Published on December 25th, 2021 | by Bibhuranjan

Crypto Options Markets, ‘Next Big Step’ for Industry adoption – Goldman Sachs

A major development for cryptocurrency will be the development of more liquid options markets as more traditional finance firms invest in the rapid growth of the assets class. Andrei Kazantsev, Goldman Sachs global head of crypto trading, said on Thursday on a CoinDesk panel that the firm is seeing an increase in demand for derivative-type hedging. “We are looking forward to the development of options markets as the next giant step.” Andrei Kazantsev continued.

In comparison to more traditional markets such as equities or foreign exchange, Kazantsev described cryptocurrency derivatives as being at the infancy of their product scope. During the past couple of years, bitcoin options have already experienced strong growth.

At the last count, the value of outstanding contracts and open interest in bitcoin options was about $12 billion, according to a subsidiary of Coinbase, Skew, who track cryptocurrency markets derivatives. Only occasionally did the market reaches $2 billion such as in the first half of 2020.

Next Big Step in the Market

To hedge out existing risks or to take on additional market exposure, investors use cryptocurrency options. The options contracts are financial instruments known as derivatives, which derive their value from the cost of other assets, in this case, cryptocurrency.

As Kazantsev explained, there may be equity funds with exposure to stocks with bitcoin holdings. The owners might trade futures against that exposure to hedge the exposure. They would rather hedge for the longer term rather than rebalance portfolios dynamically and find out the downsides of their hedge. This is where options come into play.

Kazantsev said options offer a more flexible way to hedge specific exposures than futures alone. The Goldman Sachs cryptocurrency desk reopened earlier this year in response to increased interest from its line of institutional clients, including endowments, hedge funds and funds from other institutional money managers.

This desk was created to aid CME Group with principal liquidity for crypto-related futures and above counter equivalents. Goldman Sachs’ principal liquidity means they will take over the other side of the trade which involves buying and selling, leading to a new risk position in its inside holdings.

The process allows Goldman Sachs to handle trades with larger hypothetical values, Kazantsev says Kazantsev said that his company provides liquidity and takes market risks on behalf of its clients. This comes as Goldman Sachs is one of those organizations looking to use cryptocurrency as collateral to take loans.

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Way Forward?

Goldman Sachs has vowed not to go into the cryptocurrency market but would focus instead on synthetic crypto products like Futures. Banks inclusive are exploring ways of using the same approach of not touching bitcoin just like synthetic products, but rather by simulating tri-party repo arrangements (a system of borrowing money through selling securities with a repurchase clause with a third-party agent).

CoinDesk spoke with sources who said that this could lead to more integrated crypto prime brokerage services in the future. In embracing this asset class, which has a market capitalization of approximately $2.7 trillion, Wall Street is also continuing its recent trend of embracing niche products.

One of the persons said that Goldman Sachs was preparing to get approval to lend against tri-party repos and collateral. According to them, these companies, if they had a liquidation agent, were just doing secured lending without ever receiving any value of bitcoin.” There was no comment from Goldman Sachs.

Conclusion

The more traditional finance institutions invest in the rapid growth of assets class, the higher the chance for the development of liquid option markets. With all evidence provided by Goldman Sachs, crypto investors may need to heed the direction of Goldman’s advice.

Cover Image by Freepik

Tags: Bitcoin, bitcoin news, coinbase, crypto, cryptocurrency, digital assets, NFT

About the Author

Bibhuranjan Editorial Officer, technofaq.org I'm an avid tech enthusiast at heart. I like to mug up on new and exciting developments on science and tech and have a deep love for PC gaming. Other hobbies include writing blog posts, music and DIY projects.