Last Updated on August 9, 2023 by Bitfinsider

The second quarter of 2018 was difficult for Mike Novogratz’s Galaxy Digital, which posted a net loss of $46 million and demonstrated just how badly the capital markets for the sector were damaged by the crypto credit crisis and numerous bankruptcies that occurred in 2017.

“Galaxy’s operating businesses performed well in the second quarter against a backdrop of continued uncertainty and regulatory pressure, as we continue to manage the Company to meet the evolving needs of our clients,” Novogratz said in a statement.

Galaxy Digital, a company that engages in the lending, trading, mining, and banking services industries, provides a health check on a number of pertinent cryptocurrency divisions and, in a sense, serves as a microcosm of the entire industry. There were some encouraging signs hidden within the financials that hint to the progressive institutional acceptance of digital assets in a post-FTX environment, even though many segments are still nursing their wounds from crypto’s decline last year.

Regarding the trading sector, Galaxy saw a 54% drop in sales from the prior quarter due to low liquidity and uncertain regulatory conditions. Given the well-documented drop in volumes and order book depth across exchanges, this shouldn’t be shocking.

Nevertheless, the company stated that over 1,000 counterparties were added throughout the quarter, a rise of 30. The fact that 29% of those counterparties are active shows that there is substantial lagging interest in the cryptocurrency market. In contrast, a former CEO at a competing firm claimed that 9% of the total client base of his prior firm was made up of active counterparties.

According to president Chris Ferraro, it appears like Galaxy’s clients are growing more engaged as time passes after the FTX blowup. The pertinent section of the firm’s analysts’ Q&A is as follows:

Importantly, the desk has recently seen an increase in active client engagement as both traditional and crypto-native asset managers and hedge funds have reengaged our desk to convey their opinions on crypto investments through spot and derivatives. “Investors have been reenergized to seek upside potential in Bitcoin and the larger asset class as a result of public filings in the U.S. for spot Bitcoin ETF,” said Ferraro.

Customers are acting in a different way as well, preferring to engage bilaterally through more intricate derivatives structures rather than through crypto exchange facilities. For businesses like Galaxy that can meet those demands, this is wonderful news. This change in flows is noticeable across desks; one executive at a competing trading firm noted that in this environment, bilateral, more relationship-driven flows account for nearly four times the flows from exchanges. Naturally, companies like Galaxy will need to store some of their risk on the market. In any event, Galaxy has been adjusting to this change and, in some cases, is completely onchain settling derivatives trades.

“One trend we’ve seen amongst counterparties since the meltdown of several trading venues over the past year is an increase in demand for on chain OTC options. To meet this demand in the second quarter, Galaxy completed the world’s first bilateral OTC option trade settled entirely on chain, making the expansion of the firm’s trading capabilities by leveraging the benefits of the centralized financial infrastructure. This is just one example of many of how we’re continuously innovating to meet the evolving needs of our clients,” said Ferraro.

The company’s quarterly loan originations fell from $160 million to $115 million Q/Q in the lending division. Its loan book is still “nothing to sneeze at,” to use the words of a trade officer at a rival company. As of June 30, it had a value of $550 million, making it one of the largest in the industry and giving Galaxy a good carrot as “their best bizdev tool,” in the words of a rival executive. Because there are fewer options for traders searching for leverage now than there were before the credit crisis last year, Galaxy has an advantage over competing companies.

All across the world, the deal-making climate is suffering as a result of the U.S. Federal Reserve’s decision to raise interest rates. Therefore, it is hardly unexpected that Galaxy’s M&A and advising division generated only $45,000 in revenue.

This isn’t only a crypto reality, to reiterate. According to Dan Primack of Axios, almost all deal-making metrics declined in the first half of 2023, with U.S. M&A falling 5% in terms of volume and 41% in terms of cash. With more than 15 opportunities being pursued by the team, it appears that the present situation is a little better for Galaxy’s investment banking division.

With increasing income from proprietary mining activities, mining was one of Galaxy’s business lines that saw revenue growth throughout the second quarter, bringing revenues to $15.4 million. The company provides hosting services and also looks after its own mining facilities after starting its mining operation in 2020. At the end of the previous year, it paid $65 million to acquire the Helios bitcoin mining facility owned by bitcoin miner Argo.

Thanks in part to low energy costs, the company can boast a solid 64% direct profit, with an average cost of mining between $9,000 and $10,000 per bitcoin.

Galaxy reported 3.7 exahashes per second (“EH/s”) of “Hashrate Under Management” at the end of Q2 and anticipates reaching 4.0 EH/s of “HUM” by the end of the year. That would equal 1% or more of Bitcoin’s current total hashrate, which is a sizeable portion.

Revenue at Galaxy’s asset management division increased by 619% Q/Q to $33.8 million, which was the largest increase. To be clear, a large portion of that income came from gains on the venture side of the business as well as from investments made into its family of active and passive funds.

Partnerships with conventional asset managers, such as DWS Group in Europe and Invesco in the United States, will be a key emphasis for the firm over the next quarters.

That is, as we stated, is; hence, the agreement has already been signed. The products are in development, and jurisdictions in Europe have been targeted. “Either we’re entering new markets where there’s a clear lane to be able to launch new products in Europe, or we’re breaking into new markets where there’s a clear lane to already have exchange traded products that are in existence today,” said Ferraro.

The large list of issuers competing to introduce a spot bitcoin exchange-traded fund includes Galaxy and Invesco, and according to Novogratz, the fund may be approved within the next six months. Although it’s uncertain whether the Galaxy/Invesco partnership will emerge as the market leader once such a fund is allowed by authorities, the launch of such a product would probably benefit the company’s overall operations since it would act as a stimulant for the rise in cryptocurrency values.