Goldman Sachs, the Wall Street heavyweight, says the next major development for cryptocurrencies will be more liquid options markets as more traditional financial firms pile into the rapidly growing asset class.
“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.”
Kazantsev described cryptocurrency derivatives as being in the “infancy of product scope” when compared with more traditional markets such as equities or foreign exchange.
The bitcoin options market has already been seeing fast growth over the past couple years.
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.
Investors use cryptocurrency options to hedge out existing risk or take on additional market exposure. 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.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.