Galaxy Digital Capital Management has launched two funds that offer institutions and high-net-worth investors passive exposure to Bitcoin — an alternative to more expensive hedge funds and less messy than buying actual cryptocurrency.
With the two funds, Mike Novogratz’s firm is betting that investors will pay a flat 1 percent management fee to get simple exposure to Bitcoin through a fund that also offers traditional services such as third-party custody, standard tax documentation, pricing from Bloomberg, and client service.
The new Galaxy Institutional Bitcoin Fund is a high-minimum portfolio designed for pensions, endowments, and other institutions and offers weekly liquidity. The second product — the Galaxy Bitcoin Fund — is for accredited investors and gives quarterly liquidity to investors with a $25,000 minimum.
In an interview with Institutional Investor, Novogratz, founder and CEO of crypto-focused Galaxy, said the firm originally launched an index fund, the Galaxy Crypto Index Fund, in May 2018. That was perhaps the worst time in the market for the currencies. The fund, which it still offers, didn’t get much traction.
“The market went straight down for a long time. We wanted the index to be like the S&P 500. And we still want that over time, but now the crypto world has become Bitcoin-centric, and for good reason,” he said.
“We had a spectacular bubble that peaked in late ’17, early ’18. One of the reasons the market crashed was that every crypto currency was being seen as another Bitcoin. You had Ethereum…shitcoins all flooding the market with supply,” said Galaxy’s founder.
Bitcoin has performed well since, according to Novogratz, a former macro hedge fund manager, because “it has found its lane. It’s a sovereign store of value. Of the non-crypto assets of the world, only gold is a store of value.”
[II Deep Dive: Crypto, With Crash Helmets: Hedge Funds Exploit Bitcoin Mania]
Novogratz said Bitcoin now has more believers. “It’s not just the old cyber punk crypto community. Now it’s mainstream,” he said.
“This is the first of its kind fund that any pension could put through the operational due diligence process. I can underwrite this in an allocator’s portfolio,” said Steve Kurz, head of asset management at Galaxy Digital, who will oversee the two new funds with another portfolio manager.
Novogratz said Bitcoin’s rise is being driven by macro trends, which include huge deficits, $10 to $11 trillion in negative-yielding global debt, and the decline of globalization. “Those trends make investing more difficult. So a fiat currency happens. It’s a historical story,” he added.
As volatile as Bitcoin has been, some mainstream firms are taking it seriously. Galaxy is eyeing firms like TD Ameritrade, for instance, which is working on getting regulatory approval to offer Bitcoin to its clients. Galaxy has had discussions with other firms about making Bitcoin available in individual retirement accounts.
Still, Galaxy recommends investors put only 1 to 2 percent of their portfolios in Bitcoin.
There are risks beyond price volatility. Novogratz pointed to regulators possibly pulling an about-face on the currency or the movement running out of energy.
But there is a limited supply of Bitcoin left to be mined, and the pace will get cut in half in the next six months, according to Novogratz.
“A lot of people are buying [it] to put it away. The gold analogy is such a strong one,” he said.