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Mike Novogratz, founder and chief executive officer of Galaxy Digital, gestures as he speaks during the Bitcoin Conference 2022 in Miami Beach, Fla., on April 6.MARCO BELLO/Reuters

It took four years of relentless conviction, but by November, 2021, Mike Novogratz had finally, and emphatically, proved his skeptics wrong. Or so it seemed.

A former trader at Goldman Sachs Group Inc. GS-N and Fortress Investment Group who was eventually sidelined by Wall Street, Mr. Novogratz made a killing by getting in on cryptocurrencies early. Convinced that a parallel financial system would blossom around these assets, he decided in 2017 to build a major hub for the new ecosystem.

Galaxy Digital Holdings Ltd. GLXY-T, the company he founded, went public on the TSX Venture Exchange the following year. At the time, the crypto sector was still in its infancy, and Wall Street often scoffed at its future. But Mr. Novogratz marketed his company as the “Goldman Sachs of crypto.” “I’m either going to look like a genius or an idiot,” he told The New Yorker at the time.

Early on, Galaxy’s performance was turbulent – the price of bitcoin, the most popular cryptocurrency, crashed 50 per cent or more twice in three years. Yet Mr. Novogratz endured the swings, and by late last year the company was worth $14-billion.

Six months later, Galaxy is in disarray. The company’s share price has crashed 81 per cent since November, and its losses have started piling up as investors flee the crypto sector.

Amid the chaos, Mr. Novogratz issued a mea culpa last week. He, and by extension Galaxy, had been a leading promoter of the cryptocurrencies luna and terraUSD, but in a matter of weeks their values plummeted and US$40-billion was wiped out – much of it lost by average investors who had followed the lead of people like Mr. Novogratz.

“Reading the stories of retail investors who lost their savings in one investment is heart-wrenching,” Mr. Novogratz wrote in a public letter.

As it stands, Galaxy isn’t quite dead. Only a fool would write off a company – and a sector – that has persevered through wild swings multiple times. But the forceful correction has made people reconsider what, and who, they were supporting.

Galaxy Digital CEO Mike Novogratz apologizes after US$40-billion Luna and TerraUSD crypto crash, predicts future sector woes

At Goldman Sachs, Mr. Novogratz started out as a money-market salesman, then became a macro trader based in Hong Kong who bet on major events, such as the Asian financial crisis in the late nineties. But in 2000, he left the investment bank abruptly. Very little was said about his departure, but the optics weren’t good. In 2018, he told The New Yorker his dismissal stemmed from “partying like a rock star,” adding, “It was a humiliating exit.”

A few years later, he re-emerged at Fortress, an asset manager that invests in everything from real estate to private equity to debt. Again, Mr. Novogratz made trades based on macro themes, but by 2015 he had made a few major bets that blew up, including one on the Swiss franc and another on Brazilian interest rates. Fortress shut its macro fund a short time later, and Mr. Novogratz left the company.

With his reputation damaged, Mr. Novogratz went into self-imposed exile. During this time, in late 2015, he has said he invested roughly US$500,000 in ether, when the cryptocurrency was trading for less than US$1. By late 2017 it was trading for US$400, and Mr. Novogratz cashed out US$250-million, according to Bloomberg News. Some of his gains were used to buy a Gulfstream G550 jet.

Mr. Novogratz did not return a request for comment for this story.

After a few years away from Wall Street, Mr. Novogratz decided he wanted to get back in the game – but this time he envisioned a cryptocurrency merchant bank that offered asset management, trading, investment banking and crypto mining.

To take the company public, he looked north, to Canada, where it is relatively easy to engineer a reverse takeover that involves merging a private business with a small shell company that already trades. With GMP Securities acting as a financial adviser, he acquired Vancouver-based First Coin Capital Corp. and merged it with Bradmer Pharmaceuticals Inc., which was already listed on the TSX Venture Exchange.

When Mr. Novogratz first announced his plans in late 2017, the timing looked ideal because the price of bitcoin was on a tear. Yet Canadian regulators took their time reviewing the plans, and by the time Galaxy started trading in August, 2018, bitcoin had lost almost two-thirds of its value.

It wasn’t until the summer of 2020 that the crypto sector found new life – and sent Galaxy’s stock soaring. By April, 2021, the company’s share price skyrocketed to $35 from $2, buoyed by unrealized gains on crypto investments. In addition to investing in cryptocurrencies, Galaxy also acted as a venture capital backer of sorts, putting money into private crypto companies.

As its shares soared, traditional asset managers took notice, including Canada’s CI Financial, which partnered with Galaxy to launch crypto exchange-traded funds that catered to the mass market. Such partnerships helped broaden the appeal of the sector, and by the end of 2021 Galaxy’s assets under management hovered around US$3-billion.

It has been mostly misery since. With inflation surging at multidecade highs, interest rates have started rising, which hurts growth assets such as technology stocks and cryptocurrencies.

Despite this trend, Mr. Novogratz started hyping burgeoning cryptocurrency luna, going so far as to get a tattoo of a wolf howling at the moon with the tag “Luna” on his arm in January. He tweeted a photo of it and added the line “I’m officially a Lunatic!!!”

It’s important to keep in mind that building the “Goldman Sachs of crypto” is an odd pairing. Many crypto evangelists want their ecosystem to be completely decentralized – that is, with no Goldmans acting as intermediaries. Do Kwon, the creator of luna’s sister cryptocurrency, terraUSD, has often equated fiat currencies such as U.S. dollars to “state violence.”

Nevertheless, Mr. Novogratz’s enthusiasm seemed smart for a few months. Yet by early May the price of luna started to crash – and that caused trouble for its sister cryptocurrency.

TerraUSD is what is known as a stablecoin, used as an intermediary for transferring in and out of cryptocurrencies without having to convert to U.S. dollars. Typically, stablecoins have U.S. dollar reserves in a bank account, but terraUSD was backed by luna and a fund of other cryptocurrencies, including bitcoin. When the prices of these cryptocurrencies dropped, the bottom fell out.

By then, Galaxy’s stock was already struggling because of the broad crypto selloff. The pain turned even more severe when luna started crashing. Galaxy recently disclosed it is expected to lose US$300-million during the current quarter.

By Mr. Novogratz’s own admission, there’s likely more pain to come. In his public letter last week, he said he still believes in the long-term value of cryptocurrencies but cautioned that rising interest rates mean trouble for the sector.

“At a high level, it’s important to understand that volatility is likely to continue, and the macro situation is going to remain challenging,” he wrote. “There is no cavalry coming to drive a V-shaped recovery. The Fed can’t ‘save’ the market until inflation falls.”

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