Goldman Sachs has gone a step further in assisting hedge funds and other large institutional clients with bitcoin betting.
The bank has started trading bitcoin futures alongside Galaxy Digital, the crypto merchant bank founded by Mike Novogratz.
Since the investment bank launched its cryptocurrency desk last month, the deals mark the first time Goldman has engaged a digital assets firm as a counterparty, according to Galaxy co-president Damien Vanderwilt.
The measures by Goldman Sachs, the world's largest investment bank, might have repercussions on Wall Street and beyond, as banks increasingly face pressure from clients who seek bitcoin exposure. By being the first large US bank to do so, Goldman Sachs effectively grants permission to other institutions to begin trading cryptocurrencies, according to Vanderwilt who joined Galaxy last year after working at Goldman Sachs.
In an interview this week, Vanderwilt said, "There's a whole dynamic with the major banks that I've seen time and time again: safety in numbers." “Once one bank has done it, the other banks will have [fear of losing out] and will go on board since their clientele have requested it.”
Galaxy was set to announce on Friday that it will operate as Goldman Sachs' "liquidity provider" on CME Group bitcoin futures, which is Wall Street speak for a company that offers quotes for buy and sell orders. In a document seen by CNBC last month, Goldman stated it will sign up "new liquidity sources to assist us in growing our offering."
In a statement, Max Minton, head of digital assets for Goldman's Asia-Pacific region, said, "Our goal is to provide our customers with best-execution pricing and secure access to the assets they want to trade." “We are glad to have identified a partner with a broad range of liquidity venues and innovative derivatives capabilities covering the cryptocurrency ecosystem in 2021.”
Goldman is relying on Galaxy for entry to the crypto sector because the highly regulated banking industry is unable to handle bitcoin directly, according to Vanderwilt.
Nothing, however, precludes banks from trading in financial bets based on the price of the underlying coins, which is where Wall Street is beginning its crypto adventure. He compared it to the commodities market, where banks exchange exposure to hogs or grain without owning the physical commodity.
Galaxy, whose management team includes ex-Goldman Sachs executives with experience running regulated enterprises, offers itself as a link between financial institutions and crypto exchanges. The company, whose stock is traded on the Toronto Stock Exchange, is expected to offer shares in the United States this year.
It's a step toward Vanderwilt's and the other former Goldman executives' vision for bitcoin's market infrastructure growth. As more institutions allow clients such as hedge funds, pension funds, family offices, and sovereign wealth funds to trade bitcoin, the market's depth and breadth increases, lowering bitcoin's notorious volatility, he said.
“You're transitioning the market participants from being nearly 90 percent retail, with a large portion having access to insane amounts of leverage, to an institutional community with proper, tried-and-true norms and regulations concerning leverage, asset-liability mismatch, and risk,” Vanderwilt explained. “The greater the activity in the institutional community, the lower the volatility.”
He claims that banks will be able to offer clients ways to bet on bitcoin via derivatives, emulating the world of traditional finance. Arbitrage bets on the price differential between CME bitcoin futures and bitcoin itself, relative value trading between bitcoin and ethereum, and the introduction of bitcoin structured notes are all examples.
Despite widespread distrust of bitcoin across other divisions of the corporation, Goldman is moving forward with cryptocurrency trading. The bank's chief investment officer for wealth management, in particular, has labelled bitcoin a bubble that isn't suitable for investors.
However, if a product is requested by a large number of trading clients, investment banks are obligated to deliver it, a dynamic that Vanderwilt has observed in various emerging markets throughout the world during his two decades at Goldman.
“If the phone rings enough times and clients are seeking to acquire exposure, you finally figure out how to do it for them safely,” he added, emphasising that his position in the world is to safely intermediate exposure, not to operate as a fiduciary.
Vanderwilt's old life comes full circle with this achievement. As a senior Goldman trading executive in 2017, he was charged with assisting in the launch of the bank's initial attempt to trade bitcoin futures. Later, that plan was shelved. Now, from his role at Galaxy, he's helping to make it happen.
“There's a lot of irony in it, and it makes me laugh a lot,” Vanderwilt added. “However, I'm overjoyed; it's a happy full circle.”
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