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Seasoned investors pile into the industry behind new currencies

Some benefits of investing in cryptocurrencies can be quite unexpected. For billionaire financier Mike Novogratz, it was the chance to give a speech about digital art at a prestigious auction house — and settle an old score.

“I was thinking: if only my third-grade art teacher could see me now,” says the 56-year-old former money market trader. “She didn’t think I was very good and here I am, on stage at Christie’s giving a talk.”

It may not be his biggest achievement, but it adds to the pleasure he says he is finding in his current venture, Galaxy Digital, a specialist cryptocurrency financial services and investment management company. For him, the excitement of the crypto boom stands comparison even with his greatest professional triumph: the 2007 flotation of Fortress, the first hedge fund to go public.

“That was a heady time but, of course, we ran right into the [2008] financial crisis and learnt our lessons,” says Novogratz, referring to the losses that then hit hedge funds. “[Crypto] has been even more fun in a way . . . it’s a young people’s business and it’s almost impossible to keep up with the innovation right now.”

Feeling the force: Mike Novogratz, who has described his Galaxy Digital venture as a Goldman Sachs for crypto markets © Shakira Hunt for the FT

Novogratz is one of scores of wealthy individuals who are investing not just in cryptocurrencies, but in the industry that underpins it — exchanges, asset management companies and technology providers. Mostly Americans, they often bring money to crypto that they have made in earlier ventures, along with experience that could help turn a chaotic explosion of activity into a sustainable financial sector.

But while there are plenty of fans of the blockchain technology underpinning cryptocurrency issuance and trading, there are also many critics who question how such an unruly mass of new businesses can win over mainstream investors or regulators.

Investors such as Novogratz could make the difference. Unlike many crypto investors, he has a solid financial background, having worked for a decade at Goldman Sachs before the swaggering years of Fortress. He first invested in bitcoin in 2012, ploughing in $7m when it was trading at $95. With global financial markets then in turmoil, especially in Europe, he saw bitcoin as an alternative currency and “a really interesting speculative bet”, he says. Three years later, he bought 500,000 ethereum for $0.99 each from the coin’s co-creator, Vitalik Buterin.

The punt yielded big profits, spurring Novogratz to announce he would build what he called a Goldman Sachs for crypto markets. He launched Galaxy Digital in 2018, taking his inspiration for the name from the Star Wars films and putting his entire crypto portfolio, worth $302m, behind the company. The business now has more than $9bn of assets.

Novogratz thinks the arguments for crypto now are even more compelling, with cheap money threatening the credibility of traditional finance. “What’s happening today in markets makes the quantitative easing of 2012 look like a drop in the bucket,” says Novo, as he is known in the markets. “The blockchain revolution has a purpose: we are going to rebuild the financial infrastructure and we are going after the rent-takers.”

This is not a new idea. Fans have long claimed the technology could make payments free, provide solutions for the unbanked, make it easier for individuals to own their own data and end counterfeiting. Critics say blockchain, or distributed ledger, technology destroys the environment (because of the vast amount of electricity it consumes), is clunky and is a solution desperately looking for a problem.

A decade ago, blockchain was synonymous with bitcoin. Today, new ledgers such as ethereum power new markets, including decentralised finance (DeFi) and non-fungible tokens (NFTs). Meanwhile, Ouroboro units, a new type of blockchain technology, are faster, more efficient and more environmentally friendly than the original ledger behind blockchain.

Like Novogratz, Wyoming-based Charles Hoskinson believes in blockchain’s transformative potential. A key individual in crypto, he is the joint inventor of the ethereum blockchain and of the Cardano blockchain platform, and chief executive of blockchain research organisation IOHK.

“I don’t really get weekends — I’m always on a project,” says Hoskinson, 33, who studied analytic number theory at university. When he does have some free time, he hunts with eagles in Mongolia, goes on week-long fasts and says he is “a keen user of cryogenic chambers”. And he has played football with an elephant.

Charles Hoskinson, who likens bitcoin to an early steam engine: something that proved hugely valuable but only as a starting point
Charles Hoskinson, who likens bitcoin to an early steam engine: something that proved hugely valuable but only as a starting point © Chet Strange for the FT

Hoskinson, who last year spoke at the World Economic Forum in Davos about blockchain’s potential to power social change, likens bitcoin to an early steam engine: something that proved hugely valuable but only as a starting point. “There are about half a dozen third-generation cryptocurrencies that do what bitcoin does and much more, but don’t consume [the same amount of] power,” he says. “This progress will allow blockchain to spread beyond finance and create real social change.”

Blockchain technology is seeping into areas beyond finance, including new applications in art, property and collectibles in the form of NFTs. Stablecoins — special digital assets that link cryptocurrencies with central bank-backed money — have a market capitalisation of nearly $115bn, according to cryptocurrency data website CoinMarketCap. Even football fans buying tickets to the recent Euro 2020 tournament were using a system that relies on distributed ledger technology.

But hurdles remain. Crypto’s rapid growth has caught the eyes of regulators, including those in China and the US, who are concerned about the amount of money that has flown into the volatile market. This has cooled the crypto trading frenzy that gripped investors in the early months of the Covid-19 pandemic.

The industry is at a crossroads, heading either for a bust or the emergence of clear proof that the technology is here to stay. “Right now, I can attract the best and brightest from all universities but, if something happens and it all goes quiet for four years, they won’t come to crypto,” Novogratz says. “The regulatory overhang is real, the pushback from China is real, and [these] will be a real test.”

Risks abound. Regulators, fearful of losing control, dislike private cryptocurrencies and efforts to turn traditional assets into blockchain-based tokens. Cryptocurrencies draw hordes of fraudsters: in 2020 alone, scams cost crypto investors $1.9bn, according to crypto analytics company CipherTrace.

Gary B Gorton, a professor of finance at Yale School of Management, wrote in a research paper: “Based on lessons learned from history, we argue that privately produced monies are not an effective medium of exchange because they are not always accepted at par and are subject to runs.”

But that does not deter committed investors such as William Quigley. Back in the 1990s, the 56-year-old billionaire helped create the marketplace for virtual assets in video games, where players buy extra game items. Today, the sector is worth $200bn annually. He co-founded IdeaLab Capital Partners, the first venture capital firm focused on internet start-ups, which backed payments group PayPal.

In crypto, he is a co-founder of Tether, the world’s first stablecoin, and half of the duo that developed the first crypto derivatives. He is also chief executive of the Worldwide Asset eXchange, the largest NFT platform. These pieces of computer code can store video or other multimedia content and cannot be counterfeited. They allow artworks to be “tokenised”, or sliced into pieces, with the rights sold to hundreds of customers and traded in secondary markets.

William Quigley, whose web investment background made him an ideal candidate for crypto
William Quigley, whose web investment background made him an ideal candidate for crypto © Claudia Lucia for the FT

Quigley’s affinity to digital art started with a fortuitous link to an artist with the same name, William Quigley, who exhibited his work alongside that of Andy Warhol. The entrepreneur contacted the artist, they stayed in touch and recently collaborated on a pack of baseball-themed NFTs that sold out in minutes.

However, many blockchain early adopters were not sold on NFTs. Quigley recalls giving a talk in 2017. “I remember presenting a slide and saying these pieces could go for $50,000 and someone in the audience said: who would pay $50,000 for something that is backed by nothing? So I had to remind them that’s true of the whole crypto world,” he says.

Today, NFTs are all the rage. In the first six months of the year, NFT sales amounted to $2.5bn, compared with less than $14m in the same period last year. In March, a crypto investor known as MetaKovan paid a record $69m for an NFT by digital artist Beeple.

Quigley’s web investment background made him an ideal candidate for crypto, though initially a reluctant one because of losses suffered in the dotcom boom. “I had scar tissue as a venture capitalist when my friend told me about bitcoin [in 2010],” he says.

But, a year later, despite his caution, Quigley felt there was a marketplace for virtual items. “I decided to focus fully on blockchain because it reminded me of 1994 when the first commercial web browser [Netscape Navigator] launched,” he says. “I had a playbook for how the space [was] likely to evolve whereas others didn’t.”

Quigley says NFTs could wipe out counterfeiting — whether of banknotes, art or Disney teddy bears. “Consumer products with a token that acts as a digital twin will allow buyers to check whether it is original, how many were made and where it comes from instantaneously, which is difficult to do with a dollar note or an ounce of gold,” he says.

Meanwhile, investors have been flocking this year to bet on transaction systems (financial, but in future for any sale process) where blockchain tech cuts out intermediaries and replaces them with preprogrammed algorithms.

Interest in this kind of decentralised finance has exploded since January, with the overall market now worth $53bn, up from $15bn at the start of the year, according to specialist data and analytics company DeFi Pulse. Novogratz is among the backers of DeFi. Through Galaxy Digital, he is helping to finance Bullish Global, a trading platform for DeFi recently valued at $9bn in a finance deal. “The global financial crisis wouldn’t have happened if we had DeFi then, because it’s a completely transparent system,” says Novogratz. “It’s scaring regulators right now because it’s growing so fast, but I think that will get resolved in the next six to eight months.”

Novogratz supports regulation. “I keep telling the DeFi guys: dudes, if you keep flicking the bird to the US government you’ll find out that the long arm of the US law is very scary,” he says. “We need to be more grown-up about how we approach regulation because blockchain really is a better system.”

But blockchain retains a strong anti-establishment flavour. “Ultimately, we believe [blockchain] technology is a government replacement system,” says Hoskinson, who argues that disillusionment with authority is widespread, as evidenced by Donald Trump’s success in becoming US president, the Black Lives Matter movement, Brexit and environmental protests. “We term this the ‘great reset’ and there is a global conversation right now, but what the heck does that mean? What are we actually going to do? It’s not good enough to be angry . . . you have to take a step back and say, what do we do? What’s the solution?”

But before it can change the world, however, blockchain technology has a monumental challenge: to show it can secure acceptance and trust from a much wider range of people. And turn a profit for the investors ploughing their money into it.

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment

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