What To Make Of Goldman’s Cryptocurrency Trading Plans

by Trefis Team
Goldman Sachs
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Goldman Sachs (NYSE:GS) is reportedly in the process of setting up a cryptocurrency trading desk, and is expected to begin making markets in digital currencies by next June. The investment bank is eyeing a first-mover advantage in the still-nascent segment, as many of its peers have chosen to wait it out for the time being. Notably, Goldman is the only major bank that elected to clear bitcoin futures when the product was launched earlier this month.

There is a clear risk to Goldman’s cryptocurrency strategy, though, as the industry has demonstrated extremely high volatility, and many market participants have yet to fully understand the risks involved. We believe that Goldman will deal with these issues by limiting cryptocurrency market making services to just a handful of clients to start – scaling it up as it gains more experience in the field. Also, the growing popularity of cryptocurrencies is likely to result in other major investment banks setting up their own trading desks over the coming years, and by that time Goldman will likely have captured a sizable chunk of the market while having gained invaluable experience in the industry.

We maintain a price estimate of $245 for Goldman’s stock, which is slightly below the current market price.

See the full Trefis analysis for Goldman Sachs

Goldman Likely To Remain Cautious

Over recent years, Goldman has been making incremental changes to its business model partly due to increased regulator pressure and partly in a bid to make its profits less dependent on the volatile securities trading business. Most notable among the bank’s efforts has been its push in the retail banking space through online loans and deposits. Goldman has also grown its asset management arm considerably since the downturn, and was one of the first banks to launch exchange-traded funds (ETFs) to make the most of the growing popularity of this investment channel. At the same time, its core fixed-income, currencies and commodities (FICC) trading desk has had to contend with secular headwinds which have depressed total revenues across the industry. To make things worse for the bank, its commodities trading business has been plagued by a string of poor performances this year – forcing it to review this unit.

With Goldman looking for ways to grow its top line, the recent spurt in investor activity for cryptocurrencies would appear to be a great avenue for growth. Although cryptocurrencies are slowly making their presence felt in mainstream finance, the largest banks have largely shied away thus far. While JPMorgan has voiced concerns about the industry, Bank of America and Citigroup have seemed happy to remain passive observers. However, Goldman has been quick to grab this opportunity, and became the only bank to begin clearing bitcoin futures when they debuted at the Cboe Futures Exchange earlier this month. That said, the bank has been cautious with bitcoin futures – often requiring clients to post 100% margins for clearing them. This allows Goldman to reduce the overall risk associated with clearing the extremely volatile product. The bank’s plan to set up a cryptocurrency trading desk is the logical next step towards establishing a presence in the industry.

We believe that Goldman’s crypto trading desk will remain fairly conservative for a while after being set up next year, and will be scaled up gradually in the coming years. However, the expertise the bank will gain should give it an edge over other banks in the long run. Eventually, revenues from trading cryptocurrencies should have a positive impact on Goldman’s FICC trading yields – captured in the chart below.

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