Hedgeweek exclusive: Mike Novogratz, the CEO of Galaxy Digital, gives his thoughts on the state of the digital assets hedge fund industry at the end of the first month of 2023 – and sees signs of progress.
- Last year’s events weakened institutional investor interest in digital asset hedge funds
- In the aftermath of FTX and other collapses, firms should strengthen their processes
- But there have been some promising signs that the industry has learned lessons
By Mike Novogratz
CEO, Galaxy Digital
The crypto market is off to a good start this year. That’s on the back of a lot of selling last year and the clearing out of excessive leverage.
Still, crypto faces headwinds, from looming regulatory challenges to a less confident retail investor base. But retail volumes have already picked up.
Institutional investor interest, meanwhile, has weakened. Trust was damaged, and lots of people bought at bad levels. There are some institutions that entered the space late and got hit with losses, forcing them onto the sidelines for now, such as some Canadian pensions. On the other hand, we see some opportunistic buying. Investors who have small positions feel now is a good time to start adding, while others who have long eyed the space feel they’re closer to getting in.
Last year was a setback. Our industry proved to be immature, with various players lacking proper governance and risk controls. That ended up causing a breakdown in trust within and across the industry. This year needs to be about rebuilding trust.
A big part of how the industry rebuilds trust is by stepping up and deepening due diligence practices. When evaluating exchange risk, for example, due diligence should include a close look at the firm’s financials and if they are audited, whether the exchange provides proof of reserves, and more details on governance and controls, including whether the firm employs a chief risk officer or utilizes an independent board of directors. When it comes to counterparties, firms should be reassessing their financial health following the events of 2022 and pushing to maintain a regular dialogue.
It’s too soon to declare that we, as an industry, are all clear just yet. Still, there have been some promising signs. We’ve seen progress on the transparency front, with more exchanges providing proof of reserves. We’ve also seen a significant deleveraging across the industry, suggesting investors are being more prudent. Investors are clearly more cautious too. But it’s too early to tell. Galaxy is committed to providing investors with transparency and accountability while also helping to build out the ecosystem in a responsible manner.
Education is a crucial part of our mission, and we see much more needing to be done here. Much of that education revolves around the technological capabilities of blockchain technology and how various projects and protocols work. We’ve only just scratched the surface of digital assets’ broader potential.
So as builders continue to create new, innovative projects, the industry needs to work together to help the broader market of investors and even potential users understand how it all works. In addition to frequently publishing research on digital assets, we host regular webinars and educational sessions to help people understand this space and what it’s building toward.
Mike Novogratz is the CEO of Galaxy Digital, one of the hedge fund industry’s largest digital asset managers. His insights will feature in Hedgeweek’s next research report, due later this month. To receive this report, and others in our monthly ‘Insights’ series, follow this link.
