The Year Of Digital Gold

Stock Pick: Galaxy Digital Holdings (GLXY-US, $9.1B MCAP)

Instead of a Santa Claus Rally, this week’s FOMC caused the market to react like a kid who doesn’t believe in Santa Claus.

The FOMC led to a massively volatile market, with major indices experiencing massive selloffs into year-end instead of the autopilot march higher that many expected.

This was mostly due to the Fed’s inflation expectations being much higher than anyone anticipated for 2025. The Fed is now telegraphing only 2 cuts over the course of next year, lending further credence to a higher for longer rate environment.

We saw the VIX spike from 15 to 28 as the market tanked and volatility took a hold. In these times of panic, it’s important to zoom out and re-check your thesis. This will give you confidence in staying the course when looking at longer term trends.

One of these trends is the deregulation of the crypto space. A much more friendly regulatory regime is starting to get unlocked at the same time that institutional adoption of Bitcoin accelerates, as major BTC ETFs now hold over $100B in assets.

Crypto can also serve as an uncorrelated diversifier in portfolios given this spike in volatility.

This week’s pick is at the intersection of powering the underlying infrastructure — while at the same time having significant assets on its balance sheet that are relevant to the space. Let’s dive into this full stack, vertically integrated approach.

• Overview 👉 What Does Galaxy Do?

• Operating Arms 👉 GGM, GAM, GDIS

• How Do They Make Money? 👉 Trading Fees, Holdings Appreciation

• By The Numbers 👉 Key Metrics

• Risks 👉 Potential Pitfalls

Overview 👉 What Does Galaxy Do?

Galaxy Digital Holdings Ltd. has emerged as a key player in bridging the gap between traditional finance and the rapidly evolving world of digital assets. Founded in 2018 by former hedge fund manager Michael Novogratz, the company operates as a diversified financial services firm, focusing on cryptocurrency, blockchain, and the broader digital economy. Its business model spans multiple verticals, including trading, asset management, investment banking, mining, and venture investments. With a mission to drive institutional adoption of digital assets, Galaxy Digital has positioned itself as a one-stop shop for financial firms looking to navigate this dynamic sector.

The company’s trading desk provides liquidity and risk management solutions for institutional clients, offering services such as market-making and over-the-counter (OTC) trading. On the asset management side, Galaxy Digital oversees a range of funds, including those specializing in Bitcoin and Ethereum, as well as venture and hedge funds targeting blockchain startups. Additionally, its investment banking division advises firms on capital raising, M&A, and other strategic transactions, making it a cornerstone for businesses integrating blockchain technologies into their operations. Galaxy Digital complements these efforts with direct investments in blockchain projects, aiming to capitalize on innovation and long-term growth in the sector.

Operating Arms 👉 GGM, GAM, GDIS

The way to look at this company is in three distinct operating segments. The following sections will provide an overview as well as a breakdown by each segment.

Galaxy Asset Management (GAM): GAM oversees Galaxy Digital’s investment management business, catering to institutional and high-net-worth clients seeking exposure to the digital asset market. The division offers a range of products, including passive Bitcoin and Ethereum funds, actively managed hedge funds, and venture capital funds focused on blockchain startups. GAM aims to provide investors with diversified access to the digital asset space, leveraging Galaxy Digital's deep expertise and research capabilities. It serves as a gateway for clients interested in profiting from the growth and innovation of blockchain and cryptocurrency technologies.

Galaxy Global Markets (GGM): GGM is the company’s trading and market-making arm, providing liquidity solutions for digital assets. This division operates as a critical enabler of institutional adoption, offering over-the-counter (OTC) trading services, derivatives, and structured products for clients such as hedge funds, asset managers, and family offices. As markets continue to soar, GGM will benefit from increases in agency trading, lending, and Galaxy has reported net income, driven by unrealized and realized gains of over $1B. Its market expertise also supports Galaxy Digital’s other operations, creating synergies across the firm's ecosystem.

Galaxy Digital Infrastructure Solutions (GDIS): This segment houses its proprietary BTC mining and hosting services, critical network validation services, and self-custodial technology. In December 2022, the Company acquired Helios Bitcoin, a 125,000 square foot mining facility located in Texas, from Argo Blockchain for $77M. The facility can support 1.7GW for which the Company expects approval for a “portion” in H1/2025. This build-out will take several years, but represents a significant value creation opportunity. A month back, Galaxy executed a non-binding term sheet with a “U.S.-based hyperscaler” to host high performance computing (HPC) at its Helios campus. According to the Company, the term sheet includes options to allocate all of Helios' power capacity to HPC hosting and support. This is an additional greenfield opportunity.

How Do They Make Money? 👉 Trading Fees, Holdings Appreciation

Trading Revenue (GGM): Galaxy Global Markets earns revenue through trading activities, including market-making, proprietary trading, and liquidity provisioning. These activities involve buying and selling digital assets, capturing the spread between bid and ask prices, and earning trading fees from institutional clients.

Revenue Source: Trading spreads and fees + Gains from proprietary trading in digital assets and derivatives.

Asset Management Fees (GAM): Galaxy Asset Management generates management fees by overseeing funds that invest in cryptocurrencies and blockchain-related assets. It may also earn performance fees tied to the returns of these funds, typically a percentage of profits above a specified threshold.

Revenue Source: Management fees (fixed percentage of assets under management, or AUM) + Performance fees (variable percentage based on fund performance)

Galaxy Digital also holds equity stakes in blockchain startups, protocols, and digital assets. This division earns revenue through capital appreciation of these investments and realized gains from exits (e.g., IPOs or acquisitions). Dividends or token rewards may also contribute to this line.

Revenue Source: Gains from the sale of equity positions or tokens + Dividend income or staking rewards

Mining Revenue (GDIS): Galaxy Digital earns revenue from its Bitcoin mining operations, where it participates in the cryptocurrency mining ecosystem. This involves solving complex computational problems to validate transactions and earn rewards in Bitcoin.

Revenue Source: Block rewards (newly minted Bitcoin) + Transaction fees from the Bitcoin network

By The Numbers 👉 Key Metrics

GGM: Key Metrics to track here are Counterparty trading revenue, Loan book size, and deal value of pipeline.

GAM: Key metrics to track here are Net inflows, AUM, and Client number growth.

GDIS: Critical to mining unit economics is the marginal cost to mine, in which Galaxy has a best-in-class cost structure. A Key metric here is BTC mined in the quarter.

Bringing this all together, we can see strong operating line-items for the nine-months ending Sept 30, 2024:

Risks 👉 Potential Pitfalls

Industry Nascency: Galaxy Digital operates in a young and volatile industry, exposing it to significant market, legal, regulatory, and counterparty risks. Events like the FTX bankruptcy, which resulted in a ~$68 million loss for Galaxy, highlight the potential for unexpected disruptions in this evolving ecosystem.

Spot Price Volatility: Galaxy’s revenue is heavily influenced by the price and volatility of digital assets like Bitcoin, which drive trading activity and investor participation. Prolonged price declines or periods of low volatility could lead to lower-than-expected revenue and missed investor expectations.

Regulation: The uncertain and evolving regulatory landscape for cryptocurrencies poses a risk to Galaxy’s business model and operations. Clarity in regulations is essential, as adverse rulings, such as securities designations for certain digital assets, could disrupt its operations and financial health. However, the new political landscape has drastically changed for the better.

Competition: Galaxy faces competition from traditional financial institutions, crypto-native firms, and decentralized finance platforms across all its business lines. While the company is well-positioned and gaining market share, it must continuously innovate to stay ahead in this rapidly evolving industry.

Wrapping Up…

I love vertically integrated plays with a lot of irons in the fire.

I like buying ideas just as much as I love buying companies, and when you get the theme directionally right, it can lead to a tide that lifts all boats.

By diversifying across three distinct segments that are closely integrated with each other, Galaxy’s platform becomes a flywheel that can potentially perform well across several market scenarios. This is especially helpful on the volatile crypto-coaster.

If you want to play the crypto theme — Galaxy is a great name to add to your watchlist.

For those looking for the best Week in Review and Investing Week Ahead posts on the web — click below to learn more about Rate of Return, the GRIT Flagship newsletter!

Cheers,

The GRIT Alpha Team

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