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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 investment firm founded by Mike Novogratz, CNBC has learned exclusively.
The transactions represent the first time Goldman has used a digital asset firm as a counterparty since the investment bank set up its cryptocurrency bureau last month, according to Damien Vanderwilt, co-chairman of Galaxy and chief of its global markets division.
The initiatives of Goldman, the world’s leading investment bank, could spill over to Wall Street and beyond as banks increasingly face pressure from clients to gain exposure to bitcoin. By being the first major U.S. bank to start trading cryptocurrencies, Goldman is essentially giving other banks cover to start doing so as well, said Vanderwilt, a former Goldman partner who joined Galaxy last year. .
“There’s a whole dynamic with big banks that I’ve seen time and time again: security in numbers,” Vanderwilt said this week in an interview. “Once one bank does this, other banks will have [fear of missing out] and they will be integrated because their customers requested it. “
Galaxy was due to announce on Friday that it would serve as a Wall Street “liquidity provider” for Goldman for a company that provides quotes for buy and sell orders on 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 clients with the best execution prices and secure access to the assets they wish to trade,” said Max Minton, head of digital assets for Goldman’s Asia-Pacific region, in a statement. . “In 2021 this now includes crypto, and we are delighted to have found a partner with a wide range of liquidity venues and differentiated derivatives capabilities spanning the cryptocurrency ecosystem.”
Goldman is relying on Galaxy to enter the crypto world because the highly regulated banking industry cannot directly manage bitcoin, according to Vanderwilt.
But nothing prevents banks from making financial bets tied to the price of the underlying coins, and so this is where Wall Street begins its crypto journey. There are parallels in the commodities area, where banks trade pork or corn exposure without owning the physical asset, he said.
Galaxy, whose executive ranks are made up of former Goldman executives familiar with running regulated companies, is positioning itself as a bridge for financial companies and crypto platforms. The company, whose shares are listed on the Toronto Stock Exchange, will likely offer shares in the United States this year.
It’s a step towards the vision Vanderwilt and other former Goldman executives have for the development of the bitcoin market infrastructure. As more banks allow their clients including hedge funds, pensions, family offices and sovereign wealth funds to trade bitcoin, the depth and breadth of the market is improving, which is expected to ultimately shrink. the famous bitcoin volatility, he said.
“You are moving market participants from north of 90% of retail, much of which has access to ridiculous amounts of leverage, to an institutional community, which has proper and proven rules and regulations. on leverage, assets – the mismatch of responsibilities and risk, ”said Vanderwilt. “The more activity there is in the institutional community, the less volatility there will be.”
Banks will be able to offer ways for customers to bet on bitcoin using derivatives, drawing inspiration from the world of established finance, he said. This includes arbitrage bets related to the price differential between bitcoin CME futures and bitcoin itself, relative value transactions between bitcoin and ethereum, and the creation of structured bitcoin banknotes. .
Goldman’s steps in cryptocurrency trading are unfolding despite continued bitcoin skepticism from other parts of the business. Specifically, the bank’s chief investment officer for wealth management called bitcoin a bubble that is not appropriate for investors.
But if enough commercial customers demand a product, investment banks are obligated to deliver it, a dynamic Vanderwilt has seen in other emerging markets around the world during his two decades at Goldman.
“If the phone rings enough times and customers try to be exposed, you end up figuring out how to do it for them safely, understanding that your role in the world is to be a safe middleman, not to ‘act as a trustee, “he said.
This important stage completes the Vanderwilt loop with its old life. In 2017, as Goldman’s senior trading executive, he was tasked with helping launch the bank’s first effort to trade bitcoin futures, a plan that was later scrapped. Now he’s helping to achieve it from his position at Galaxy.
“There’s a lot of irony, I smile a lot,” Vanderwilt said. “But I’m really happy, it’s a happy, full circle.”
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