Crypto Is In Limbo, Whatever Goldman Does

(Bloomberg) -- Imagine if Goldman Sachs Group Inc. had announced a Bitcoin trading operation at the end of 2017, just as public enthusiasm was reaching fever pitch. What an endorsement! With Bitcoin futures being rolled out on exchanges and hedge funds reinventing themselves as cryptocurrency firms, supporters of stateless money would no doubt have claimed Wall Street's use of it as inevitable step on the path to riches.

That announcement never came — but the sell-off did. Five months and a 50-percent drop in the price later, news that Goldman will start trading Bitcoin after all, or rather contracts linked to its price, seems awkwardly timed. As fun as it might be to build a brand-new, interesting kind of banking product (as my colleague Matt Levine described it) this doesn't look like the kind of endorsement that boosts adoption and revitalizes wary investors.

Bitcoin is languishing in a crypto-limbo that any big bank would find hard to break. Individual investors, stung by heavy losses, appear to have put aside their urge to gamble for the time being. Trading volumes have dwindled. Hedge-fund traders who drooled over Bitcoin's volatility last year now describe it as boring — its daily trading range has fallen to around $100, close to 1 percent of the spot price.

Bitcoin's defenders will say that all of this proves its worth as a store of value. One Bitcoin has changed hands for somewhere between $6,000 and $9,000 since March, so it can't be all that toxic. In that sense, the more boring it gets the better. The New York Times reports that clients are asking Goldman to help them hold Bitcoin as a valuable commodity like gold. It may be anathema to the crypto-anarchists, but perhaps more established investors might bite if Bitcoin remains stable?

The problem is that big investors tend to have long memories. Any lull in price volatility will be set against the historical record: If Bitcoin's price was able to double in one month and halve in the next, what's to stop that happening again? Some dedicated crypto hedge funds will probably be able to roll with the punches, going with and against the crypto tide as necessary. But only a long track record will instill confidence.

And let's not forget the legal questions that still need to be addressed. Regulators have subpoenaed cryptocurrency investment funds, exchanges and companies selling new tokens to the public. They are mulling the rather important question of whether widely traded cryptocurrencies like Ether or Ripple are actually unregistered securities — which, if so, would doubtless unleash a fresh bout of selling. The G-20 has also yet to issue a common global position. There are plenty of reasons to hold back. Even Goldman knows it — it's not yet ready to trade actual Bitcoin.

If regulators keep dithering, and the balance of power remains in favor of wealthy “whales” who have outsized influence in crypto-circles, there could be room for a new break-out of animal spirits among punters as Bitcoin regains its allure as a source of life-changing riches. But the promise that it will involve Wall Street money feels flimsy. Banks aren't going to rush into this particular market.

To contact the author of this story: Lionel Laurent at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.

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