- Goldman Sachs Group (-1.85%) executed its first ever OTC cryptocurrency options trade, in a further step to expand digital asset offerings to Wall Street investors.
- Ultimately, institutional investors will now have more ways to bet on Bitcoin’s price in either direction, and much of that will be away from the prying eyes of the market.
The world of financial derivatives is often opaque and inaccessible.
Because many derivatives are traded over-the-counter or OTC with other counterparties, it’s hard to put a finger on how significant or large the size of the derivatives market is, unless of course, something goes horribly wrong, as was the case of Archegos Capital Management.
In the case of Archegos, the family office run by Bill Hwang, a former “Tiger Cub,” a term used to describe ex-employees at Tiger Management, forced liquidations of over US$20 billion in holdings almost crashed the market and led to billions of dollars in losses for some of the biggest banks.
Much of the leverage used by Hwang was provided directly by banks, including Nomura Holdings and Credit Suisse Group through swaps and contracts-for-difference, meaning that Archegos probably never owned most of the underlying securities, if any at all.
These OTC derivatives traded by Archegos are transacted off exchange, allowing managers like Hwang to amass massive positions in publicly-traded companies without having to declare such exposure.
And now it appears that those same style of OTC products are bleeding the cryptoverse into that of traditional finance as Goldman Sachs Group (-1.85%) executed its first ever OTC cryptocurrency options trade, in a further step to expand digital asset offerings to Wall Street investors.
Similar to the CME Group’s (+0.46%) cash-settled Bitcoin futures, the Goldman Sachs options are non-deliverable, meaning that while the derivative is tied to Bitcoin’s price, it pays out in cash.
But unlike the CME Group’s product, who buys these options and how much they cost is completely opaque, as is the nature of OTC markets.
While many crypto traders use options to hedge risk or gin up returns, OTC transactions are typically larger trades negotiated privately and may usher in a new era where counterparties have far more exposure to the nascent asset class than publicly declarable.
Last year, Goldman Sachs opened up trading of non-deliverable forwards, akin to CME Group’s Bitcoin futures, and are a derivative tied to Bitcoin’s price that settles in cash.
Ultimately, institutional investors will now have more ways to bet on Bitcoin’s price in either direction, and much of that will be away from the prying eyes of the market.
On the flipside, Goldman’s move to make more crypto derivatives available and could nudge other banks sitting on the fence about crypto to use OTC as a conduit for trading cryptocurrencies.
Because derivatives can be cash-settled, banks don’t have to deal with issues of custody, which raises expensive and clunky investigations into the source of the underlying digital asset, as well as KYC and AML baggage that typically goes along with that.
And while familiar names like Goldman Sachs could help pave the way for greater institutional adoption, they could also usher in a period of immense speculation, similar to the opaque mortgage-backed securities that contributed to the 2008 Financial Crisis.
