Nothing changes one’s mind like a 5,000% return over four years.
Two of Wall Street’s biggest and most powerful banks, Goldman Sachs and JPMorgan Chase, are changing their tune on cryptocurrencies. While they’re approaching it in different ways, both banks have come to the same conclusion…
Investors want exposure to cryptos… and there’s a lot of money to be made.
As I’ll explain, both banks were skeptical about crypto for years.
But the crypto market is evolving. And for institutions like Goldman and JPMorgan, the situation is too good to pass up. There’s a lot of money to be made by trading volatility and collecting investment fees from clients.
And the banks’ latest actions suggest the crypto bull market could have a long way to go.
You might remember Jamie Dimon’s famous comments about bitcoin a few years ago. Dimon is one of the most respected CEOs in the world. During the bitcoin bull market of 2017, he said the cryptocurrency was a “fraud.”
To his credit, Dimon pulled back on his statement. In 2018, he said he regretted those comments and acknowledged the merits of blockchain technology.
Dimon may still be skeptical about bitcoin, but his firm is changing its tune.
Last month, JPMorgan sent a special report to its private clients (those with a net worth over $10 million), educating them about the risks and opportunities in cryptocurrencies.
The banking giant isn’t rushing into the space yet. That’s not surprising, since crypto is still a small market compared to stocks and bonds.
But Daniel Pinto, co-president at JPMorgan, recently told CNBC, “The demand isn’t there yet, but I’m sure it will be at some point.” At some point in the future, JPMorgan will allow clients to have exposure to cryptos. Of course, the bank will make a fortune by charging trading and custodian fees.
The bank’s special report also includes a few price targets for bitcoin ranging from around $21,000 to $1.9 million per coin.
Turning to Goldman Sachs, the historic investment bank began dabbling in crypto years ago. It started building its own cryptocurrency trading desk as bitcoin prices boomed in 2017.
But as you probably know, crypto fell into a brutal bear market in 2018. Bitcoin crashed below $4,000 by the end of the year, falling more than 80% from its highs.
Goldman killed its crypto trading desk as investor interest dropped along with the price of bitcoin. It wasn’t a solid risk/return for Goldman, and regulatory concerns added to the potential headaches.
But bitcoin prices recovered over the last couple years. More importantly, the infrastructure and compliance have improved, with companies like Coinbase helping facilitate large purchases from buyers like Microstrategy and Tesla. But the biggest change is on the investor side. Today, instead of just individual investors fueling the bull market, you have huge corporations and institutions getting involved.
The latest sign of improving conditions came last week, when Goldman confirmed it’s restarting its cryptocurrency trading desk and will start trading bitcoin futures.
The investment bank is also looking into launching a bitcoin exchange traded fund (ETF). Why now? It’s seeing growing interest from institutions and wants in on the investment fees.
Plus, Goldman’s trading desk takes advantage of massive price swings and generates windfall returns. The more volatile the asset, the bigger its trading profits.
While JPMorgan doesn’t trade like Goldman, its third largest division, Asset & Wealth Management, managed to grow revenue nearly 5% in 2020 despite the coronavirus disruption. JPMorgan charges fees on assets under management (AUM) and investment advisory services.
In short, both banks see a long runway for the crypto market. They’re successful because they give clients what they want. The greater the demand, the more money they can make. That’s why both are pushing into crypto.
What should individual investors take away from this? Well, the best strategy is to expect volatility to continue. As big players enter the crypto market, we’re likely to see big swings on both the upside and downside.
Long-term, the recent news is very bullish. JPMorgan is the largest U.S. bank by asset. And Goldman Sachs is arguably the world’s top investment bank.
Seeing two of the biggest and best Wall Street banks expanding into bitcoin means this bull market likely has a long way to go.
But make no mistake about it… Goldman and JPMorgan are getting into crypto because their clients want exposure. And that means big profits for Wall Street.
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