Photo by Patrick Weissenberger on Unsplash
On May 27, 2020, Goldman Sachs hosted a call about bitcoin, gold, and inflation.
Leading up to this call, the cryptosphere praised Goldman Sachs and buzzed about institutional adoption. After the call, they lambasted Wall Street’s ignorance and ridiculed Goldman Sachs for being out of touch.
What happened?
Goldman Sachs told investors that cryptocurrency is a bad investment. Or, as I put it:
Tweet from May 27, 2020
Fortunately for bitcoin, Goldman Sachs doesn’t matter.
Wall Street has already entered cryptocurrency.
Accredited investors and money managers have already put a little money into bitcoin and Ethereum, mostly through regulated funds from licensed firms like Grayscale and Bitwise. A bunch of ex-Goldman executives and junior officers now hold high-ranking positions at crypto-focused financial firms. Top brands like JP Morgan and State Street have started crypto-related ventures. Fidelity and TD Ameritrade own subsidiaries that deal in cryptocurrency.
True, these are fairly limited ventures.
From my contacts in the financial realm, it seems like most fund managers remain skeptical of crypto. Some think it’s great but worry their reputations will suffer if they suggest others should buy it. Wall Street firms are not known for their embrace of novelty or assets that (supposedly) always crash.
What happens when Coinbase, Fidelity, and Grayscale, 3iQ, Bitwise, and all the other players start taking away their customers? What happens when firms like Goldman Sachs can’t service their clients’ desires to allocate 1% or 2% of their assets into bitcoin?
Cryptocurrency exchanges made $6 billion in 2019, during a so-called bear market. If we’re really at the beginning of that massive bull run everybody’s calling for, you can bet those profits will go up.
How many Wall Street firms will stick with their convictions once BitOffer and Gemini steal their fees and commissions?
From a business perspective, Goldman Sachs did not necessarily make a bad decision. Since it doesn’t do much retail business, relative to its size, it doesn’t really need to dabble in crypto. What does it lose by trashing it? Why hype something it can’t make money off of? That would just give clients a reason to take their money to another firm.
Besides, many Goldman Sachs clients have fiduciary responsibilities or investment guidelines that limit or prohibit volatile, high-risk assets. They’re not likely to put much money into cryptocurrency, even if they wanted to.
Maybe in the future, Goldman Sachs changes its mind and decides to get involved. Who cares? It has only $2 trillion of assets under management.
Yes, $2 trillion is a lot of money.
But that number includes a lot of money from institutions that will never allocate a penny to crypto (or any other risky asset).
Not to mention, the overall market for crypto is much bigger than $2 trillion. It’s literally everything you can put a price on.
Compared to $100 trillion in paper money, $300 trillion in “things” people can collateralize for loans, and $700 trillion in derivative financial products, $2 trillion isn’t very much. A drop in the bucket for the global financial system.
The crypto market is so tiny, it will see massive gains if just a tiny fraction of that money enters the markets. Goldman Sachs has nothing to do with it.
Keep in mind, Wall Street firms are not coming to make you rich. They’re coming to make their clients rich.
(For a small fee.)
Once they gain a foothold in cryptocurrency, they will do everything they can to make sure that they can keep making money from people who want to get rich.
I’m not saying they’re all trying to screw you over. They get paid to make money for other people — a job most of them take seriously.
As professional money-makers, they know how to stack the deck, rig the game, and make you feel like they’re doing you a service. If cryptocurrency really is the casino everybody thinks it is, Wall Street wants to be the house, the dealer, and the bank.
Does that mean everybody wants to rip you off?
No, quite the opposite. I can trust almost everybody I know in finance.
But when it’s your job to make money, and you take the job seriously, you don’t necessarily worry about the guy on the other side of the table. You’re just looking to get the best deal you can.
As one Wall Street insider once told me, “if they tell you they’re going to buy, it means they’ve already bought.” By the time they talk up an asset, you can be sure they already know how to make money off of your interest in that asset.
Did you recently sell bitcoin? If so, who do you think bought it?
Chances are, it wasn’t the YouTuber with a long position or the guy in your Telegram group.
Grayscale, a fund limited almost exclusively to institutional investors, reported buying 150% of the bitcoin mined this year. It holds more than $2 billion in bitcoin, growing daily.
ARK Investment Management holds at least $400 million worth of cryptocurrency for its clients. 3iQ raised $48 million for its publicly-traded Bitcoin ETP. New York Digital Investment Group reported $140 million in investments.
Tiny numbers for Wall Street, big numbers for crypto. Using regulated funds, institutional investors now own at least 2% of all bitcoins. Throw in private stashes and closed investment pools, that number may be much higher.
On the same day Goldman Sachs held its call, Coinbase acquired Tagomi, a trading service for institutional investors that was started by Wall Street veterans (including a former Goldman Sachs executive).
Bakkt now sees more of its contracts settled in physical bitcoin instead of cash equivalents.
Why does this matter?
Because it means professional investors want your bitcoin, not your cash. For years, they’ve used you to make money. Now, they’re using you to stack sats.
That shift in thinking will have really big implications down the line, which I discuss further in my book, Bitcoin or Bust: Wall Street’s Entry Into Cryptocurrency. It’s one thing to trade paper derivatives for kicks. Once you take custody of bitcoin, you usually intend to use it.
With DeFi starting to take off, savvy pros can leverage those real bitcoins into additional gains. Or perhaps engineer some new financial products?
Some may simply want a stash of actual BTC, which means less bitcoin for people who really need it.
When will Wall Street stop buying bitcoin?
Probably when your parents start buying it.
If you’re already in the space, you probably consider yourself among the smart money. You can expect to ride Wall Street’s coattails all the way to the top of the bull market.
Except, with one difference: you will not know when to sell. Once you sell, the pros will have already run away with your money. You will end up on the short side of the stick.
If you are a premium subscriber of the Crypto is Easy newsletter, you will not worry about this. You will know exactly when the top is near and you will make sure that you get out before greed and fear crash the market.
If you’re not subscribed, now might be a good time to reflect on how crypto will change as more and more traditional financial professionals stake their claims to these new financial networks. Are you a beneficiary or simply liquidity when they need to buy low, sell high, and cash out their position?
As cryptocurrency markets get more professional and money rushes in, you will see a lot of positive developments. More money for crypto projects, innovations in blockchain technology, and the infrastructure to support mass adoption.
Oh, also, “price go up,” moon, Lambo, all that.
What does that do for everybody who isn’t already in this market? Who will look out for them?
I worry about all the people who don’t understand bitcoin and cryptocurrency, don’t want to buy it now, and miss the boat until their financial advisor or somebody else tells them to buy it. Those people who are going to get fleeced.
Goldman Sachs’s opinion will do nothing to stop that.
