I certainly hope you weren’t surprised on Thursday afternoon when you learned that Goldman is in fact moving ahead with plans to establish a digital currency trading desk.
For one thing, this was tipped by the Wall Street Journal in early October, although Lloyd Blankfein subsequently attempted to throw cold (or at least “cool”) water on it a day later using his official Twitter account.
Since then, Blankfein has flip-flopped on Bitcoin, although I’m sure he would contend that his position has been consistent.
A month or so after that tweet, in an interview with Bloomberg, Lloyd came across as pretty open-minded about the crypto space. A couple of weeks after that, following a truly absurd bout of volatility that saw Bitcoin plunge more than 20% after hitting an intraday high near $11,400 (that was back when $11,000 was still a big deal), Blankfein seemed to sour on the digital currency anew. “Something that moves up and down 20 percent in a day doesn’t feel like a currency, doesn’t feel like a store of value,” Blankfein told Bloomberg in another interview. “If it works out — and it gets more established, and it trades more like a store of value, and it doesn’t move up and down 20 percent, and there is liquidity to it — we’ll get to it.” He also said this:
One of the main uses of Bitcoin is as a vehicle to perpetrate fraud.
That may be, but as Barclays wrote a couple of weeks back, one thing Bitcoin “has in spades” is volatility and it goes without saying that volatility is a beast that’s rarely seen in the wild these days – or at least among traditional assets.
“Bitcoin is 15-25x as volatile as the S&P 500, 20x-40x as volatile as gold, and even 5x-11x as volatile as oil as measured by the coefficient of variation,” the bank noted. Here’s the chart:
That’s bound to attract Wall Street at a time when low vol. has been variously blamed for plunging trading revenues. As one former trader put it this evening: “I’m not saying its easy, but what would you prefer to be making markets in, a dinosaur currency that spends its day lazing in a garbage range … or in wild swingers like BTC?”
Fortuitously, this comes on the same day as a note from Marko Kolanovic (and this would be the same Marko Kolanovic who in September warned that cryptocurrencies have “some parallels to fraudulent pyramid schemes”), who had the following to say about Bitcoin and volatility:
At a time when volatilities across asset classes have plummeted, this presents us with the oddity of an asset with extreme daily moves. Realized vols in BTC are unlike anything we’ve seen in other asset classes.
Yes, the market has been “presented” us with an asset “with extreme daily moves.”
And when “presented” with that opportunity in an environment where trading revenues are drying up, you can bet the whales and squids are going to come knocking demanding their “fair” share of the action.
According to Bloomberg, Goldman “aims to get the business running by the end of June, if not earlier,” while another source said the bank is “still trying to work out security issues as well as how it would hold, or custody, the assets.”
Right. Of course “fire, aim, ready” is the preferred strategy when it comes to transacting in Bitcoin and other cryptocurrencies, something Goldman and every other blue chip bank will need to come to terms with quickly if they want to ride this wave. “Fortunately”, if there’s anything we learned from the crisis it’s that Wall Street isn’t averse to trading aggressively in things they don’t fully understand without regard for the consequences.
On that note, we’ll leave you with an excerpt from “Bitcoin’s Milkshake Volatility Is Bringing Too Many Boys To The Yard,” a piece we penned the other day about how commodities traders are likely to fare in this arena:
Forgive me, but I’m not sure past performance in traditional commodities is a guarantee of future results in Bitcoin. If these swashbucklers thought commodities were exciting, just wait until they find themselves trading against someone’s Dewar’s-guzzling, chain-smoking grandma who’s placing orders on Coinbase while shrieking “hit me” to the blackjack dealer. Or against a Millennial who’s literally gambling his student loan disbursements on GDAX at 3 in the morning while doing a keg stand.