This week was dominated by rumors that Goldman Sachs has ditched plans for a crypto trading desk, sending crypto prices into a panic. But this is actually good news. Goldman Sachs is instead focusing on a safe, long-term crypto strategy rather than volatile trading.
Bitcoin traders threw themselves into a panic on Wednesday as the market collapsed beneath them.
Bitcoin fell 13% in a day. Altcoins fell as much as 20%. Ethereum hit its lowest price in 12 months.
While other factors were at play for the selloff, many blamed Goldman Sachs, which reportedly sidelined plans for a crypto trading desk.
The Long-Rumored Goldman Sachs Crypto Trading Desk
Goldman Sachs began eying up bitcoin in October 2017. Rumors of a trading desk emerged after they hired Justin Schmidt, a veteran crypto trader. An official from the bank said they were looking into bitcoin possibilities after receiving interest from clients.
This news was among the flurry of optimism that sent bitcoin to $20,000 last winter.
However, nothing was confirmed. In fact, Goldman Sachs distanced itself from crypto trading in January when CEO Lloyd Blankfein said day-to-day trading was not the bank’s priority for crypto. Instead, they would consider buying bitcoin futures contracts for some of its clients.
So Wednesday’s news shouldn’t come as too much of a surprise.
Clearing up the Rumors
To be clear, Goldman Sachs has not ruled out the possibility of a crypto trading desk. The bank’s CFO even called the recent rumors “fake news.”
“I never thought I would hear myself use this term but I really have to describe that news as fake news.” Martin Chavez, CFO.
The bank is not ditching its plans. A crypto trading desk has simply moved down the priority list while they look at better ways to work with bitcoin.
So What Exactly is Goldman Sachs Doing in Crypto?
Right now, the bank is helping its clients get into crypto by executing bitcoin futures contracts. Bitcoin futures are a way of betting on the future price movements. Goldman Sachs is using the bank’s money (“providing liquidity”) to do this.
At the same time, they are working on some form of derivative for bitcoin. A derivative is like an exchange-traded fund (ETF); an easy investing product that would track the price of bitcoin.
A Safe Way to Store Crypto
Most importantly, Goldman Sachs is working on a custody solution that would allow institutional investors to store millions of dollars in crypto safely.
“Physical bitcoin is something tremendously interesting, and tremendously challenging… From the perspective of custody, we don’t yet see an institutional-grade custodial solution for bitcoin, we’re interested in having that exist and it’s a long road.” Martin Chavez, CFO
Good News for Bitcoin
Don’t believe the panic. Goldman Sachs’ strategy is a sound and sensible way to approach bitcoin.
Goldman first needs to prove it can store bitcoin safely. Can you imagine if Goldman Sachs’ bitcoin accounts were hacked? A custody solution is a necessary first step before traditional investors trust their money to a relatively new phenomenon.
Secondly, the bank’s focus on bitcoin futures and derivatives reveals a long-term approach to trading. They are taking cryptocurrencies seriously. They’re looking to build products their investors understand.
It’s no wonder a crypto trading desk is low on the priority list. They simply don’t yet have the infrastructure to store and handle millions in daily, physical bitcoin trades.
Not only that, but high-volume, daily trading at a Goldman Sachs trading desk would introduce yet more volatility to a volatile market.
Wall Street Isn’t Ready for Crypto Yet
Although Wall Street is dabbling in bitcoin, it’s not yet ready to fully embrace it. As we have seen with bitcoin ETF rejections, Wall Street adoption will take time. But, rest assured, the foundations are being laid.
“When we talked about exploring digital assets that it was going to be exploration that would be evolving over time… Maybe someone who was thinking about our activities here got very excited that we would be making markets as principal and physical bitcoin, and as they got into it they realized part of the evolution but it’s not here yet.” Martin Chavez, CFO.
Wall Street is getting on board, but this will not happen overnight. Patience is key.