It's a great question to ask since the Crypto market, including Bitcoin is getting banged up this week and it all started with a report that Goldman Sachs has killed plans of a Bitcoin trading desk. Many want to blame them for the carnage but I've got news for you, you're blaming the wrong entity. But before we go any further lets see how much Bitcoin and the Crypto market have gotten hit this week.
Bitcoin is down 11.8% since the report. How about the entire Crypto market?
Well that's down 14.4%, ouch. That makes for a loss since July 31 of 26.2%, please see below.
Now what did this famous report say? A reporter claimed "sources" within Goldman said that they were dropping plans to develop a Bitcoin trading desk. This was certainly the spark which set-off the selling but if it was the true reason we should've seen a bounce back for a few reasons. As you see we haven't had a bounce back, instead the selling continued over the rest of the week.
What are these reasons I'm referencing?
The report was inaccurate, within hours of the news release Goldman made a public statement saying they are "concentrating on building a custody product to better serve their large institutional clients."
The report was fake news, less than 24 hours the CFO of Goldman Sachs spoke at a conference and himself called it "fake news."
A custody product is much more important and influential to the Crypto market than a trading desk.
Not only is Goldman not dropping plans of building a Bitcoin trading desk but they are building a custody product. The Bitcoin trading desk is still being built, according to the company it has been put on the back-burner until the custody product is complete. If you know anything about how Wall Street works these days a custody product is huge and one that is sorely needed for the Crypto space, obviously Goldman knows it. Even Michael Novogratz is on record saying a custodian product is desperately needed to help push institutional money into Crypto.
A trading desk will be nice for Goldman Sachs as it will allow them to trade Bitcoin for their proprietary account as well as work orders for institutions. But in all reality with the advancement in technology on Wall Street institutional money managers really don't need traders at Goldman Sachs to work their orders especially in the Crypto space. Of course they still have Goldman work orders for them but it's reciprocal for the research they receive from Goldman. Institutions receive economic research as well as stocks and bonds research from firms like Goldman and in return they send them order flow. Since they are already receiving this research they really don't need it for Bitcoin and Crypto as these instruments trade mostly on technical analysis rather than fundamental and most institutional traders know how to read charts.
Now on the other hand the custodian product is huge. Knowing a firm like Goldman Sachs is running a custodian product for Crypto will give large institutions more confidence to invest capital within the space. Goldman will be holding Crypto for these institutions as well as lending and clearing trades all of which they already do for in the equity and bond markets for these very same large institutional investors.
With all that said and known by influential people within the investment community we still haven't seen a bounce back in Bitcoin and Crypto prices. Of course no mainstream media is reporting on this the way we just explained, I don't want to sound like a conspiracy theorist, I'm simply laying out the facts.
We believe the original news story was certainly the spark which started the selling but you must look deeper. We've posted this chart before and we will show you again, it's the correlation between Bitcoin and EEM (the emerging market index).
Over the past couple of years we've seen a solid correlation between the two and since the start of the year EM's have been under pressure by large investors. Hedge funds have been risk-off when it comes to EM stocks and bonds as the Fed has picked up its pace of interest rate hikes. As the Fed raises rates most of the major economic countries are doing the same making it much harder for EM companies and countries to borrow which is impacting them economically. You impact an EM's economy you start impacting the companies within those economies. Until hedge funds feel the Fed is slowing or even stopping these rate hikes they will not look at EM's from a risk-on point of view.
Why does all this EM talk impact Bitcoin? Why are the two so correlated? Millions of people throughout the EM countries have adopted the use of Bitcoin and other Cryptos for everyday use. Much more so than in America and other developed countries as we tend to look at Cryptos more as an investment. These people want to use it to protect themselves from high inflation as well as actually buying goods and services with Bitcoin. These people are massively under-banked in their countries, Bitcoin is enabling them to get around this problem.
We expect to see Bitcoin under pressure as long as hedge funds view EM's as risk-off. Two things have the potential to stop the selling pressure, one is the Fed and their interest rate hiking policy this will allow risk-on capital to start flowing back into EM's. The second not only has the potential to stop the selling pressure but also break the correlation between Bitcoin and EM's, and that is a custody product like Goldman Sachs is building.
When will this product be complete? I don't know and Goldman Sachs didn't give a timeline but as people say, as goes Bitcoin so goes Crypto...
So many complexities... so little time. 😬
I hear ya...
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