The financial world watches intently as Wall Street giant Goldman Sachs reportedly considers direct market-making in Bitcoin and other digital currencies. This potential move, if realized, would mark a significant milestone, positioning Goldman as the first major Wall Street institution to engage directly in cryptocurrency trading.
Following initial media reports, Goldman Sachs CEO Lloyd Blankfein took to Twitter to clarify the firm's stance, stating that they are "still thinking about Bitcoin" and have reached "no conclusion," emphasizing a position that is neither endorsing nor rejecting the digital asset. He drew a historical parallel, noting that skepticism also existed when paper currency replaced gold. A Goldman Sachs spokesperson added that the firm is exploring ways to offer clients the best possible service within the digital currency space.
This exploration began in earnest in June, when Goldman Sachs started publishing research reports on Bitcoin, becoming the first major investment bank on Wall Street to provide formal Bitcoin price analysis. An August report from the firm argued that institutional investors are finding it increasingly difficult to ignore the burgeoning Bitcoin and virtual currency market. Shortly after Goldman's foray, Morgan Stanley followed suit, releasing its own comprehensive report on the digital currency market.
The Allure of Bitcoin
Since its inception, Bitcoin has been a subject of intense debate and skepticism. Despite this, no mainstream bank has yet become a market maker for it, nor do major exchanges offer a dedicated trading platform. The extreme price volatility of Bitcoin, while risky, creates the potential for substantial gains, a prospect that is driving demand from the bank's own clients.
Morgan Stanley noted in its report that client inquiries about Bitcoin and other digital currencies had surged dramatically, resembling a "flood" of calls to their headquarters. This overwhelming client interest is creating a new imperative for financial institutions to develop expertise and offer related services.
Goldman Sachs estimates the total market capitalization of all cryptographic currencies to be approximately $120 billion. Within this ecosystem, nine individual cryptocurrencies boast a market cap exceeding $1 billion. Bitcoin, as the dominant force, commands a market cap of around $55.5 billion, representing nearly half of the entire market's value. Alongside trading, Initial Coin Offerings (ICOs), which are analogous to stock market IPOs, have seen explosive growth. According to data from Coin Schedule, ICOs have raised a staggering $2.37 billion so far this year, with the funds raised in June and July alone surpassing global internet angel and seed-stage venture capital investments.
This burgeoning asset class presents a new potential revenue stream at a time when persistently low volatility in traditional asset classes has compressed margins and severely impacted income from institutional trading businesses on Wall Street. Furthermore, bullish sentiment on Bitcoin has been widespread.
A Bank of America Merrill Lynch survey of over 200 global fund managers, who collectively oversee at least $600 billion in assets, identified Bitcoin as the "most crowded trade" in September. 26% of managers viewed Bitcoin trades as overly crowded, edging out bets on the Nasdaq (22%) and shorting the US dollar (21%). While a "crowded trade" suggests a potential reversal due to an overabundance of investors, it's notable that these three strategies had all delivered significant returns up to that point in the year.
Navigating Extreme Volatility
Bitcoin's price journey in 2017 has been nothing short of meteoric, skyrocketing from under $1,000 at the beginning of the year to nearly $4,400, even touching $4,900 in early September—a near fourfold increase in just nine months. This was followed by a sharp correction down to around $3,500 in mid-September before a rebound back toward $4,400.
This very volatility is a double-edged sword. It is both the primary reason Wall Street is considering entering the market and the most significant barrier to immediate entry.
During the September correction, JPMorgan Chase CEO Jamie Dimon famously declared Bitcoin a "fraud" at a Barclays financial conference in New York, predicting the bubble would eventually burst. He stated, "It's worse than tulip bulbs," referencing the 17th-century Dutch tulip mania, one of history's most famous speculative bubbles. Dimon expressed astonishment that anyone could not see its true nature and even joked that he would fire any JPMorgan trader caught trading Bitcoin for being "stupid" and violating company rules.
Beyond the risk of a bubble, such wild price swings present profound regulatory challenges. A report from the Federal Reserve Bank of Philadelphia earlier this year highlighted that Bitcoin's relatively small trading volume and high volatility lead to significant price discrepancies across different exchanges at any given moment. This makes it exceptionally difficult to determine a single, fair market price for the asset.
This uncertainty complicates regulatory compliance for banks. Key requirements, such as conducting accurate asset valuations and providing fair and consistent pricing to all clients, become nearly impossible to execute reliably in such a volatile and fragmented market.
The Regulatory Question Mark
The issue of regulation is central to Wall Street's adoption of Bitcoin. Larry Fink, CEO of the world's largest asset manager, BlackRock, has publicly questioned the cryptocurrency's purpose, suggesting it is primarily a vehicle for money laundering and rampant speculation, particularly in Asia.
Jamie Dimon has echoed concerns about its use cases, arguing that the only plausible legitimate reason to use Bitcoin would be if one lived in an economically unstable country like Venezuela or was engaged in illicit activities. He and others believe that for Bitcoin to be embraced by major banks, it must find a way to satisfy stringent regulatory requirements, notably "Know Your Customer" (KYC) rules.
This creates a fundamental tension. A major selling point of Bitcoin and other digital currencies is the ability to conduct anonymous or pseudo-anonymous transactions, protecting individual privacy. James Gorman, CEO of Morgan Stanley, acknowledged this paradox, noting that "anonymous currency is a very interesting concept" for the privacy it offers and its implications for the central banking system.
Dimon's core argument since 2015 has been that no government will long tolerate a virtual currency that operates outside its regulatory reach, especially for cross-border transactions. While the scale was smaller then, his point remains: the current lack of a clear regulatory framework is the single biggest hurdle. Today, the key question for executives like Blankfein, Gorman, and Dimon is not just their personal views on Bitcoin, but how governments will ultimately move to bring the currently under-regulated digital currency ecosystem under their purview.
👉 Explore advanced market analysis tools
The Underlying Value of Blockchain
Despite the fierce debate surrounding Bitcoin itself, there is widespread agreement among Wall Street leaders on the value of its underlying technology: blockchain.
Even Jamie Dimon, a frequent Bitcoin critic, is a proponent of blockchain, calling it a "real technology" that is cheaper, more efficient, and more secure. He envisions its use for moving currency, but specifically national currencies like the U.S. dollar, not Bitcoin. JPMorgan Chase itself is a leader in this space, having partnered with 22 other major banks and blockchain startup R3 back in 2015 to research the technology.
This sentiment is shared by regulators. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, stated that he finds blockchain and its underlying technology "a lot more interesting and perhaps has a lot more potential than Bitcoin itself." He noted that the market's and the Fed's understanding of the technology is evolving. Jim Cunha, a Senior Vice President at the Federal Reserve Bank of Boston, added that new fintech, including blockchain, will challenge existing intermediary systems like SWIFT, which handles interbank payments.
Practical applications are already emerging. The New York Interactive Advertising Exchange (NYIAX) announced plans to test a new exchange in the fourth quarter, creating a transparent market for digital media advertising contracts using a blockchain-based platform provided by Nasdaq. The goal is to use blockchain as a "core ledger" to simplify the $32 billion digital advertising market, providing more security and reducing risk for both advertisers and publishers.
Frequently Asked Questions
What does it mean for a bank to be a 'market maker' in Bitcoin?
A market maker provides liquidity to a market by continuously quoting both buy and sell prices for an asset. If a bank like Goldman Sachs became a market maker for Bitcoin, it would stand ready to buy and sell Bitcoin for its clients, facilitating easier trading and potentially reducing transaction costs, thereby bridging the gap between cryptocurrencies and traditional finance.
Why is Bitcoin's volatility a problem for banks?
Banks operate under strict regulatory requirements that mandate accurate asset valuation, risk management, and fair client treatment. Extreme price volatility makes it difficult to value holdings accurately, manage risk effectively, and ensure all clients receive consistent and fair pricing, which are all cornerstones of banking regulation and compliance.
What is the difference between Bitcoin and blockchain?
Bitcoin is a specific digital currency, a cryptocurrency. Blockchain is the decentralized, distributed digital ledger technology that underpins Bitcoin and records all transactions. While Bitcoin is one application of blockchain, the technology itself has myriad other potential uses across finance, supply chain management, voting systems, and more.
How could Bitcoin become regulated?
Governments and regulatory bodies could impose rules around Bitcoin exchanges and trading platforms, mandating strict KYC and anti-money laundering (AML) procedures. They could also classify Bitcoin as a specific type of asset (e.g., a commodity, security, or currency), which would determine which existing regulations apply to its trade and ownership.
Why are Wall Street banks interested in blockchain technology?
Banks see blockchain technology as a way to revolutionize back-office operations. It promises to make processes like securities settlement, cross-border payments, and trade finance far more efficient, transparent, and secure by reducing the need for intermediaries, cutting costs, and minimizing errors and fraud.