those heavy-hitting Wall Street investors will be comfortable going all in on crypto.
“To get institutional investors, there’s a few things missing. The biggest thing missing is custody. And that’s kind of strange to say because we have a lot of good custody solutions. Xapo is a very good custody solution. BitGo is a very good custody solution. There are plenty of them out there. But if you think about how institutional investors operate. If you’re the state of Wisconsin or if you’re a pension fund, it’s hard to tell your boss if something went wrong, ‘Well I had my money with Bitgo or Zapo.’ People have never heard of those places.
And so what you really need as a bridge step is you need a trusted name custodian. You need a Japanese bank or a Hong Kong, Shanghai bank or State Street or ICE or Goldman Sachs to allow institutional investors to feel more comfortable. And that’s going to happen…
We won’t take out $20,000 in Bitcoin or $1,300 in Ethereum until there’s a proper institutional custodian. The second piece that’s needed and coming is regulatory clarity. Because the US controls the global banking system, it really needs clarity in the US first. It’s coming.”
Novogratz says he believes attractive custody solutions that appeal to institutional investors will fully arrive within a year and bring the price of Bitcoin up to at least $10,000.
As for the impact government regulators are having on the space, Novogratz says US regulators were shell shocked by the huge rise in the cryptocurrency market last year, and says he’s pleasantly surprised with the actions they have taken since.
He believes the single most positive sign from regulators is the SEC’s recent declaration that Ethereum is not a security.
I have been wonderfully happy with the posture of US regulators. First of all, all regulators missed the crypto move. Right? Crypto was 98% retail. It was the people’s revolution… and so regulators missed it. Regulators come from the institutional world. The head of the SEC worked at Sullivan & Cromwell. They come from the JPMorgans and the Goldman Sachses. And so, they missed it. And it was small and didn’t matter. And then last fall, October, November, December, January, there was this frenzy, this craziness where prices went up. And regulators said, ‘Oh shit. We need to do something fast.’
And so what they did in lots of places is just say, ‘Stop.’ Or they said, ‘Put the brakes on.’ And they were giving themselves time to understand what was happening. So the SEC, they subpoenaed companies. They really dug in, and the first thing they decided is, let’s go after the fraud and let’s go after market manipulation. And let’s slowly set rules as we understand it better.
And so it was a really, really big deal that they said Ethereum is not a security because they gave a path forward. Most of the tokens issued in the last 18 months were security tokens. They were issued without having a proper decentralized ecosystem to start. But what the SEC did, and I think what’s going to happen is, say, ‘You could have started as a security token, but now you’re a utility token.’ I think you’re going to see some people fined. They’re going to say, ‘Yes, you should have known better and now you’re going to be a utility token.’ But I don’t think they want to crush the whole system…’
And so, regulators are supposed to protect the little guy. And they were doing a crummy job of it. And so that’s changing. And as we get a little bit more regulatory certainty, you’re going to see the institutions feel much more comfortable coming in. And we need them. People say, ‘Well why do we need the institutions? Aren’t we going backwards?’ You’re not going to change the world on a half a trillion dollars of market cap. For crypto to really fulfill its mission, we need lots more money in the system to fund lots of these projects.”
As for which cryptocurrency is the single best to invest in, Novogratz preaches diversity and says trying to pick which platform will have the most success is not a smart way to invest in the market.
“We have 100 blockchains, roughly, 30 or 40 in China alone, and then another 60 or 70 outside. They’re all trying to become the same thing. They want to be this decentralized global super computer that processes data, that authenticates data. And so, it’s a race to see who’s going to get adoption…
None of them are fast enough right now for any real institutional applications. And you’re going to start seeing some of those. You’re going to see side chain on lots of these blockchains. You know, state channels or plasma in Ethereum. Or lightning network in Bitcoin. They go from very decentralized to less decentralized. EOS is already I think the fastest blockchain and it’s only three weeks old. Its critics will say it’s not decentralized enough. That there’s 21 nodes, that the Chinese control a lot of them. It’s three weeks old. Let’s give it some time. Let’s see how this develops.
My philosophy is, don’t think you’re so smart that you’re going to pick the one winner. Is it NEO or RChain or Thunder or Ethereum? Listen, Ethereum has got a giant lead. The most developers. There’s unbelievable human capital in the system. But they’ve got a big transition to make. They’ve got to go from proof of work to proof of stake and deal with a mining community that’s going to lose money on that whole process. So we’ll see. I find Vitalik one of the smartest guys on the planet, and so I wouldn’t want to short him.”