Goldman says cryptos aren’t “viable”, but Wall Street piles in, followed by a legendary quant fund
Wall Street wolfs down BTC
One of the biggest surprises around bitcoin’s critical halving event in May was that full-blown FOMO wasn’t limited to the crypto community. It swept up significant Wall Street players too. And if that wasn’t already enough of an eye opener, the scale of establishment interest ought to have been. It’s no secret that Wall Street remains sceptical overall. Yet as silos separating decentralised and centralised finance begin to disintegrate, more and more Street traders are becoming cognisant of opportunities, like the halving, that look too hot to miss.
Futures turnover across the crypto asset class rocketed 314% to $2 trillion versus 2019’s four-quarter average, according to TokenInsight’s Q1 2020 exchange report. Note that bitcoin futures accounted for 78% of Q1 contract turnover. CME Group’s open interest data confirmed that institutional moves made up the lion’s share of activity. Contract value bounded 43% to $407m, or 8,399 contracts, around a week before halving, compared to the same period in 2019.
What’s more, there’s also evidence that mainstream interest preceded bitcoin’s policy change. Late May brought news of Grayscale Investments’ continued no-holds-barred buying spree. Blockchain researchers calculated that the scale of its purchases, since the halving on 11th May, amounted to all bitcoin mined since that date – and more. With 18,910 purchased by the last days of May, Grayscale buys outstripped the number of newly minted coins by 6,573. That means the asset manager was also probably hoovering up BTC on the open market.
Through an entity named Grayscale Bitcoin Trust, launched in 2013, Grayscale was the first listed financial group with an exclusive focus on BTC. And if Grayscale has accelerated BTC purchases of late, it’s doing so on behalf of clients: accredited investors only; some of whom may be ‘ordinary’ wealthy individuals, some that may be corporate. In other words, Grayscale’s investment campaign is one of the latest signs that bitcoin is becoming about as ‘mainstream’ as Wall Street can be.
Goldman vs. The Street
But the trend also lays bare a widening split in the financial establishment that mirrors divided global opinion, with newly enthusiastic crypto buyers on one side and die-hard sceptics on the other. Goldman Sachs, the quintessential ‘bulge-bracket’ bank, epitomises the risk-averse point of view right now. News site Decrypt reported that a Goldman presentation to investors decried bitcoin as “not an asset class”. The bank acknowledged that “hedge funds may find trading cryptocurrencies appealing because of their high volatility” but concluded that the “allure does not constitute a viable investment rationale”. That view pits Goldman against a rising tide of heavyweight Wall Street opinion to the contrary.
Enter the Renaissance man
Apart from Grayscale’s unabashed push, the buzz in the crypto sphere has also been cranked by signs that one of the most legendary quant funds in the market may be limbering up to go big on bitcoin. Renaissance Technologies was founded about 40 years ago and is still chaired by mathematician and former U.S. National Security Agency cryptologist Jim Simons. Commonly known as RenTech, the firm is arguably the most successful quantitative U.S. hedge fund ever. Its flagship Medallion vehicle has averaged annual gains of 39%, post-fees, since 1988, with a 66% pre-fee annual return that’s unmatched by any comparable institution. Medallion’s return for the year to mid-April was 24%, already trouncing the S&P 500’s negative 2020 performance.
Bitcoin trading “Permitted“
Consequently, a late-March filing by the group was widely seen as a potential game changer. The form essentially gave notice that RenTech is now “permitted”, to deploy some of its $166bn in assets under management on bitcoin cash-settled futures traded on the CME. Noting that the “relatively new and highly speculative asset” carried several risks, Renaissance did not state whether it had already taken positions in BTC contracts, or whether it would do so in future. The notoriously secretive firm—its main fund has no external investors—hasn’t elaborated since.
All told, there were few concrete takeaways from the disclosure. On the other hand, a firm like Renaissance is unlikely to grant itself the freedom to trade a particular asset and then simply park that facility on a shelf. The group has accumulated a raft of quantitative data-driven strategies over decades of research. It deploys algorithmic systems, AI and machine learning, in a multilateral, multi-asset universe. For an attempted graphical depiction of RenTech’s key strategic pillars, see Figure 1. Note: I have no illusions about the high probability that my take is flawed in multiple ways. Still, I hope it at least serves as an adequate introduction for the uninitiated.
Figure 1. – Simplified graphical depiction of Medallion Fund strategy
Sources: Little Harbor Advisors LLC; Institutional Investor; Wilmott, P., Orrell, D.: ‘The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets’, Wiley, 2017
In short, RenTech has maximum freedom to trade in what it wants, when it wants. So, if it says it can now trade bitcoin futures, it probably has already, or will imminently. As such, bitcoin may have just quietly received its weightiest validation as a speculative asset yet.
For sure, the significance of notable hedge fund operators like RenTech coming to the market needs careful clarification. Almost by definition, quant funds have no stance on the ‘viability’ of an asset class. To RenTech, Bitcoin could just as well be orange juice futures, gold, USD/JPY, or any other tradeable commodity or instrument. The new involvement of RenTech in the cryptocurrency market is therefore not an endorsement of bitcoin or blockchain technologies. However, as we argued in a recent article, such developments are vital milestones. Only time will tell whether Goldman was correct to eschew cryptocurrencies due to high volatility whilst neglecting to exclude other assets (for instance crude oil) for the same reason. In the meantime, Wall Street’s never-ending ‘search for yield’ is helping to authenticate a new currency.
Ken Odeluga, 5th June 2020