The wall street titan is now all in when it comes to allowing clients to trade Bitcoin futures via one of its New York desks. Goldman Sachs becomes the first regulated financial institution to offer such a service. Part of the reason the firm decided to go this route is due to several inquiries received from hedge funds, foundations and endowments which had received donations from Bitcoin millionaires. Will Goldman Sachs cosign of Bitcoin increase confidence in the digital currency?
The Breakdown You Need to Know
The legitimacy bar for digital currencies has been raised now that Goldman Sachs is going to facilitate the institutional trading of Bitcoin. They’re proceeding cautiously and will not trade actual Bitcoin initially. Instead, the bank will use its own money to trade Bitcoin futures contracts for clients. It will also trade non-deliverable forward futures where trades will be settled in the regulated currency it’s quoted in.
Bitcoin had been on a rebound the past couple of months. Interest in the currency increased over the course of 2017, which also caused volatility to skyrocket. The price of the digital currency tripled in the second half of last year, topping out at $20,000 before dropping to $8,000 in February of 2018. The cryptocurrency traded as high as $9,300 before South Korean officials raided South Korea’s largest cryptocurrency exchange, sending prices to $8,650.
While Goldman Sachs dips its toes in the cryptocurrency markets, CultureBanx found BitMEX is way ahead of the game. CEO Arthur Hayes helms this leading cryptocurrency derivative exchange. The company offers derivative products to retail investors and has a daily trading volume approaching $3 billion. BitMEX made revenue of $83 million in 2017 and posted $21 million in revenue during January of this year. The company is on track to exceed its 2018 performance. “This is the best thing you could ever have. We make more money when the market goes down. We love this volatility,” Hayes said to Bloomberg.
As institutional investors engage in these derivatives, they’ll be looking to ease their cautiousness by having a reliable benchmark for their performance. Goldman Sachs alumnus and billionaire cryptocurrency advocate Mike Novogratz announced a partnership with Bloomberg to launch the Bloomberg Galaxy Crypto Index. It will track the performance of the 10 most liquid cryptocurrencies. “This is just one more building block in the foundation which will get, at one point, pension funds and family offices and sovereign wealth funds all participating in the crypto economy,” Novogratz told Business Insider.
Bitcoin had a rough start to the year and suffered a major loss during the first quarter causing the price to plummet down 48%. Hayes noted we should be on the lookout for increased volatility in Bitcoin prices as more players enter the derivatives market for the cryptocurrency. “People have been lulled into complacency with a market that keeps going up every day,” Hayes said on the Flux Podcast. The market got a taste of this volatility in December 2017 when the Chicago Mercantile Exchange (CME) launched Bitcoin futures trading. The Federal Reserve Bank of San Francisco went on to confirm this volatility relationship. “It is consistent with trading behavior that typically accompanies the introduction of futures markets for an asset,” the bank said. It will be interesting to see just how much volatility institutional investors are willing to stomach as more players enter the cryptocurrency derivatives market.
Regarding cryptocurrencies and their stability, there’s always plenty of debate, creating an opinion matrix on the subject. Some experts believe the potential growth of virtual coins is undeniable and secure, and on the other hand, others sustain that what happens behind the curtains with cryptos is just a trend with a limited future.
American company Bloomberg, that offers financial software, data, and news, recently deployed a study to determine how the future for cryptocurrencies looks and how comparable virtual coins are with traditional asset classes.
Bloomberg’s research on cryptocurrencies
To complete the study, Bloomberg collected information related to the trading activity of cryptocurrencies over 16 months and observed the volatility of virtual coins to establish how close or far are cryptocurrencies to acting like a traditional asset.
The study was published last Wednesday, May 3rd, on their website. Among other things it firmly concluded that, even though cryptocurrencies have shown a bullish behavior despite its volatility, this doesn’t give assurance that the new form of money will continue this behavior into the future.
An important factor mentioned in the study is that cryptocurrencies are so volatile that they are unlikely to be used as a payment method while purchasing goods or services, and even less so for paying salaries. In fact, during the timeframe of the study, only two out of the thousands of investments not related to cryptos had similar fluctuation.
Similarly, Bloomberg established that cryptocurrencies are not comparable with traditional assets and that if there were to be a relation between these two, it would be very remote.
Bloomberg concludes their study by saying that potential notable returns within the crypto market through Initial Coin Offerings could actually be dwarfed and put at risk with by the government entities designed to keep an eye on virtual coins, such as the US Securities and Exchange Commission’s (SEC).
The insights of the study deployed by Bloomberg are somehow discouraging in relation to what’s the ‘actual’ future of cryptocurrencies.
While there isn’t good reason to disregard Bloomberg’s opinion, it is also true that cryptocurrencies are still new, and their long-term behavior has not been deciphered yet.
So, even when many may think they have it all discovered, the new form of money could strike back and surprise them in the near future. In fact, Goldman Sachs, the giant of the banking industry has recently declared that is opening up a crypto trading desk as many of its users were calling for it.