Potential Wall Street Adoption of Bitcoin
There is a great divide on Wall Street at the moment. Like many times in its history when new technology came to the fore, there were those that were sceptical and there were the new adopters and optimists.
This has become increasingly evident today with discussion around Bitcoin and cryptocurrencies in general. On the one side you have vocal critics like Jamie Dimon of JP Morgan who claim it is a fraud. They have railed against the cryptocurrency from the beginning and appear loathe to accept any change to the status quo.
However, there are a number of Jamie Dimon's competitors who take a different view. Last week it was reported that Goldman Sachs was actually considering whether they should offer Bitcoin related trading services to their clients. Goldman Research has actually been covering Bitcoin as an asset class for sometime already.
A Sign of Mass Adoption
Although this got the community quite excited about the prospect of mass adoption, the CEO of Goldman Sachs, Llyod Blankfein appeared to play down the reports slightly in the tweet below. The tone of the tweet as well as the comment surrounding it still seems to sound optimistic.
Goldman is not alone in their overtures towards Bitcoin. For example, Fidelity investments has been working with Bitcoin related startups through its Fidelity Labs. We have also had comments from James Gorman of Morgan Stanley that Bitcoin was "more than just a fad". What this does indeed show is that there are many industry leaders who are taking notice of Bitcoin and are looking for ways in which to enter the market.
Although one would think that this could be about the banks trying to embrace technological change, there is also important business reasons for them exploring the idea. This is because of the lack of general volatility in the traditional markets. Investors and clients themselves are looking for returns.
Moreover, if one was to look at the trading numbers of Goldman for the second quarter of this year, they were down over 40% from last year. If they were to offer Bitcoin trading opportunities there would be an opportunity for them to increase their revenues.
Impact of Institutional Trading
If a large financial institution such as Goldman were to offer Bitcoin trading on their books then this could have profound impacts on the market. For example, there will be a large increase in the volatility in price which could in turn increase the returns.
It could also further legitimise the institutional need of hedging alternatives in the derivatives space. This would lead to a large increase in the amount of derivative products which are traded on LedgerX. LedgerX was the first derivatives exchange that was authorised by the Chicago Board of Exchange.
This could in fact even counter the increased volatility that one could see from Bitcoin itself. Derivatives allow for attractive returns without having to necessarily churn positions.
The introduction of institutional trading desks that hedge with derivatives could also lend weight to an eventual ETF. One of the few arguments given by the SEC as to why they would not allow an ETF is that Bitcoin is really volatile. However, with the dampening effect of derivatives, it could lend weight to an eventual ETF.
A Broader Trend
Even if the large investment banks don't decide right now to enter the trading fray, one cannot deny the sweeping winds of change that are blowing through the banking community. For example, at a Fintech conference last week many of the participants were of the view that mass adoption was not a matter of if but when.
Similarly, banks in a number of countries have decided to invest in Bitcoin related businesses as well as offering Bitcoin services to their clients. For example, Skandiabanken in Norway is allowing their customers the opportunity to link bank accounts to cryptocurrency holdings.
As more investors, traders, bankers and consumers start joining the trend so too will the businesses they interact with. Mass adoption may indeed be around the corner.
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Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.