Goldman Sachs is jumping into cryptocurrency with both feet. According to a Bloomberg report, Goldman Sachs Group Inc. is setting up a trading desk to make markets in digital currencies such as bitcoin, according to people with knowledge of the strategy. The bank aims to get the business running by the end of June, if not earlier, two of the people said. Another said it’s still trying to work out security issues as well as how it would hold, or custody, the assets.
Goldman Sachs intends to become a market maker for cryptocurrencies and is working out details related to their security and custody. It has previously had a cautious stance towards digital currencies. Goldman CEO Lloyd Blankfein said bitcoin cannot be ruled out and the the company acts as a clearing agent for futures contracts. According to reports, Goldman is demanding 100 % margin from brokers to clear trades.
The move positions Goldman Sachs to become the first large Wall Street firm to make markets in cryptocurrencies, whose wild price swings and surging values have captured the public's imagination but given pause to established institutions.
Already, the bank is one of the first large players from Wall Street to devote intensive resources to tracking and trading in cryptocurrency, but don’t expect the first mover advantage to last for long. A number of recent moves are beginning to legitimize the volatile currency market, and investors everywhere are taking notice.
But the setting up of trading desks may be a win-win for digital currencies and Goldman itself. For cryptocurrencies, it brings liquidity and depth to the market. This is expected to curtail wild price swings for cryptocurrencies and bring price stability to the markets. At the same time, it will boost Goldman’s profits. The firm’s commodities division, where the new desk might be placed, has reported losses on the back of a swoon in commodity prices and lower client activity.
As Matt Levine from Bloomberg points out, bitcoin’s volatility might be an interesting play for Goldman. “You want a nice happy medium, volatile enough to get some action but not so volatile that you're constantly losing your shirt,” he writes.
With a range of between 75% to over 100% this year, bitcoin is among the year’s most volatile assets. For context, gold, a commodity to which bitcoin is often compared, has mostly moved upwards in price as its volatility hovers to percentages below 30. Traders prefer volatility in an asset’s price since it creates opportunities for arbitrage. As such, bitcoin’s volatility percentages could open up a new source of profit for Goldman.
Several institutional traders are exploring or have already made investments in cryptocurrencies. For example, Bloomberg earlier reported that analysts at JPMorgan Chase & Co are exploring realized volatility for bitcoin. This could be a precursor setting up a trading desk. In addition, hedge funds dealing in cryptocurrencies have reported stellar gains.
However, for cryptocurrency to gain a foothold with smaller, private investors, it still needs to simplify the process by which coins are bought, sold, and traded.
A San Francisco startup, Bitwise, aims to do just that by providing a passively managed index fund of the world’s top 10 cryptocurrencies. In investing speak, it’s an index or mutual fund in which private investors diversify their holdings across a number of digital currencies while only investing in a single asset — the index fund.