So this happened.
Goldman Sachs Group Inc. is weighing a new trading operation dedicated to bitcoin and other digital currencies, the first blue-chip Wall Street firm preparing to deal directly in this burgeoning yet controversial market, according to people familiar with the matter.
I have yet to meet a neutral objective analyst of the Bitcoin market. So I’m really not expecting to get a very good answer as to what happens next. I do expect, however, that Bitcoin in particular will react differently as a market leader and that other coins are traded in a basket without reference to their actual strengths and weaknesses. At some point that will change. I’m singly focused on Bitcoin because the most people know the most about it, and I consider it the safest investment of them all.
Anyway, I know a lot of people have been jawboning against Bitcoin, especially a good friend of mine who works for Morgan. They had a jolly good laugh a couple weeks ago when they were convinced that China and Jamie Dimon were going to destroy Bitcoin. The price has rebounded. (and yes I bought on the dip). So now they are going to think twice and wonder what Goldman is doing. I like the idea that Goldman’s interest seems to be coming from its own captive audience of customers, but I cannot imagine that GS will build an exchange to compete with the likes of Kraken, Bitfinex and Coinbase.
One smart thing would be for GS to simply acquire Coinbase (although I wish they wouldn’t), or one of the notable exchanges. It’s a decent idea for them to make their own exchange. They could amass a fair amount of goodwill by funding or certifying banking transactions with one of the major exchanges. But also one of the historical problems in establishing these large public cryptocurrency exchanges is that no banks would do business with them. I’m certain that GS has enough contacts and influence in the industry to quickly martial some tech folks behind market making, and simply on reputation alone could convince people to ‘bank’ on their exchange. In the end, all the bitterness about MtGox was about who was sloppy and who was a crook. So if GS doesn’t have a reputation as being sloppy and crooked, there’s another piece of the market who would trust a GS branded Bitcoin exchange. Interestingly enough, I bet GS knows 1000 whales who would actually pay for access to such a branded exchange, which is somewhat reasonable to expect.
About six months ago, I thought that private blockchains would be an avenue towards improving the lot of clearinghouse tech. Today I’m not so sure. I’d be willing to bet that there’s a lot of efficiency to be gained in the settlement process without blockchain. I’m sure GS among others have figured exactly how much by now, so we should see walking at long last after all the talking. I expected that investment houses would simply chuck out their staffs and replace them with blockchain settlements. But they could save a lot of money by tailoring a service around Bitcoin itself rather than trying to build their own blockchain. The trick is that they’re going to have to buy enough themselves to manage that business as their internal paper. That will make the price go up, as they acquire, and allow their customers to acquire. It’s a big part of the liquidity that Bitcoin needs. If all GS has done is setup their own systems to work with Bitcoin for settlements and for their own investment customers convenience, it would be a very smart move, and all they really needed to do. If I were a macher at Goldman, that’s what I would do.