‘DeFi Is Going to Win’ Over TradFi: Crypto Billionaire Mike Novogratz

  • Michael Novogratz says crypto replaces centralized trust in institutions.
  • He says DeFi will be widely adopted because it’s faster and more transparent. 
  • He predicts there will be fewer sovereign currencies that are accompanied by digital currencies.

Will crypto reshape the world? Michael Novogratz, the CEO of Galaxy Investment Partners, believes it will.

At the recent Emerge 2022 conference, he reminded the audience that bitcoin itself was born during a period of rapid global change.

He cited the 2008 financial crisis, which coincided with a collapse in world trade that had been built on trust between countries, and the loss of jobs and homes for millions of Americans. Shortly after, in 2009, bitcoin was born. 

“And so the entire crypto revolution essentially came out of this breakdown of trust,” Novogratz said. 

Trust in centralized institutions is still being challenged today. Novogratz listed the war in Ukraine, rising tensions between the US and China, public distrust of politicians, social media, and elections as part of the breakdown. 


“And so as trust is in a


bear market

, what has been fascinating is blockchain, crypto, bitcoin is in a


bull market

, right? Because it was set up to not need trust. It’s set up for communities to buy in and have algorithmic or automatic or mathematical trust,” Novogratz said. 

But the idea of bitcoin being used as a hedge against global uncertainty and inflation hasn’t exactly played out in its price. Year-to-date it has failed to break above $50,000. And there’s no sign yet of a retrace back to its November all-time high near $70,000. 

While bitcoin’s performance has been correlated with risky tech stocks, Novogratz believes it will decouple over time. He reminded the conference audience that what started off as a science experiment 13 years ago has expanded to a trillion-dollar


market cap

and outperformed currencies such as the yuan, ruble, and lira. And he’s optimistic that the impact of cryptocurrencies — and decentralized finance (DeFi) — will stretch into the traditional financial system.

Crypto adoption 

Among institutions, sovereign wealth funds, and high-


net-worth

, there’s a long line of people on their way into digital assets, Novogratz said. He estimates that over the next five years, 30% to 40% of global pension funds will start participating, followed by the remainder of them in the next 10 years. On Monday, Fidelity became the first retirement-plan provider to announce plans to allow investors to hold bitcoin in their 401(k)s. 

As for adoption of the technology, blockchain provides the infrastructure for DeFi that can be used in lending, derivatives, and the insurance business. Novogratz claimed that banks are worried and will lobby against that. 

But there’s already a giant DeFi network in which billions of dollars trade peer-to-peer, over thousands of tokens, he said. Most of Wall Street hasn’t participated because of regulatory and Know-Your-Customer (KYC) issues. 

“Those things are going to be solved,” Novogratz said. “And once they’re solved, DeFi is going to win because it’s better. It settles atomically, which means it settles that day. So there’s no settlement risk. It’s transparent.”

However, Commissioner Caroline Crenshaw of the US Securities and Exchange Commission released a statement in November listing numerous issues with DeFi. These include a lack of transparency for retail investors due to complicated code and pseudonymity. 

The industry is also rife with scams. According to Chainalysis, 72% of crypto thefts in 2021 — a record year for crypto-related crime — were from DeFi protocols.

Crypto as an asset 

Despite his optimism about DeFi, Novogratz made no promises about a timeline or which blockchains will lead the way. Determining the leading project is hard because building the infrastructure is complicated; it will take at least a couple more years before this technology impacts how we live our lives, Novogratz said. 

Even leading layer-1 contenders like Ethereum will scale and get faster but not fast enough to process all the necessary transactions, he noted. And not every transaction needs to be verified by every computer in the network, nor does every transaction need to be transparent, he added. 

The end result will be levels of transactions batched and verified by layer-2 solutions or side chains. This architecture is being worked out now, he said, adding a tip for investors. 

“I think as a prudent investor, you need to have some ethereum and you should have bets in other protocols where you have knowledge,” Novogratz said. 

His investing approach is to follow adoption volume. This means if programmers are building on the blockchain, and people and businesses are using it at an accelerating rate, he invests. Otherwise, it’s just hype. 

Crypto as a currency 

The world currently has about 164 national currencies. Novogratz believes there won’t be a need for that many. Global currencies will be reduced to a few major contenders such as the dollar and the euro and will be accompanied by digital currencies such as stablecoins. He foresees many emerging economies flipping to stablecoins rather than their local currencies. But forced adoption isn’t the right path, he noted. 

“So what El Salvador did was make bitcoin legal tender, that kind of cuts against the ethos,” Novogratz said. “A real commandment of crypto is permissionless. No one forced you to buy your bitcoin, right? And so forcing people to accept bitcoin or accept crypto is kind of an anti-crypto ethos.”

He believes that in the US, the transition to digital currency needs to be policed so that it remains in line with the values of privacy and freedom.

He stands in agreement with the stablecoin plan laid out by Brian Brooks, who served as Acting Comptroller of the Currency at the Office of the Comptroller of the Currency (OCC) up until 2021. 

Under the guidance of Brooks, the OCC made clear that the area of stablecoins subject to regulation should be the holding of the reserve assets. If the stablecoin is fiat-backed, then it needs to be backed by fiat instruments and be redeemable at par. However, stablecoin issuers don’t need to be banks. For example, retailers that issue credit cards aren’t banks but offer a stored-value card supported by an underlying bank. 

As for algorithmic stablecoins, which are not backed by assets but rather an algorithm, such as Terra (LUNA), Novogratz admits they’re riskier. But the yields are higher. The risks just need to be disclosed to participants.