Commodity traders make big bets on cryptocurrency

It has been widely debated as to whether cryptocurrencies are a currency or a commodity. Benoit Bosc – Ex Head Crude Oil Option Trader at Goldman Sachs in New York commented that “whether you class cryptocurrency as an FX asset or a commodity, really it is a mix of the two, but cryptocurrency mining closely resembles the production of a commodity asset.”

While commodities margins have been thinning, we are in the midst of a commodities super cycle and many commodity trading firms have experienced record years in 2020. Bosc suggests that “looking ahead there are great opportunities in both commodities and crypto. But commodities are a mature asset class compared to digital assets and it just cannot compare. Crypto currently feels like commodities did in the 90’s. Much like oil or natural gas, cryptocurrencies are assets you can hedge directly in. For issuers and miners, who are essentially producing coins, the recent rally in prices has meant looking for hedging solutions for cash flow and inventory management similar to what raw material producers did then.”

Bitcoin came into existence in 2009, but over the last eight years we have seen it change from a distant, abstract entity into a legitimate financial asset. Gen-Z is investing in cryptocurrency, Wall Street bankers are moving towards cryptocurrency and baby boomers are considering diversifying their 401K’s to include exposure to cryptocurrencies.

Digital assets are increasingly common and impossible to ignore now. More and more commodity traders are moving towards including cryptocurrencies within their commodity trading portfolios as the industry continues to swell. In fact, some traders are considering making the switch altogether, moving to focus exclusively on trading digital assets instead.

Benoit Bosc always had an interest in crypto, but the opportunity only really materialized when his former co-worker, Rich Rosenblum, now president and co-founder of GSR contacted him at the start of this year. GSR is a cryptocurrency market maker and the leader in digital asset derivatives. Bosc quickly made the decision to join the rapidly expanding firm that went from 30 employees to now over a 100. One of the main factors in his decision was the firm’s reputation and standing, with its founders coming from traditional finance. However, there is nothing obvious in cryptocurrency, it remains an emerging asset class, with a lot of risks and volatility associated with it.

“The rapid rise in market capitalization has turned smaller companies into true corporations, and with institutions now involved, the digital capital marketplace is quickly evolving, causing demand for cryptocurrency trading to soar,” said Bosc. “If you look at departures from Goldman Sachs, JP Morgan, Morgan Stanley and others… prominent Partners and Managing Directors are leaving traditional finance to join firms such as NYDIG, Gemini, Galaxy… Those firms are looking at the next step in the asset class evolution and goes through normalization and institutionalization”

As the cryptocurrency industry has grown, we can expect to see the industry hiring at a rapid pace to keep up with demand. This doesn’t just mean Traders – Bosc thinks that the sector will be hiring professionals with real credentials in data, operations, legal & compliance and senior management executives urgently. Just a couple years ago, the industry was seen as far less promising and much riskier, while still in its infancy stage. Now, as it matures slightly, the market is accelerating rapidly – it’s grown from $200 billion to a whopping $2.2 trillion in just a few months.

Because of these transformational shifts, we expect to see more commodity traders considering working at digital asset shops in order to take advantage of larger opportunities in cryptocurrency trading. This might be especially true if they cannot include cryptocurrencies into their commodities portfolios due to compliance restrictions at their current institutions. It is well known that commodities margins have been slimming and it has become harder to create a trading edge with the wide access to commodities market information, making the market less opaque. Digital assets, however, have much more room for risk and reward due to their volatile nature and upside.

What happens next?

We predict that the adoption of digital assets and cryptocurrencies will increase through large financial institutions as well as global leading corporations. At this stage, there probably isn’t too much of a looming threat that commodity traders are looking to become pure cryptocurrency traders immediately. However, that could change considering the rapid rates of technology adoption and development taking place across the world.

Companies may do well to begin to think more about adopting cryptocurrencies to trade on their platforms so that they don’t lose talent to other standalone cryptocurrency trading firms or hedge funds. However, caution is still recommended. Benoit Bosc advises that if you’re thinking about a career into cryptocurrency, it’s important to learn and educate yourself as much as you can. “Cryptocurrencies were born as a solution to technological problems, they are still subject to hacking, there are regulatory risks and tax implications.” said Bosc. He also mentions that as cryptocurrency is still widening in scope, where you land specifically in the industry may differ from your expectations.

Cryptocurrencies and digital assets are still being questioned as to whether it is simply another bubble, set to burst as quickly as it formed, or a legitimate, long-term adoption process with the opportunity for larger gains. But we can make some accurate predictions about how this will affect the commodities industry. For one, as traders move out of commodities and into digital assets, we could see a reduction in the pool of talent wanting to move into the commodity trading industry at a graduate intake level. This industry has already seen some competition from Big Tech companies like Google and Facebook, who are pulling talent into their own sector. We may see a similar trend with cryptocurrency, particularly as those firms scale up and hire talent in droves.

Bosc left with a final summary statement, “The next phase of crypto is not about the cult, it is about building the financial digital ecosystem.”