Goldman Sachs and Galaxy Digital, the “Goldman Sachs of Crypto”, Join Forces to Safeguard Bitcoin Transactions

According to CNBC, Goldman Sachs has begun to establish a deep cooperative relationship with Galaxy Digital, a digital investment company founded by Mike Novogratz and known as the "Goldman Sachs of the crypto world". Galaxy Digital will serve as Goldman Sachs' "liquidity provider" for CME Group's Bitcoin futures. Last month, Goldman Sachs said it would work with "new liquidity providers" to help expand its business operations.

Damien Vanderwilt, a former Goldman Sachs partner and current co-president of Galaxy Digital, said that as more banks allow clients including hedge funds, pensions, family offices and sovereign wealth funds to trade Bitcoin, the depth and breadth of the crypto trading market will improve, which will ultimately reduce Bitcoin's volatility.

As a global investment bank, Goldman Sachs' move is likely to have huge repercussions on Wall Street and elsewhere as banks face pressure from clients who want exposure to Bitcoin. Vanderwilt, a former Goldman Sachs partner who joined Galaxy Digital last year, said that by becoming the first major U.S. bank to start trading cryptocurrencies, Goldman Sachs is setting a trustworthy example for other banks.

“Once one bank starts doing this, other banks will be afraid of missing out and will jump in because their customers have been asking for it,” Vanderwilt told CNBC this week.

Max Minton, head of digital assets for Asia Pacific at Goldman Sachs, said in a statement, "Our goal is to provide our clients with the best trading prices and secure access to the assets they want to trade. In 2021, cryptocurrencies have joined this list. We are pleased to have found a partner with sufficient liquidity and capabilities across the cryptocurrency derivatives ecosystem."

Vanderwilt said that Goldman Sachs is relying on Galaxy Digital to enter the world of cryptocurrency because the highly regulated banking industry is not allowed to directly handle Bitcoin. But in reality, it is difficult for regulators to organize banks to indirectly contact the crypto industry, which is where Wall Street began its cryptocurrency journey. The crypto market also has similarities with the commodity sector, where banks can also trade pigs or corn without owning physical assets.

Galaxy Digital’s shares are listed on the Toronto Stock Exchange and it may offer shares in the U.S. this year.

Vanderwilt said of the market transition, "You're moving market participants from 90% retail investors, a large portion of which are using ridiculously high leverage, to institutional investors who have proper, tested norms and regulations on leverage, asset-liability mismatches and risk. The more institutional investor activity there is, the less volatility there will be."

He said the bank will be able to offer clients ways to trade bitcoin using derivatives, drawing from the established financial world. This includes offering arbitrage trades on the price gap between CME bitcoin futures and bitcoin itself, as well as relative value trades between bitcoin and ethereum.

Goldman's moves into cryptocurrency trading have gone ahead despite continued skepticism about bitcoin from other parts of the firm, most notably when the bank's chief investment officer for wealth management called bitcoin a bubble and unsuitable for investors.

But from a banking perspective, if enough clients ask for a product, investment banks have an obligation to offer it, and Vanderwilt has seen this play out in many places around the world, including other emerging markets, during his 20 years at Goldman.

“If the phone rings enough times and clients want exposure, you should find a way to do that for them safely, knowing that your role in the world is to safely facilitate risk transactions, not to act as a fiduciary,” he said.

On a personal level, the partnership also means a lot to Vanderwilt. In 2017, as a senior trading executive at Goldman Sachs, Vanderwilt was tasked with helping to kick off the bank’s first effort to trade bitcoin futures. That plan was later shelved. But now, he’s finally fulfilling his original mission through Goldman’s partnership with Galaxy Digital.

"There are definitely a lot of ironies in this, and I often have to laugh about it, but I'm really glad it's a happy ending," Vanderwilt said.