Mike Novogratz's Galaxy Digital reported a rough second quarter on Tuesday, posting a net loss of $46 million and highlighting the extent to which last year's crypto credit crisis and slew of bankruptcies left the industry's capital markets in tatters.

"Galaxy's operating businesses performed well in the second quarter against a backdrop of continued uncertainty and regulatory pressure, as we continue to manage the Company to meet the evolving needs of our clients," Novogratz noted in a statement. 

Galaxy Digital — which operates businesses in lending, trading, mining, and banking services — offers a health check on a number of relevant segments within crypto and, in a sense, is a microcosm of the industry writ large. And while many segments are still licking their wounds from crypto's drawdown last year, there were some bright spots buried within the financials that point to the gradual institutional adoption of digital assets in a post-FTX world. 

Declining revenues from trading business

As for the trading business, Galaxy witnessed a 54% decline in revenues relative to the previous quarter in an environment underpinned by low liquidity and regulatory uncertainty. This shouldn't come as a surprise given the decline in volumes and order book depth across exchanges has been well-documented. 

Still, the firm reported that its number of onboarded counterparties increased by 30 during the quarter to over 1,000. About 29% of those counterparties are active, indicating there is quite of bit of sidelined interest in the crypto market. By way of comparison, a former executive at a rival shop said that active counterparties represented 9% of the total number of his previous shop's onboarded client base. 

As we move further away from the FTX blowup, it appears Galaxy's clients are becoming more active, according to president Chris Ferraro. Here's the relevant passage from the firm's analysts' Q&A: 

"Importantly, in recent weeks, the desk has witnessed an uptick in active client activity with both crypto native and traditional asset managers and hedge funds reengaging our desk to express their crypto investment views via spot and derivatives. Public filings in the U.S. for spot Bitcoin ETF has been a major catalyst with investors reinvigorated to seek upside potential in Bitcoin and the broader asset class," said Ferraro.

Clients are also behaving differently, opting to engage bilaterally through more complex derivatives structures rather than via crypto exchange venues. That's good news for shops like Galaxy which can service those needs. This shift in flows is apparent across desks, with one executive at a rival trading shop noting that bilateral, more relationship-driven flows in this climate represent about four times the flows from exchanges. Of course, firms like Galaxy will have to warehouse some of their risk on exchange. In any case, Galaxy has been adapting to this shift and, in some instance, is settling derivatives trades entirely onchain. 

"One trend we've seen amongst counterparties since the meltdown of several trading venues over the past year is an increase in demand for on chain OTC options. To meet this demand in the second quarter, Galaxy completed the world's first bilateral OTC option trade settled entirely on chain, making the expansion of the firm's trading capabilities by leveraging the benefits of the centralized financial infrastructure. This is just one example of many of how we're continuously innovating to meet the evolving needs of our clients," said Ferraro.

As for the firm's lending business, it saw quarterly loan originations decline from $160 million to $115 million Q/Q. Still, its loan book is "nothing to sneeze at," as one trading executive at a rival firm put it. At $550 million as of June 30, it is likely one of the largest in the space and it provides Galaxy with a nice carrot for potential counterparties  as "their best bizdev tool," as another rival executive put it. Following last year's credit crisis, there aren't many places for traders looking for leverage to go and that presents Galaxy with an advantage over other firms. 

Low revenues from M&A

The deal-making environment is struggling everywhere thanks to the U.S. Federal Reserve's move to hike interest rates. Thus, it's not surprising that revenue for Galaxy's M&A and advisory business came in at a measly $45,000. 

Again, this isn't just a crypto reality. As noted by Axios's Dan Primack, nearly every metric relevant to deal-making was down during the first half of 2023, with U.S. M&A declining 41% in terms of dollars and 5% in terms of the number of deals. It looks like the current environment is slightly better for Galaxy's investment banking team, with 15-plus deals being pursued by the team. 

A boost from mining 

Mining was among Galaxy's business lines that saw revenue increase over the second quarter, with higher income from proprietary mining activities bringing revenues to $15.4 million. The firm, which launched its mining operation in 2020, offers hosting services and also maintains its own mining facilities. It acquired bitcoin miner Argo's bitcoin mining facility Helios for $65 million at the end of last year.

The business can boast a healthy 64% direct margin thanks in part to low energy costs, with its average cost to mine coming in at $9,000 and $10,000 per bitcoin. 

Galaxy ended Q2 with 3.7 exahash per second ("EH/s") in what it describes as Hashrate Under Management and it expects to hit 4.0 EH/s of "HUM" by the end of the year. That would represent more than 1% of Bitcoin's current total hashrate, which is not insignificant. 

Surging revenues from asset management

Galaxy's asset management unit saw the biggest surge in revenue, increasing 619% Q/Q to $33.8 million. To be clear, much of that revenue was realized from gains on its venture side of the house as well as inflows into its family of active and passive funds. 

The unit's focus over the next several quarters hinges on partnerships with traditional asset managers, including DWS Group in Europe and Invesco in the U.S.

"That is, as we said, is — so that partnership is already inked. The products are in development and the jurisdictions in Europe have been targeted that either already have exchange traded products that are in existence today, and therefore, approval is not a concern or we're breaking into new markets where there's a clear lane to be able to launch new products in Europe," said Ferraro.

Galaxy and Invesco are on the long list of issuers vying to launch a spot bitcoin exchange-traded fund, which Novogratz thinks could be approved within the next six months. While it's unclear if the Galaxy/Invesco tie-up will prove to be the leader of the pack when such a fund is approved by regulators, the introduction of such a product would likely serve as a tailwind for the firm's broader business since it would serve as a catalyst for crypto prices to move higher.