The Breakdown - Goldman Sachs To Offer Bitcoin to Wealthy Clients, Completely Reversing Course

Episode Date: April 1, 2021

As the old saying goes: “First they ignore you, then they mock you, then they fight you, then you win.”  Ten months ago, Goldman Sachs declared that “cryptocurrencies including bitcoin are not an asset class.” Today, CNBC broke the news Goldman is planning to release a full suite of bitcoin and crypto investment products.  On this episode, NLW breaks down the larger macro context that got us from then to now and explains why, if you’re a wealthy client of Goldman, you might have some big questions to ask.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

First they ignore you, then they mock you, then they fight you, and then you win. This is what the then you win tastes like. And that doesn't mean that we don't still have a lot of mocking and fighting to do. But when you have one of the world's best-known financial brands completely, and I mean completely, reverse course, in less than a year, you know you're on to something. Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro, Bitcoin. and the big picture power shifts remaking our world.

The breakdown is sponsored by nexo.io and Casper and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, March 31st, and today we are talking about Goldman offering Bitcoin to wealthy clients. Now, sometimes as a bitcoiner, you have an obligation to dance on the grave of a vanquished foe. And boy, do I have a... jig for you today. First, however, let's go back in time about 10 months to late May 2020. The world is heaving. The relentless spread of COVID-19 as shuttered markets, economies, lives, central banks have been spurred to action. With people on lockdown, unable to work, unable to make money, unable to keep the gears of the economy turning, everything is threatened.

And it's not just day-to-day lives, but the cascade of failures that could happen if people can't pay for things like rent and mortgages. An unprecedented money printing operation is underway, and it's not just the U.S. but everywhere all at once. Regardless of one's feeling about whether that action from central banks was necessary, there was a sense among many that there would ultimately be negative consequences as well, whatever the important short-term impact. Because this wasn't just a one-time shift in the relationship of the government to markets. It was the natural extension of a policy experiment that started during the great financial crisis all the way back in 2008-2009. This was, of course, to backstop markets with not only low interest rates, but never-ending

liquidity in the form of asset purchases. Of course, in 2020, new times called for new measures, and the Fed's toolkit expanded, being able to buy an ever-widening set of assets to backstop the market. In this environment, some started to ask, when we get through this and we will get through it, what will the state of things be then? Enter Paul Tudor Jones. Paul Tudor Jones is a famous hedge funder who, among other things, called the crash of 1987. In early May of last year, he wrote a letter about what he called the Great Monetary Inflation. And let's just read the first few paragraphs. COVID-19 is a one-of-a-kind virus that has triggered a one-of-a-kind policy response globally. The depth and magnitude of the economic drop-off took modern monetary theory,

or the direct monetization of massive fiscal spending, from the theoretical to practice without any debate. It has happened globally with such speed that even a market veteran like myself was left speechless. Just since February, a global total of $3.9 trillion, 6.6% of global GDP, has been magically created through quantitative easing. We are witnessing the great monetary inflation, an unprecedented expansion of every form of money unlike anything the developed world has ever seen.

Global debt was very elevated and during the pandemic and this monetary expansion is funding large additional debt creation, for now without provoking the disciplining response of rising market yields. So far, the result has been asset price reflation. A large demand shortfall will prevent goods and services inflation from rising in the short term. The question is whether that will be the case in the long term, with the central bank whose central focus will be repairing the worst employment crisis since the Great Depression.

One thing is for sure, there will be many assets that will move as a result of this money creation. So, what is an investor to do? Traditional hedges, like gold, have done well, and we expect investors to continue to seek refuge in this safe asset. One thing I have learned over time is the best thing to do is let market price action guide your decision-making, and then try to understand the fundamentals as they become more evident and comprehensible.

Quite often, how the markets respond will be at odds with your priors. But remember, the P&L always wins in the long run. With that in mind, in a world that craves new safe assets, there may be a growing role for Bitcoin. I genuinely believe that when the financial history books are written about this time, this paper will be seen as the seminal moment for the institutional shift towards Bitcoin. There would be others who followed throughout 2020, Stan Drucken Miller, for example, being notable, But Paul Tudor Jones was the first, and to the extent we have indeed moved into a new Bitcoin

super cycle, this will be seen as even more significant. Of course, his reward is not just the accolades, but the position itself, which has about sextupled since he took it. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. Borrow against your digital assets at just 5.9% APR. Earn passive income, with yields of up to 12%, and swap between more than 75%. market pairs with the instant nexo exchange. Try the nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. Until now, blockchain technology has been a series of compromises. No layer one protocol exists in the market that supports everything enterprises,

developers, and consumers need from decentralized applications. Mead Casper. Casper provides the blockchain ecosystem with a solution that makes no compromises, around. decentralization, security, or performance. Learn more at casper.network. Not everyone was as quick to come around. Indeed, some of the biggest names in the financial world not only rejected Paul Tudor Jones' premise of Bitcoin as an inflation hedge, but went to pains to reinforce their dismissal. On Wednesday, May 27, 2020, Goldman Sachs released a slide presentation and held a call titled U.S. Economic Outlook, an implication of current policies for inflation, gold, and Bitcoin. They captured attention in our

neck of the world for the big, bold headline on slide 30, cryptocurrencies including Bitcoin are not an asset class. This slide went to repeat their reasons for this. Cryptos don't generate cash flow like bonds. They don't generate any earnings through exposure to global economic growth. They do not dampen volatility given historic volatility. They do not show evidence of inflation hedging. And then there was this gem. We believe, that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients. As though Goldman Sachs, every security in this market's appreciation is not primarily dependent on whether someone else is willing

to pay a higher price for it. There was so much to critique about this slide. There still is so much to critique about this slide. And by the way, they went on in the next set of slides to talk about hacks as a threat. They talked about illicit purposes, so they would be right at home in today's fud. Oh, and my favorite, the presenters on the call brought up the idea that Bitcoin wasn't, in fact, scarce because forks could come at any time. At the end of the day, however, the real thing was this summary bullet on the very last slide, quote, we do not recommend Bitcoin on a strategic or tactical basis for clients' investment portfolios. At the time, my thought was that there had to be a reason that they put together this seemingly hastily designed no new information presentation. This was their consumer wealth group, i.e. the group that deals with private wealth clients,

which led me personally to believe that they must have been fielding an absolute crap ton of questions from their clients who were asking about Bitcoin. Remember, at this time, it wasn't just Paul Tudor Jones. It was the asset itself that was capturing attention. Bitcoin had entirely recovered its losses from Black Thursday, March 12th, showing just how resilient it was. From there, let's fast forward 10 months or so. obviously Bitcoin has made fools of the skeptics. We're sitting around here bored at 60,000, and the longer we stay above 50,000, the more the market gets convinced that this is the new price floor. What's more, since Goldman released its note, we've had a huge array of institutional

actors get into the space, including those paragons of risk-taking, the insurance company general accounts like Mass Mutual. In fact, we've had an entire new category of demand in the form of corporate treasury holdings, kicked off by micro-strategy and brought to the mainstream by Tesla. By the way, a quick aside, remember when Tesla said that they were running nodes and would be active participants in the Bitcoin ecosystem? Today's top headline on CoinDesk is, quote, Tesla just helped patch a bug in this open source Bitcoin payment processor. In short, they caught a bug in BTC pay server and helped the team with a patch. As Mr. Hoddle put it on Twitter, Tesla is fucking contributing to Bitcoin what

planet am I on. Anyway, the point is that there have been these massive shifts in who is buying, and how much they're buying, and why they're buying, and how likely to keep buying they are. This is prompting some, like Dan Held, to argue we're in a new Bitcoin super cycle that will break the market patterns of the past. And so it becomes fair to ask, where is Goldman with Bitcoin now? This brings us to today. A CNBC headline blares, Goldman Sachs is close to offering Bitcoin and other digital assets to its wealth management clients. So what's the story? Mary Rich was scheduled to be announced today as the new global head of digital assets for Goldman's private wealth management group. In an interview this week, she said, quote, we are working

closely with teams across the firm to explore ways to offer thoughtful and appropriate access to the ecosystem for private wealth clients, and that is something we expect to offer in the near term. CNBC got a few more details, saying Goldman is looking at ultimately offering a full spectrum of investments in Bitcoin and digital assets, whether that's through the physical Bitcoin, derivatives or traditional investment vehicles. CNBC also got the significance of this move pointing to Morgan Stanley's announcement earlier this month. Indeed, two of the world's most important financial institutions in Goldman Sachs and Morgan Stanley both announced new Bitcoin products in the same month. And that month is

exactly one year after the price of Bitcoin cratered to below 4,000 in a single day, and many asked if this, this was the time the thing would truly die. Now, one question for Goldman Sachs is, how much is this about the inflation narrative? Let's look to Rich again. Quote, there is a contingent of clients who are looking to this asset as a hedge against inflation, and the macro backdrop over the past year has certainly played into that. There are also a large contingent of clients who feel like we're sitting at the dawn of a new internet in some ways and are looking for ways to participate in this space. This strikes me as supremely important. The inflation hedge is getting them in the door,

but this idea that Bitcoin is the native currency of the internet, of a new internet of financial rails, that's part of the staying power. What about the products Goldman is going to offer themselves? Will it just be the sort of broad exposure funds that Morgan Stanley announced? Rich says yes, but that there also may be some other types of investment options, quote, more akin to the underlying asset class which trades 24-7 globally. For comparison, many institutional Bitcoin funds, like the Galaxy Bitcoin Fund, can only be bought or sold once a quarter. Now, I've seen a lots of comments on Twitter about why Goldman is only offering this to wealthy clients. We saw the same type of comments around Morgan Stanley. I think you just have to put yourself in the context of this

department. These are the groups inside these institutions whose explicit mandate is to deal with that tier of clientele. So in that way, I don't interpret it as a rejection of the appropriateness of Bitcoin for the PLEBs. It's just that they don't care about the PLEBs at all, Bitcoin or not. What's more, let's be honest, the PLEBs don't need their help. We figured out Bitcoin a lot earlier than they did. But this brings me back to the question of what does this actually mean for us in Bitcoin land? Well, it means yet another step on the path to where, for the wealthy, having some Bitcoin exposure is simply part of a normal portfolio. It means yet another institution with a financial incentive to fight for this asset class's right to exist whatever comes from the halls of

Washington. It means that you, dear listener, frontran the supposed masters of the financial universe to a generational investment opportunity. It means that a whole lot of wealthy people who took their advice last year at this time should be firing Goldman Sachs. And it means yet another notch on the journey that is most often attributed to Gandhi, but actually comes from a 1914 union speech. First they ignore you, then they mock you, then they fight you, and then you win. This is what the then you win tastes like. And that doesn't mean that we don't still have a lot of mocking and fighting to do. But when you have one of the world's best known financial brands completely, and I mean completely

reverse course in less than a year you know you're on to something. Until tomorrow, guys, be safe and take care of each other. Peace.