Posted on May 14, 2018
Goldman Sachs have announced they will be the first Wall Street bank to have a Bitcoin trading operation. The bank will begin by using its own money to trade with clients in a variety of contracts linked to the price of Bitcoin.
Essentially this means the firm will allow customers to trade bitcoin as a non-deliverable forward (futures), as opposed to directly exchanging the cryptocurrency asset itself. They will not, to begin with, be buying and selling actual Bitcoins, but it is thought they will move in that direction, depending on regulatory approval.
How significant is this move by Goldman Sachs in terms of the increasing legitimacy of Bitcoin and other virtual currencies? It is certainly indicative of cryptocurrencies becoming more mainstream. If the bank had done this even two or three years ago, it would have caused many more shockwaves. Certainly some of Goldman Sachs’ peers seem disinclined to join them. Most famously, Jamie Dimon, the chief executive of JPMorgan Chase, called the currency a fraud and others have referred to it as simply a speculative bubble.
However, Goldman Sachs is far from alone in the mainstream financial sector in venturing into cryptocurrencies. We have seen hedge funds and other major investors expressing interest. The commodity exchanges in Chicago started allowing customers to trade Bitcoin futures contracts in December 2017.
Why has Goldman Sachs made this bold move? It was a high-level decision at their Board of Directors level. It appears to be a response to client demand, with their customers seeing it as a desirable commodity, perhaps similar to gold, and they are encouraged by the limited quantities that can be ‘mined’. Rather like gold, they see it as an alternative place to store wealth. For Goldman Sachs, it fits with their desire to be seen as the most cutting edge in terms of technology in their sector.
There are certainly risks for Goldman Sachs to manage in this new venture. The very nature of Bitcoin means that prices are set on unregulated exchanges in places where there are few checks or balances to counteract market manipulation. Also, we have seen dramatically fluctuating prices as those trading try to calculate what regulatory hurdles they might eventually come up against. They also need to address the hacking issue which has affected Bitcoin exchanges.
What internal changes will this move mean for Goldman Sachs? At the time of writing, no precise date had been given but we expect to see the bank using its own money in the weeks ahead to trade Bitcoin futures contracts on behalf of clients. The big hire has been Justin Schmidt who was a trader at the hedge fund Seven Eight Capital before quitting to trade virtual currencies independently. If Goldman Sachs is successful in obtaining regulatory approval from the Federal Reserve and the relevant New York authorities, it is expected they will start trading actual Bitcoin.
Goldman Sachs will need to tread carefully, as their brand still suffers from the disapproval they faced due to their lucrative trading of synthetic derivatives tied to the subprime mortgage markets.
There is something of an irony in the idea that Bitcoin’s original creator Satoshi Nakamoto actually saw his creation as something that would eventually replace Wall Street banks like Goldman Sachs, a sort of revolution. Yet here we are discussing them trading in it as just another mainstream revenue line.
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