Mike Novogratz on His Big Crypto Mistake and What’s Ahead for Bitcoin

Photo-Illustration: Intelligencer; Photo: Jeenah Moon/Bloomberg via Getty Images

A little over a year ago, when I interviewed Mike Novogratz, a veteran hedge-fund manager and crypto billionaire, I asked him what he was excited about. The CEO of Galaxy Digital, a blockchain-focused investing firm, had a short list to tout that included “luna, my new favorite coin.” By January of this year, after luna’s price soared to $100, Novogratz had celebrated the cryptocurrency with a tattoo on his shoulder, depicting a wolf howling at the moon:

When I spoke with Novogratz this week — in the wake of the stunning $50 billion collapse of the luna cryptocurrency and its blockchain ecosystem — I reminded him of that earlier conversation and his plug of luna. “Yeah, erase that one,” he said ruefully. (To be fair, in our last conversation, around cryptocurrency’s peak last year, he did advise newly rich crypto investors to “be prudent, take some chips and buy yourself a house if you can afford it.”) The crypto crash, in luna and the industry more broadly, has burned Galaxy’s portfolio and, presumably, a chunk of Novogratz’s net worth. (In recent days, the price of bitcoin fell below $20,000 from a high of nearly $70,000, while ethereum — the second-largest cryptocurrency — fell under $1,000 after topping out at almost $5,000.) The wipeout led to mass casualties in crypto funds, spreading a dangerous contagion throughout the industry akin to what the financial crisis did to Wall Street in 2008. The pain is particularly severe in some decentralized finance, or DeFi, companies, such as Celsius, which lent out their crypto assets only to have to freeze withdrawals as investors came rushing back to pull out their money. Novogratz has been on Wall Street long enough to know how this happens, yet he admits even he took on too much risk. In an interview, he reflected on what happened this time around and what he might do differently ahead of the next crypto bubble and crash — because in crypto, there is always a next one not too far away.

A lot of people are saying, “We told you crypto was a scam.” Were they right?
You have to put things in perspective. If I told you at the beginning of the pandemic you could buy Zoom stock or bitcoin — today you would have doubled your money on bitcoin and you’d have made nothing on Zoom. So that’s what I think is hard for people to get their heads around. This has been a complete and total old-school ass-beating. But it’s important not to throw the baby out with the bathwater because we had a speculative mania in lots of asset classes. Bitcoin is not going away as a macro asset. Web3 is not going away. We’ll spend more time in the metaverse, therefore companies will sell digital assets, and for digital assets to have value, they have to be unique, and to be unique, they have to live in a blockchain.

Now, is crypto criticizable? Well of course it is because it’s such an amazing mechanism that if you own a token in an ecosystem, you benefit by more people buying into your ecosystem. And so it gets very tribal. I was loved by some ecosystems and literally despised by others. Because I’d say “Hey, I think this is overvalued,” and just making that comment was like a declaration of war against their mother. And so, to this day, I get trolled just for making what seemed like rational statements. And I don’t think tribalism leads to great investing decisions long term.

Does this crypto collapse feel different from what we’ve seen in the past — for instance, in 2018 or 2014? How are you making sense of this?
It’s like in Beauty and the Beast — “Tale as old as time.” In an asset bubble, which we obviously had, when it crashes, you always find far more and bizarre pockets of leverage than you had expected. And even though you kind of know there’s leverage in the system, when it breaks apart, you’re like, “Oh, there was gambling going on here?”

I’m hoping we saw the worst last weekend. I’d be more confident of that if I knew where inflation was going to be in the next two quarters. But if you had a sell order, you most likely sold — ethereum went down to $890, bitcoin went down to $17,900. And so I think now you’re going to see the triage you see after big crashes, where people are a little less risky or a lot less risky. And so in all likelihood, we have a big recession coming. And that’s not terrible for crypto, but it’s terrible for the economy. And it’s not good for the stock market.

You don’t think it’s terrible for crypto? Why not?
It’s not great for crypto, but crypto also needs a pause. The lead horse that pulls the sled in crypto is bitcoin. And bitcoin is one of the only scarce things we have on the frigging planet. If the Fed is going to have to pause its rate hikes because the economy slows down, and we know there are still inflationary pressures, crypto takes back off or bitcoin takes back off. And that fuels the rest of the industry.

Is there anything in crypto that you’re still worried about right now? We keep learning about new casualties of this contagion in crypto, like the hedge fund Three Arrows Capital, which seems to have imploded and created various cascading effects.
I think people have their arms around the worst situations, at least understanding where things stand. It will take a while for these things to be either put into bankruptcy or sold off. Just like after ’08, there was a whole industry of Lehman claims and buying broken hedge funds or the assets of broken hedge funds. That’s going to happen. But the biggest worry everyone had was that the largest stablecoin, tether, would collapse. And the best I can tell is that it doesn’t feel like it’s a category-five worry right now. Those guys, for lots of different reasons, seem pretty stable (though there’s not transparency there as much as we’d like — we’d love more transparency). But I’m hoping that we’re somewhere between 90 and 100 percent through the forced-liquidation game. It doesn’t mean you won’t have liquidations, but it’s forced liquidations that cause that sheer fear in markets, and that’s what we saw last weekend.

People been worrying about the specter of a potential Coinbase bankruptcy after a warning the company made recently. Do you see that as a threat?
They have a bunch of cash on their balance sheet. They have a burn rate that’s way too high. And so my guess is CEO Brian Armstrong will cut that burn rate over the next quarter or two pretty immensely. They have a great brand. I think their worst-case scenario is some big traditional finance guy comes and partners up or buys them. I think Coinbase is a foundational asset for the space. And so I’d be very surprised to see Coinbase not exist in some form. They’re going to most likely try to run it on their own. But if they can’t pull that off because the crypto winter gets too grim, I’m sure someone would step in and buy them.

What seems scary about this crash is that some of these companies or protocols that have collapsed were highly regarded in the industry. Luna, of course, but also Celsius, a multibillion-dollar company that offered consumers relatively generous interest payments in exchange for taking custody of their bitcoin or other cryptocurrencies. Did you see this coming in any way?
I was worried about the macro environment. But I was hoping bitcoin would stay in the $30,000 to $50,000 range. We weren’t invested in any of the credit shops like Celsius. We had been invested in their competitor BlockFi, but we exited that over a year ago because I worried about that business model. We had at times been big investors. And in terra, we scaled back our holdings — that’s what we do with most positions when things kind of go to the sky. With hindsight, looking at luna, you can’t offer people 18 percent interest, as they did with Anchor, and not have the world all run into yours. And so they grew their ecosystem too fast — before they grew the rest of the use cases. And I think that’s one of the lessons of crypto. With this bull run, with the money printer goes brr — everything kind of went up. And the speculative mania that took place in baseball cards and fine wines and watches and tech stocks also happened in crypto. I think the speculative frenzy part is over for the time being. So it becomes a much more sober business of having to build shit that people use.

Is it over for DeFi, a decentralized financial system on the blockchain? Has the crash raised too many doubts?
In some ways, the regulators are going to lick their chops and say, “Oh my goodness.” But DeFi, for the most part, has worked. It just is worth a lot less. Where the big losses are, it’s really in this weird combination of CeFi (centralized finance) and DeFi. Celsius and BlockFi were black boxes that investors put their money in and then they did whatever they wanted with it. It wasn’t on-chain. You didn’t know what the leverage was unless you got under the hood. You didn’t know what their asset-liability mismatch was. They borrowed short and they lent long. Those are the two ways you die a sudden death in markets. You see financial services companies like the European banks in 2008, like Lehman Brothers, like Merrill Lynch, in bull markets take a bizarre amount of leverage and think they’re geniuses. And that’s what happened.

Luna and terra are a little different because it was completely transparent. So that was a combination of greed by the investors, and it was a very charismatic founder. The stablecoin was a peg based on bullishness, and when the market turned, the mechanisms to create that peg just didn’t withstand the pressure. But that was the biggest black eye because it was transparent. You’re going to have failures, but broadly, DeFi lending systems have worked — projects like Compound, Aave, MakerDAO, and Uniswap. But they’re going to have a whole lot fewer assets on them.

So is your experience with luna and this collapse going to change the way that you invest in the future?
The market will grade me. We did some things very, very well. If you look back on the last year, we sold crypto, we sold some private equity and some of our venture stuff. We took a lot of chips off the table, but we left a lot of chips on the table. And if I was that smart, I would have sold more. As a trader, it’s tough to not be tough on yourself. If you’re in the job I’m in for 30 years, you don’t like to lose. I think we get a good grade on having…