Billionaire and former hedge fund manager Mike Novogratz explains why institutional adoption of cryp

Publish date: 2024-07-04
2021-06-04T13:38:45Z

Crypto billionaire Mike Novogratz expects institutional players to start piling into digital assets soon. 

Novogratz, who founded Galaxy Digital years after leaving Fortress Investment Group in 2015, is one of crypto's most prominent advocates in the investment world. As a merchant bank, Galaxy's business model depends on institutional adoption, particularly by financial advisers.

Although many institutions have made advances this year in adopting digital asset technology, they still make up a small portion of the overall crypto market. Novogratz estimated that 98% of the crypto market was held by retail investors in 2017 compared to around 80% today.

"At the beginning of 2020, I was depressed because I was like, "damn, I was just way too early on institutions coming," Novogratz said, speaking at a virtual event hosted by AllianceBernstein Wednesday. The pandemic initially made him nervous, he said, but it quickly became an inflection point that drove wider institutional adoption of crypto.

Novogratz first stumbled upon bitcoin in 2012 when the currency was only popular among niche communities like "libertarians" and "people that want to live off the grid," Novogratz said. This year, shares in publicly traded Galaxy Digital have nearly doubled in price to $18 from their level at the end of December 2020, buoyed by the broader crypto rally.

Novogratz founded Galaxy to connect the crypto community to the institutional world by offering asset management and advisory services. The firm has made strides to that end — as of March, it now offers two of its bitcoin funds to wealthy clients through a joint venture with Morgan Stanley.

There is still lots of runway left in the institutional space — while some hedge fund managers have been quicker to jump in, wealth managers Morgan Stanley and Wells Fargo are now ramping up their crypto offerings. Novogratz said he recently spoke with one of the three biggest pension funds in America and that they are getting close to investing in crypto. 

Novogratz said volatility in the market has made institutions nervous, saying liquidity in the crypto market is driven by a "gigantic community of gamblers all over the world" and that it can resemble a casino at times. He said once some key regulatory concerns are addressed, institutions will flock to the space.

One of the biggest hurdles for institutions interested in crypto is their inability to see who is on the other side of a smart contract and ensure that one is not transacting with a bad actor, like "North Korea, Iran, or Hamas," Novogratz said. Institutions want to see that their counterparties have undergone the Know Your Customer (KYC) identity verification process so they cannot get in trouble with regulators, though they don't necessarily need to know the parties' specific identity, he continued.

"The moment that gets solved, you're going to see institutional adoption [of decentralized finance] explode."

He said he thinks a solution is not far off, citing six different projects he is currently looking at that are working on improving the compliance and verification process for institutions investing in crypto.

Novogratz is optimistic about many different blockchain innovations, not just crypto tokens. Galaxy helped launch a non-fungible token (NFT) company on Tuesday that will partner with Major League Baseball (MLB) to build an platform where fans can buy, share, and trade licensed content like baseball cards, Coindesk first reported. 

Check out Business Insider's picks for best cryptocurrency exchanges

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