Summary Galaxy Digital Holdings has outperformed Bitcoin by over 100% mainly due to leveraged exposure to digital assets and potentially favorable regulatory developments. The firm's diversified financial services, including margin lending and structured products, amplify returns. Despite a net loss, Galaxy's strong liquidity position, asset management business, and diversification provide stability amid crypto market volatility. There are volatility risks associated with its leverage strategy and as traditional financial institutions proposing crypto products. Still, increasing institutional interest in crypto and higher liquidity, thanks to the possibility of being listed on the Nasdaq, are positives for investor sentiment. Since I last covered Galaxy Digital Holdings ( BRPHF ) in July last year, it has risen by over 90%. At that time, I had a Hold position because of short-term volatility, and from $13.74, the stock indeed dropped to $8.30 by August before subsequently appreciating. Moreover, it outperformed Bitcoin by more than 125% last year, largely helped by the November 5 election, as charted below. Data by YCharts This may be because of a more crypto-friendly regulatory environment likely to encourage wider institutional BTC adoption, leading to better revenues for this diversified financial services firm with investments in Bitcoin mining. Also, a potential Nasdaq listing could greatly improve its visibility. Thus, after highlighting the risks, this thesis aims to paint a bullish case due to Galaxy's leveraged exposure to crypto gains leading to a multiplier effect on the stock price. Highlighting its Leveraged Exposure to Bitcoin's Gains It offers leveraged products as part of its Global Markets business. These include collateralized loans, which allow clients to borrow against their digital assets, including Bitcoin. This enables Galaxy's clients to leverage their holdings for additional capital without needing to sell their assets for dollars. Additionally, Galaxy offers structured products that combine loans with derivative risk management solutions for leveraged exposure to Bitcoin while managing associated risks. Also, by providing customized debt capital financing secured by BTC miner treasuries and infrastructure assets, Galaxy indirectly increases its exposure to Bitcoin. The counterparty trading business generated $54 million in sales in the third quarter of 2023 (Q3), a 117% increase quarter-over-quarter, primarily driven by higher derivatives volumes and increased lending activity. This was achieved despite a slowdown in trading volumes broadly caused by BTC prices decreasing by 7% in Q3 compared to Q2. Company presentation (s201.q4cdn.com) Looking at the fourth quarter, BTC has now surged to over $100K, suggesting better trading revenues. Continuing on a positive note, with a loan book size of $863 million, Galaxy's leverage with a debt-to-equity ratio of around 0.4x (863M/2.1B) appears manageable given its equity capital was $2.1 billion at the end of Q3. Moreover, given its total liquid assets were $1.5 billion, the loan book coverage comes to around 1.7x ($1.5B/$863M). This signifies that even with leverage, Galaxy's liquid assets provide a strong cushion as long as BTC prices hold up. Moreover, similarly to leveraged stocks like MicroStrategy ( MSTR ), Galaxy has experienced amplified returns compared to its underlying asset during bullish market conditions as shown in blue below, namely during 2021. Data by YCharts However, the above deep blue chart also exhibits a high degree of volatility. Faces Volatility Risks Because of Exposure to Leverage and Mining Shifting to caution, only $475 million of the liquid assets consist of cash and stablecoins with most tied to net digital assets like Bitcoin and Ethereum ( ETH-USD ) which are volatile. This implies that in a crypto market downturn, these assets could lose value, reducing liquidity and increasing the relative size of its loan book. Additionally, this is a non-profitable company, with a net loss of $54 million reported in Q3. This is partly explained by its mining business bearing the brunt of increasing mining difficulty, while rewards plummeted by 50% following April's halving event. As a result, its total mining revenue decreased by $5.6 million sequentially, while the average marginal cost to mine increased by $15.5K to $38K per Bitcoin. Company presentation (investor.galaxy.com) Thus, while its stock benefits both from its leveraged exposure to BTC and as a miner when asset prices go up, this double exposure may entail a high degree of stock volatility if the crypto market were to suffer from a plunge. This was the case in 2022 when the Fed raised rates aggressively as shown in the above chart. Consequently, depending on the amount of loans tied to floating rates, monetary policy staying higher for longer means interest expenses are not likely to decline. This may be the reason why it suffered from more volatility than Bitcoin or the tech-heavy Invesco QQQ Trust ETF ( QQQ ) around December 19 (as highlighted in brown) when the Fed proceeded to a hawkish cut, or reduced rates by 25 basis points while signaling that further cuts may take longer than the market expected. www.seekingalpha.com Still, I believe the asset management business plays a stabilizer role and there is also diversification into AI. The Stabilizer Role of the Asset Management Business and Diversification This business grew by only 2% QoQ in Q3 with $4.6 billion in AUM as shown below with $250 million inflows, a result of lower asset prices compared to Q2, but growth could receive an acceleration in Q4 thanks to increasing institutional interest in cryptocurrency investment products following Bitcoin's recent rally. Thus, the firm is likely to earn substantial performance fees in case of strong demand for its passive and active ETFs, as its managed funds become attractive vehicles for investors seeking exposure to digital assets without direct ownership risks. Company presentation (s201.q4cdn.com) Thinking aloud, by providing a relatively stable revenue stream compared to the more volatile trading and mining segments, the asset management business could help absorb the adverse impact of Bitcoin price fluctuations on the company's financial results. Moreover, Galaxy has strategically positioned itself in HPC infrastructure and the firm's initiatives to integrate AI technologies have enhanced its service offerings and could receive a boost from the new administration deregulating AI , or making it easier for businesses to invest and develop super smart apps. Thus, as a result of its diversified revenue streams and ability to attract a broader client base, investor confidence has been boosted, contributing to the stock's robust performance. Looking forward, with the positive market sentiment around regulatory developments, there is likely to be a " crypto renaissance" . More Crypto-Friendly Regulators may accelerate the transition to the Nasdaq Thus, after the election of the crypto-friendly President, the landscape of the industry is rapidly evolving, particularly in light of anticipated regulatory changes, especially at the SEC (Security and Exchange Commission). Furthermore, the new administration is moving fast as evidenced by the repeal of the Staff Accounting Bulletin 121 (SAB 121) which has hindered FIs (financial institutions) from entering the crypto space. Instead, the U.S. regulator has introduced SAB 122, which allows FIs to manage clients’ crypto holdings. This could facilitate broader participation from established banks and could unleash a wave of institutional investment in cryptocurrencies because with more traditional players entering the market, there is an expectation that substantial capital will flow into the industry. Ultimately, this inflow could drive up prices by fostering innovation, namely creating new crypto-based products to attract both retail and institutional investors. For Galaxy, a better regulatory environment also increases the likelihood of being listed on the Nasdaq. For investors, in addition to a lawsuit filed against it by BitGo on claims of wrongfully terminating a merger agreement between the two in 2022, Galaxy’s listing was also delayed by the crypto regulatory environment in the U.S. being more stringent than in Canada. Things are now different as the complaint was subsequently dismissed by a court and regulatory hurdles are being removed as part of a strategy to turn America into the " crypto capital of the planet". To this end, a potential listing on the NASDAQ will provide Galaxy access to a broader pool of investors in the United States, where interest in crypto is high . Moreover, the Nasdaq is one of the world’s most liquid markets, offering higher trading volumes, implying better market efficiency, and potentially attracting more traders. Company presentation (s201.q4cdn.com) Also, it should enhance Galaxy’s visibility and credibility among international investors, synonymous with a higher valuation multiple. Now, since I last covered the stock, the share price has increased by 100% while its forward price-to-sales ratio increased by 125%, or from 2x to 4.5x . This is higher than the median for the financial sector of 2.98x, indicating strong market confidence. Even then, it deserves better considering a potential alignment with peers trading on U.S. exchanges, like Coinbase ( COIN ) which boasts a forward P/S of 12.55x . Deserves Better Despite Competitive Risks Therefore, assuming a re-rating to a forward P/S of 5.5x, or an increase of 22% to narrow the gap with its U.S.-listed peer leads to a target of $27.67 (22.68 x 1.22) based on the current share price of $22.68. To justify this bullish case, dollar-backed stablecoins which formed $203 million of its liquidity at the end of Q3 as shown below received a boost from President Trump's recent executive order. The aim seems to promote the development and growth of stablecoins, possibly encouraging their use as reliable alternatives for payments and money transfers. investor.galaxy.com Moreover, in addition to its diversified revenue streams (asset management and trading), Galaxy operates both as an HPC infrastructure play and a Bitcoin miner, somewhat similar to Core Scientific ( CORZ ) whose forward P/S is 8.74x , which means that with a targeted P/S of 5.5x, I am moderately bullish for Galaxy. The reason is there are risks. First, the company must grow its operating segments strongly to justify higher multiples, but the problem is its strategy to partner with other companies may face challenges as, encouraged by more crypto-friendly regulations, FIs like banks may get more involved in the digital asset marketplace, undermining Galaxy's ability to keep its moat. To address this challenge, it may need to spend more marketing dollars to maintain its competitive edge, thereby impacting profits. This may be why the stock dived by more than 5% after President Trump's executive order called for a working group to make policy recommendations on digital assets to his administration on January 24. www.seekingalpha.com Therefore, trading activities could suffer as less stringent regulations encourage the emergence of new competitors, but with crypto potentially being adopted more widely, its asset management business should benefit. Also, its cost to mine of $38K per BTC remains much lower than the market average of $49.5K , auguring well for the profitability of the mining business. Finally, while there are volatility risks relating to its uses of leverage, the ingredients are present for this diversified FI to continue outperforming Bitcoin as it manages to get listed on the Nasdaq.
