Goldman Sachs’ efforts to help hedge funds and other large institutional clients bet on Bitcoin have taken a step forward.
The bank has started trading Bitcoin futures with Galaxy Digital, the crypto trading bank founded by Mike Novogratz, as CNBC learned.
According to Galaxy Co-President Damien Vanderwilt, the trades mark the first time Goldman has used a digital asset firm as a counterparty since the investment bank set up its cryptocurrency desk last month.
The moves of Goldman, the preeminent global investment bank, can have an impact on Wall Street and beyond as banks are increasingly under pressure from customers seeking exposure to Bitcoin. By being the first major U.S. bank to start trading cryptocurrencies, Goldman is essentially giving cover to other banks to do the same, said Vanderwilt, a former Goldman partner who joined Galaxy last year.
“With the big banks there is a whole dynamic that I have seen again and again: Security in numbers,” Vanderwilt said in an interview this week. “Once one bank does that, the other banks will have [fear of missing out] and they are accepted because their customers asked for it. “
Galaxy was due to announce on Friday that it would act as Goldman’s “liquidity provider” – Wall Street parlance for a company that provides quotes for buy and sell orders – for CME Group’s Bitcoin futures. Last month, in a memo first reported by CNBC, Goldman said it would “sign new liquidity providers to help us expand our offering.”
“Our goal is to provide our customers with best execution pricing and secure access to the assets they want to trade,” said Max Minton, Head of Digital Assets for Goldman’s Asia Pacific region, in a statement. “This will now include crypto in 2021 and we are excited to have a partner with a wide range of liquidity places and differentiated derivatives capabilities across the cryptocurrency ecosystem.”
Goldman relies on Galaxy to access the crypto world because, according to Vanderwilt, the highly regulated banking industry cannot handle Bitcoin directly.
But nothing is stopping banks from making financial bets tied to the price of the underlying coins, and this is where Wall Street begins its crypto journey. There are parallels in commodities, where banks trade pigs or corn without owning the physical asset, he said.
Galaxy – whose management ranks are filled with former Goldman executives familiar with running regulated businesses – is positioning itself as a bridge for financial firms and crypto locations. The company, whose shares are listed on the Toronto Stock Exchange, is expected to offer shares in the United States this year.
It is a step towards the vision that Vanderwilt and the other former Goldman executives have for developing Bitcoin’s market infrastructure. As more banks allow customers, including hedge funds, pensions, family offices, and sovereign wealth funds, to trade Bitcoin, the depth and breadth of the market will improve, which should ultimately lower Bitcoin’s famous volatility, he said.
“They are moving market participants from north of 90% retail, a large proportion of whom have access to ridiculous amounts of leverage, to an institutional community that has adequate, proven rules and regulations on leverage, assets – liability mismatch and risk,” Vanderwilt said, “The more activity penetrates the institutional community, the less volatility there will be.”
Banks will be able to offer their customers ways to bet on Bitcoin using derivatives, taking a page out of the world of established finance, he said. These include arbitrage betting related to the price gap between CME Bitcoin futures and Bitcoin itself, relative value trades between Bitcoin and Ethereum, and the creation of Bitcoin structured notes.
Goldman’s moves in cryptocurrency trading come despite continued skepticism about Bitcoin from other parts of the company. In particular, the Chief Investment Officer of the Bank for Wealth Management has called Bitcoin a bubble that is unsuitable for investors.
However, if enough retail customers ask for a product, investment banks are required to deliver it, a dynamic Vanderwilt has seen in other emerging markets around the world during his two decades with Goldman.
“Eventually, when the phone rings enough and customers try to expose themselves, you will find out how to do it safely for them and understand that your role in the world is to convey exposure safely, not as a trustee to act, ”he said.
The milestone closes Vanderwilt’s circle with his previous life. In 2017, he was hired as Goldman’s senior trading manager to support the bank’s early efforts to trade Bitcoin futures. That plan was later put on hold. Now, from his position at Galaxy, he is helping to make this a reality.
“There’s a lot of irony, I smile about it a lot,” said Vanderwilt. “But I’m really happy, it’s a happy circle.”
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