Mike Novogratz: How Tokenization Will Redefine Wall Street Forever

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1:53Thanks. Hey, everyone. As you know, on this podcast, I bring the best guests in the world at that nexus of understanding of macro crypto in the exponential age of technology. If you're enjoying the show, a quick five-star rating goes a long way. It helps us grow and keep these conversations coming with the best guests in the world. Thanks a lot.

2:36Hi, I'm Raoul Pal, and welcome to my show, The Journeyman. As you know by now, The Journeyman is that journey to the nexus of understanding between macro, crypto, and the exponential age of technology. Now, this whole exponential age thesis is the coming together of many big megatrends. One of them is crypto, one of them is AI, but it's also technology overall is advancing at an incredibly rapid pace. Now, my next guest brings it all together because he's an old school macro friend of mine. So he understands the macro. He's also is the majority owner and founder of Galaxy, the investment bank that also not only focuses on crypto, but also on AI and data centers.

3:27So look, I think it's going to be a fascinating conversation. I know a lot of you follow Novo and have been fans over the years. So let's sit back and enjoy. Join me, Raoul Powell, as I go on a journey of discovery through the macro, crypto, and exponential age landscapes. In The Journeyman, I talk to the smartest people in the world so we can all become smarter together.

3:53Novo, welcome back, my friend. It's got to be my fifth one of these. I'm excited. Exactly. So listen, as ever, look, we've got a lot to talk about in Galaxy. But first, you and I need to talk macro because that's how we always start. So what are you thinking? You know, we're in such a weird space. The economy is growing pretty strong. And you've got a Fed that broadly said, we think the economy is going to be a little stronger and inflation is going to be a little higher, but we think we should be cutting rates. That's why gold is at the all-time high. Bitcoin's at the all-time high. it's a funny world out there there's a president who is just dead set on picking a fed share that wants to cut rates there's a huge amount of debt that needs to get financed and so lower the financing cost helps with the deficit although they kind of lose the control of the long end doing that well japan certainly has isn't it japan certainly has uh the u.s is actually the flattest curve of the three.

5:02Yeah. You know, they're, they're issuing a lot of bills, not a lot of long end. And at one point that ratio has got to shift or, or does it. And so every single person I know is nervous. And it's funny that, you know, macro you've made money this year. If you just stayed in the trades, begin the year, you say, got to be long gold, long silver, long commodities, long the curve, and probably long stocks. And guess what? Oh, and short the dollar. Every one of those trades has worked. So you look at a company like Bridgewater, who are too big to move, you know, and Meltman over there right now, they're up 26%.

5:42Ben would have traded himself into a paper bag with all the Trump stuff, but that whole group. Is Ben at Bridgewater now? Ben's at Bridgewater. He's the deputy CIO. Oh, he's got a big job. Wow, I didn't know that. What a perfect place for a guy that calls them well and might overtrade them. If you can't overtrade, it's been pretty easy. Most of my other macro friends, their performance is anywhere from flat to up single digits in one of the great macro years because all the Trump stuff with the tariffs, with the slow, has just taken people out of what were their predictions early on. And also, Scott, who you know as well, has made it pretty clear what they want to do.

6:27They've just basically said, he's basically said, I want a weaker dollar. I want to get rates down because I need to refinance the debt, which is a rare thing for them to actually admit what they're doing. And we're going to jam the bills in in the meantime. And that's kind of debasing the currency. And he's made it very clear what the trade is. And people just got freaked out by all of the political stuff. Yeah. And listen, we're a very strange time politically in our country, right? You know, the administration, I went to the inauguration and in the big inaugural ball where everyone was there, the president said, guys, we're going to do more in 100 days than any administration's done in four years.

7:08And we're going to just hit them and hit them and hit them and hit them. And that's exactly what they've done. They are moving at lightning speed on so many fronts that the opposition doesn't know what to do, but the markets feel like it can chaos. I mean, the downside of it is you are undermining a lot of the great institutions in America. If it's the military or the Department of Justice or the Fed or the FBI. And some of that needed to be cleaned out. But you are now really, I think, you know, not cutting out the scar like the viruses you're cutting through the bone. And that's scary. Um, and I think the market doesn't like that.

7:52Uh, and the polls don't like that. And so we'll see what, you know, when you run into midterms. And the other thing is like growth is weird as well, because we've got like CapEx growth because of the data centers, which we'll come on to is exploding. So, uh, so we've got the fixed asset investment side going up, but main street is pretty dead because of rates. So I can see this kind of dichotomy they've got going on. I was out to dinner last night with a, it was a group dinner, but one of Scott's top lieutenants was there. And it was interesting. They see the same thing. They're like, growth is fine.

8:34You know, a lot of capex, not just a data center, but capex across the board. But unemployment, you know, but the labor statistics are harder to also get your arms around because you're pushing all the foreigners out, right? All the immigrants out. And so like in construction, were they on record or not on record? Messy numbers. But it certainly feels like you've got softness in the labor market. That's why they want to cut rates. But you got a pretty strong economy, right? And the second quarter was really strong and the third quarter looked pretty strong. And so it's a very, you know, I mean, in some ways, It's a long equities, you know, long gold, long risk asset market.

9:24That's right. It seems pretty clear from that. And I don't see many major risks on the horizon yet. Well, the only question is it's become so consensus that, I mean, you saw Paul Jones went on TV yesterday and I love Paul and he was like, that's it. We're going to melt up into year end, right? Right. Sometimes those calls become, you know, the great butt of jokes later on in life. You're like, you know, the great thing about Paul, he'll say it and he'll be stopped out by it. By yes. You never listen to anything he says, as you know, he's like he's got a three second time horizon on everything he does.

9:57He is he is often, you know, the most disciplined guy I know. And that's why he's, I think he's 35 years of trading and one year in his own account, he was down like 72 basis points in 35 years. Like that's discipline. Don't lose your money. You get rich. Right. It's how many people have a few good years. And they're like, oh, I had that one down 30. And I was like, what? And one down 30 takes a 45 just to get back to break even. Right. Right. And so your Sharpe ratio, one bad year crushes your Sharpe ratio. Yeah, dead right. So listen, why has crypto been heavy, you think, versus equities? I mean, all the tech stocks have been ripping higher.

10:45It's been a really easy trade. While crypto has just been choppier. Yeah, listen, we had a huge run in some ways. Yeah. And crypto is about narrative and flow, right? And so what's the story? You had a great Bitcoin story for a while, and then it kind of ran into selling. We sold$9 billion ourselves for one client. I know, with almost no impact, bizarrely. But that swallowed all that treasury company buying. Yeah. And so without that$9 billion, you're probably significantly higher. Remember, prices are set on the margin. And there were a lot of people in the Bitcoin world that had rode this so long that finally decided, I want to buy something.

11:32I'm not going to sell all my Bitcoin, but I got a friend that bought a yacht, a friend that bought part of a sports team. And so people trimming because it had been a great run. And, you know, you're just digesting that turnover. And do you think that's the main supply has been old OGs plus miners and stuff like that? Is that the main supply, you think? That's the only supply we've seen. And the other piece has been, remember, Ethereum was dead. And then all of a sudden you've got the Genius Act plus Tom Lee and Joe Lubin with their dats. And it became a buying machine. And so East had a spectacular run in the last, you know, whatever, two and a half months.

12:15But that's, you know, you go from 1800 or 1600 all the way to 3800. That's a pretty good run. Yeah. And so, you know, on the year, these things are up whatever, 30%, 32%. Not stunning. Good year. But usually it's back end loaded as well, almost every time. And so that's the question is, are, listen, if you looked at the normal four-year cycle, you'd be lightening up and you'd be getting flat into Christmas. Like, what could be different? Dangerous freaking words. It's different this time. There are two things that could be different. We are going to pass a market structure bill. And that plus genius is going to allow, you know, at one point, Apple's going to have stable coins on their iPhone.

13:07Like there's no excuses anymore that there's regulation around what's a commodity and what's a security and what's – and the SEC is saying we want you to be on chain. And so I think there's an acceleration of the existing giant players in consumer and financial markets getting into crypto. We are going to see tokenized stuff, probably starting with token equities and mortgages and everything else. um that's good for the narrative of all these level one you know l1 chains um you also have a president who says i'm gonna pick a dove and we are risking fed independence did we really have independence though honestly i don't think we did i mean from yelling to go from one to the other kind of shows that it's all one thing now uh you know we yeah that was I thought that was the dumbest move a president had done is taking a Fed governor and making it the Secretary of Treasury.

14:07Literally, I thought it was the dumbest thing. I said that over and over. But Chairman Powell's his own guy. You know, like, I mean, you've got a president screaming that he's stupid and he's this, and he just says something, smiles and says, I'm going to do what I think is right. And so I do think there's Fed independence. And what's coming out of this regulation? Do you have any wind of that yet when that, when it's going to come? I think there are two different approaches, but you're going to broadly, I think, say that 20 % threshold of ownership is decentralized. And if you're under 20, open source code, a few other things, that's a commodity and it'll be CFTC regulated and the rest will be security.

14:58What's more interesting, I guess, is once you know that, like where security tokens can trade and are there going to be different levels? Are you going to have to go through the whole SEC process to become a security token? And is that going to be easier than it used to be? This SEC is unbelievably forward in wanting, you know, like we tokenized our equity and that was all done compliant where the first tokenized equity, that's the same as an equity, right? There's not a, and so, but it's trading on solid super state, which is pretty much a walled garden, right? It's only cool once it starts trading on hyperliquid or on some decentralized, you know, decentralized platform, right?

15:49Could be you to swap wherever. And then you're like, whoa, now we're out in the wild. It feels like this SEC and this administration is pro-DeFi. So for the simple viewer, why was DeFi such a threat? Well, all the regulation around know your customer that JP Morgan and Galaxy and everyone else does go through is different in DeFi. The protocol itself won't know their customer. The user of the protocol, the on-link, is supposed to do their best. The best they're going to do is say, we're going to use a radar gun to catch speeders. We're going to use the fact that this is all in the blockchain, companies like Chainalysis and others to say, hey, we're doing the best we can to make sure no one on the OFAC list is in the trading, no one on the bad actor list is on.

16:49But you're not guilty before you, right? Like there's two ways to think about it. We have the technology in America that took every car up to an internet device. Then when you go over 55, you instantly start getting tickets. We don't do that. We choose to actually have to catch you speeding, right? And if that's the approach for DeFi, like DeFi is going to eat the world. And that's the approach it feels like the SEC is okay with. But the moment they said they were We're going to do a sandbox in DeFi. I was talking to a guy down there. Their phone's lit up with the banks in New York saying, that's not fair.

17:26That's not fair. That's not fair. And you saw today, you know, in prediction markets, right? The Jeff Sprecher putting$2 billion into. Polymarket. Polymarket. Like I was out this weekend in Vegas at the fights and I was sitting with a guy that runs five casinos. And he was like, that scares me because we have unbelievable regulatory requirements to run a casino, right? If you're draft kings or fanatics draft, you know, sports or, you know, any of these gambling sites, phenomenal regulation, state level and federal level. and now you're saying you guys can just do this unregulated and so there's going to be lobbying back to say that's not fair in some ways it isn't fair right you can't make one group get you know go through 19 you know exams when i when i got okay to run casinos when we were at fortress we bought pen gaming and there were 13 states we had to get licensed in we had to get every check we wrote for 15 years.

18:41They went through every last thing of your financial history and your criminal history. If you had it, you got a ticket for, you know, getting in a fight in college. Like it's a huge process, costly, invasive to say, hey, we trust you to run a casino. And now we're saying. Your favorite neighborhood spot grows with Square. Indeed, my favorite neighborhood spot has quickly become Todd Snyder in Williamsburg. Todd Snyder is one of my favorite menswear shops and has supplied me with all the clothes I have needed this quite hot summer. Every business has different goals, but Square is the business platform that supports them all, from opening a new location, selling something new, or just expanding their reach.

19:27Indeed, I've seen it with Todd Snyder. In Square also, you can get real-time insights, so don't wait for end-of-day reports. Go to square.com forward slash go forward slash real vision to learn more about how your business can grow with Square. That's S-Q-U-A-R-E dot com slash G-O slash R-E-A-L-B-I-S-I-O-N. If there again, crypto is like the world's biggest casino and there's almost no interference now in what we do on it, right? Yeah. And so that's going to cause more friction. But right now, the gates are open. The other thing that's a bit weird is this thing about 20%. Because you end up...

20:14So if you build a business, you kind of want to keep as much equity as you can. Like when you built Galaxy, you want to keep as much equity. But we're kind of forcing people to not hold much equity. Well, because... And I'm not sure the incentives are relying. because you get a lot of, you know, kind of the excess capital gets dumped onto the market pretty quick as soon as lockups come out and the management team or the founders don't actually hold that much of it in the end. You know, it's a really interesting process. Like, is it like, is it a decentralized company or not? Like the idea of decentralization wasn't centralization.

20:49It wasn't, I'm going to build a company. We already have the model for that. Yeah. It was, we were going to have this new model where if it's decentralized rideshare where the owner, the riders, the customers, the engineers, and the investors are all owners and no one really owns it, right? The whole decentralized thesis was a new business model. And what we have is a lot of people wanting to use the old business model. I want to hold most of the profits for myself and just use this easier regulatory framework. And so, listen, there's plenty of ways to be a centralized business on chain, just registered as a security.

21:35That's right. You can use the equity and all the token. They're two separate things. But it feels like, I was speaking to Mickey Malker about this, that this is all going to collapse and you're kind of proving it with your equity being tokenized, that the difference between token and equity I don't know whether it stays. No, it's going to collapse, but you're still going to have a regulate, you know, like I'm not going to be able to issue equity willy nilly and say, hey, best of my, like certainly not with the US framework. And what the SEC chair told us, which is really interesting, is they're not prosecuting people right now because the rules aren't clear.

22:11The moment the rules are clear, they're going to be all over this. Yeah. Right. You break the rule and the rules are clear. They're going to come after you. Right now, there's no rule. Like what's what's a security? What's like? And and Gensler was willing to prosecute you in this OPEC rule set. And Paul Atkins said no. And so there's kind of free reign until this bill comes out. And when is the bill going to come out, we think? I think, well, the government changes this a little bit, but assuming the government opens the next two weeks, I think by mid-November, mid to late November, you have a market structure bill done.

22:52So let's talk about Galaxy for a bit. You're up to ridiculous amounts of things. So catch us up with what you're doing. You've got the announcements today of Galaxy One. You've got the data center business. You've got, I mean, it's just, you've got everything. You've tokenized your equity. You've got to talk me through it because you're up to all sorts of things. And I can see there's a lot of retail interest. You and I were chatting about this offline the other day. There's a lot of retail interest in Galaxy now because it seems to be really focused on all of the kind of key points that people are looking at.

23:23So a lot of people really want to know what you're up to. Listen, we had not done. It's hard to tell your story when you're listed in Canada and you're a US-based company. And you're not allowed to. It's by pre-selling a market and all these SEC rules. And so we've done a much better job telling our story. And we've got a good story to tell. We have an unbelievable data center business, right? We have 800 megawatts already leased out. That's 20 billion plus. Explain to people how that came about. Why you suddenly came to the date? Because people won't put two and two together, but it's best to explain it.

23:57Yeah, a little bit of luck and a little bit of skill. So we got into Bitcoin mining after 2021 because we had made so much money. We had put a lot of it into an opportunity zone. And Bitcoin mining is a great opportunity zone asset. And so we said, OK, let's Bitcoin mine in opportunity zones. And as it turned out, we didn't own our own data center. So we were going to places that we could host that were in opportunity zones. And as 2022 started unfolding and the price of Bitcoin came down, a lot of those hosting agreements turned out not to be as firm as you'd think. Right. There was either deception or bad judgment on our part.

24:46And we were like, oh, shit, we have all these chips and no place to put them. And so Chris Ferraro, my president, was like, I'm not doing this again. We're going to own our own infrastructure. And so we searched for infrastructure and there was a company named Argo, a public company that was under duress. And we gave them a loan and we bought their data center from them. That gave them enough money to pay back the debt they owed and stay alive. Well, that data center called Helios turned out to literally be not just the best Bitcoin mining data center, but one of the best AI data centers. And when I first got my phone and sort of played with chat GPT, we started talking about, well, how do we play AI?

25:27And I was quite frankly on a plane with a friend of mine who was an expert at power. And he gave me the whole we're running out of power thesis. And I told him at my data center. And he's like, dude, I'll buy that. And I was like, well, and all of a sudden people started coming to us and we were smart enough not to sell it. We did our homework and quickly realized out with the Bitcoin mines and with the AI data center. um we have a strong team down there uh we made relationships with a lot of the hyperscalers and picked core wave to be our partner uh it was a risky bet to some degree but they were at the same part of their growth trajectory as we were and now on our first 800 megawatts which is what we had they have leased it out for 15 years plus five to five-year extensions their credit is getting better by the week, which is great for us.

26:19And so we are in the process of building. The first data halls come online in the first quarter, and that's when it starts cash flowing. But in two and a half years time, when it's all built out, it'll be seven,$800 million of free cash flow a year with 95 % margins, because all we're doing is security. And we provide the shell and the power connections and they do the inside. And it's about a$7 billion CapEx build for us. And so what does it take to be a player to go from Bitcoin mining to this? A, you need access to the power now. And the power people care about was 2026, 2027, 2028. The further you get along, they care a little less, right?

27:06So we had that power. Then you need a tenant. Tenants got to trust you that you can build it on time, that you have the resources to do it, that you can get it financed. Then you got to get it financed. So we borrowed$1.4 billion from Deutsche Bank recently, and we'll borrow another$2.8 billion and then another billion to build the whole thing out. You can't get it financed unless you have equity on your balance sheet, right? Because even though you're bringing the lease and saying, hey, this is what you're financing, here's the lease. they're like yeah we want a parent guarantee on completion because they're like construction modes yeah and so it really helped that chris ferraro is a structured finance guy and tony paquette had you know been the cfo at many places understood all those banking relationships because you know it's it's a the agreement with deutsche bank was like this thick then there were 32 of them, right?

28:03Wow. And so, but now that that's done, I pray and call the GC up and my team up there to make sure it's, you know, we're a couple of weeks ahead of schedule. Like we got to build on time and on cost. And other than that, I'm just a landlord collecting the rent. And what about the thesis going around that we're going to overbuild data centers? We very well might. Right now, there's no one in sight. we are we have another 2.7 gigawatts under study and what's crazy about this is so what does that mean so you apply to the grid there are two grids there's the texas grid and there's everyone else right so we're in texas so you apply to the grid and say and they have to do all these studies to say well if your power comes on 28 and their power like over 10 years are we You're going to put too much power on it, blows out the grid.

28:57And it's not just when you're using it, you can't not use it, right? These grids are very finicky. And so there's all kinds of technical studies that get done. And if you get approved, they basically sign a piece of paper. And now you've got the approval for the electricity. Like that alone, it's worth a fortune. Then you start the process. You take that, you go to the hyperscaler, you get it financed. And so we're waiting in the queue. my intuition is by the end of this year, we will go on some of that 2.7. And I think that'll be a positive answer. And I say that because, A, we've lobbied, but it's not lobbying.

29:35It's you just, we're in a part of Texas where we're the only real valid user of the power that's in that part of the state. There's two switching stations already, one switching station already built, one halfway being built. There's a giant lake for the cooling. And so it's perfectly situated. No guarantee they give it to us, but I'd be surprised if they don't. And so then we go from a trade to a business. Will we have the same tenant? Maybe, maybe not. Probably not because you want some diversity of tenants. But it's a different business than crypto. It's a different mindset. It's easier to figure out and it's not easy to execute, but like your intellectual cycles are about one-tenth of what cryptos are because on the other side, we're like, okay, how do we play the wallet game?