Goldman Sachs Sees Crypto Options Markets as the ‘Next Big Step’ to Institutional Adoption

Goldman Sachs Sees Crypto Options Markets as the 'Next Big Step' to Institutional Adoption

“We are seeing a lot of demand for more derivative-type hedging,” Andrei Kazantsev, Goldman’s global head of crypto trading, said Thursday during a CoinDesk-hosted panel discussion. “The next big step that we are envisioning is the development of options markets.”

Goldman Sachs, the Wall Street heavyweight, says the following significant improvement for cryptocurrencies will be more liquid choices markets as more conventional monetary firms pile into the quickly developing asset class. Kazantsev depicted digital currency subsidiaries as being in the “infancy of product scope” when compared and more customary business sectors like values or foreign exchange. The bitcoin choices market has as of now been seeing quick development over the two or three years. Investors use digital money choices to fence out existing danger or take on extra market openness.

Open interest in bitcoin options, or the total value of outstanding contracts, stood at about $12 billion as of the latest data from Skew, a subsidiary of Coinbase that tracks data on cryptocurrency derivatives markets. As recently as the first half of 2020, the market rarely exceeded $2 billion.

Options are a type of financial instrument called a “derivative,” which obtains its value from the price of another asset – in this case, the underlying cryptocurrency.

“There might be equity funds that have an exposure to a stock that has underlying bitcoin holdings,” explained Kazantsev. “In order to hedge that exposure, they might trade futures against that. For them, rather than rebalancing the portfolio dynamically, what they really want to do is hedge for the longer term, and to know the downside on the hedge that they can have. That’s where options become really important.”

“There are more versatile possibilities to hedge specific exposures with options than with futures alone,” added Kazantsev.

Earlier this year, Goldman Sachs re-established a cryptocurrency trading desk amid increased interest from its roster of clients, which include hedge funds, endowments and other institutional money managers.

The trading desk was set up to provide principal liquidity for CME Group’s crypto-related futures and over-the-counter equivalents. Principal liquidity implies Goldman Sachs takes the other side of the buy or sell trade, resulting in a new risk position in the bank’s internal holdings.

Kazantsev says the process allows Goldman Sachs to execute trades with larger notional values. “We’re active in providing liquidity and taking risk on behalf of our clients and in the market,” said Kazantsev.

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