Bitcoin and other cryptocurrencies are down sharply on Wednesday after investment banking giant Goldman Sachs (NYSE:GS) reportedly decided to give up on its plans to open a cryptocurrency trading desk. Here's what happened and why a hypothetical trading desk that never even opened is such a big deal for cryptocurrencies.

Today's cryptocurrency prices

Before we get into today's news, here's a look at how Goldman's decision is affecting the cryptocurrency market.

Cryptocurrency Name (Code)

Price in U.S. Dollars

Day's Change

Bitcoin (BTC-USD)

$7,009.00

(5.3%)

Ethereum (ETH-USD)

$259.29

(12%)

Ripple (XRP-USD)

$0.31

(10.9%)

Bitcoin Cash (BCH-USD)

$564.05

(14.5%)

EOS (EOS-USD)

$5.83

(13.1%)

Stellar Lumens (XLM-USD)

$0.22

(2.7%)

Litecoin (LTC-USD)

$62.87

(9%)

Tether (USDT-USD)

$1.00

0.2%

Cardano (ADA-USD)

$0.09

(12.9%)

Monero (XMR-USD)

$125.73

(7.5%)

Data source: www.investing.com. Prices and daily changes as of Sept. 5, 2018, at approximately 10:45 a.m. EDT, and prices are rounded to the nearest cent where appropriate.

In addition to cryptocurrencies themselves, stocks with cryptocurrency-related business activities are also getting hammered today. To name a couple of examples, Square and Overstock.com are down by about 5% and 7%, respectively.

Goldman's crypto plans and why they're being abandoned

In October 2017, investment banking giant Goldman Sachs was considering a cryptocurrency trading desk in response to client interest.

Two male traders looking at an array of monitors with graphs on them.

Image source: Getty Images.

However, Business Insider now says that Goldman is backing off from its ambitious plan to lead the charge into crypto among legitimate investment banks. The reason? An uncertain regulatory environment, which has also been the cause of much of the cryptocurrency volatility we've seen in 2018.

The report isn't confirmed, and Goldman responded by saying that it's still investigating the cryptocurrency space. However, if regulation is the issue, Goldman certainly has a valid point. The Securities and Exchange Commission and other U.S. regulatory bodies haven't exactly made their stance on cryptocurrencies clear, and much of what they have said has been in the form of warnings to investors.

A big setback for institutional adoption

Here's why this is such a big deal. The potential for institutional investors to get involved in the cryptocurrency market is widely considered to be a huge potential upside catalyst. This is also why every time the SEC rejects a bitcoin exchange-traded fund, prices fall.

Thus far, the cryptocurrency boom has largely been fueled by the demand of retail investors around the world. Obviously, this has had quite an impact, as many cryptocurrencies have skyrocketed over the past few years and the number of cryptocurrencies in existence have increased from just one (bitcoin) in 2010 to 2,216 as of this writing.

Retail investors, though, don't have nearly as much ability to move the needle higher from here as institutional buyers do. In fact, one widely followed cryptocurrency expert estimated that bitcoin could rise to $50,000 or more if an ETF is approved, simply because of the institutional money that would likely flow in.

This latest news from Goldman is a setback of a similar nature. Goldman's plan to create a cryptocurrency trading desk represented serious institutional interest from arguably the most respected name on Wall Street. And, until we get some clarity of the SEC's position on bitcoin and other cryptocurrencies, institutional players may continue to stay on the sidelines.

Matthew Frankel, CFP, owns shares of Square and has the following options: short December 2018 $90 calls on Square. Matthew Frankel, CFP has no position in any cryptocurrencies mentioned and doesn't recommend any cryptocurrencies to clients. The Motley Fool owns shares of and recommends Square. The Motley Fool has the following options: short September 2018 $80 calls on Square. The Motley Fool has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.