By Joseph Adinolfi
Michael Novogratz, the Galaxy Digital founder and former Goldman Sachs banker, returned to CNBC’s “Squawk Box” for a lengthy interview Thursday morning where he said he believes that many of the fraudsters working in the crypto space will be brought to justice — although he didn’t delve into specifics.
His latest warning about a reckoning for bad-faith players in the crypto space is not his first, but is perhaps his harshest yet. Since the spring, Novogratz has been saying that the crypto market has essentially lost the trust of the public, saying the current selloff isn’t just a bear market in the traditional markets sense of the word — but also a “bear market in trust”.
Now, following the collapse of the Luna “algorithmic stablecoin” (Novogratz’s Galaxy Digital /zigman2/quotes/205842391/delayed BRPHF -0.20% was a backer) and the blowup of Three Arrows Capital , which has had a ripple effect across the crypto space, investors are running scared and waiting for the next shoe to drop.
The problem, Novogratz claims, isn’t inherent to crypto itself — but rather, is the result of disingenuous people who saw crypto as an opportunity to make easy money, and used leverage and deception to amplify their profits.
“I think when all is said and done there will be accusations and prosecutions for fraud,” he said. “There will be gross misconduct in some of these companies where you just look at the amount of leverage and inter-lending that went on.”
Novogratz has previously said crypto is facing a “Long Term Capital Management” moment , a reference to the collapse of a hedge fund in the 1990s that triggered a brief financial crisis. He has also warned that the U.S. economy is likely headed toward — or perhaps already in — a recession.
Trillions of dollars have been wiped away from the market capitalization of cryptos since the start of the year, with bitcoin recording its worst first half of a year yet at the end of June.
Shares of companies like Voyager Digital have crumpled, as have the shares of many other crypto companies. Novogratz’s Galaxy Digital are down more than 76% year-to-date. Bitcoin has lost nearly 60% of its value against the dollar /zigman2/quotes/31322028/realtime BTCUSD -6.98% , and was recently trading around $20,000 per coin.
As for whether the crypto market has much further to fall, Novogratz — a major holder of crypto and the founder of a publicly listed crypto investment firm — said he believes the “deleveraging” driving the selloff is almost over.
“Could we go lower? Of course we could, although it feels like we’re 90% through that deleveraging. My instinct is that it will be choppy sideways for a while,” he added.
Novogratz criticized SEC Chairman Gary Gensler for being tougher on crypto , and crypto-companies like Galaxy, than his predecessor, Trump appointee Jay Clayton, in response to a question about a recent Wall Street Journal editorial.
Novogratz also acknowledged that he once worked with Gensler at Goldman Sachs.
“I know Gary…I taught his class once at MIT…he’s a very smart guy. When he went in I had hope that he was going to be very positive for crypto. But he’s been cautious…and I’m guessing this selloff only emboldens him. We’re with the SEC right now on our S-1/S-4, it’s been a long and grueling process for all the crypto companies…he has not been the prince of crypto like everyone was hoping when he came in.”
Finally, when asked about whether he still has his infamous tattoo commemorating Luna, the “algorithmic” stablecoin that collapsed in May, Novogratz affirmed that he did, and that he has no plans to get rid of the body art.
“It’s a good reminder that you’re not always right,” Novogratz said.