Here’s why Goldman Sachs is Wrong about Bitcoin
Goldman Sachs, one of the largest multinational investment banks in the world, published a report with it’s earning’s calls on May 27th about the U.S. economic outlook.
The report by their investment strategy group, aiming to measure the implications of current policies for inflation, gold, and Bitcoin, highlighted the following points on why cryptocurrencies, including Bitcoin, are not an asset class.
Do Not Generate Cash Flow Like Bonds: Goldman Sachs knowledge is clearly outdated here. Cryptocurrencies like Bitcoin can generate cash flow like bonds. There are various strategies through which cryptocurrency holders can earn fixed interest or yields through staking. Tezos already offers staking, Cardano and Ethereum are in the process of launching it.
Many large cryptocurrency exchanges like Binance or Crypto.com allow users to park their Bitcoins in fixed deposits that offer fixed interest. More tech-savvy users can also opt for using DeFi protocols and staking their cryptocurrencies in a decentralized manner.
Do Not Generate any Earnings Through Exposure to Global Economic Growth: Bitcoin and other currencies are leading the economic growth by removing barriers to entry of trade and by reducing reliance on fiat transfers. Our current economic system is not diversified as it is full of red-tapes; wealth transfer across nations is hard.
Bitcoin and cryptocurrencies will directly lead to economic growth by providing a level playing field to all. New DeFi protocols like Synthetix enable a teenager in Ghana to invest his money in FTSE index.
Do Not Provide Consistent Diversification Benefits Given Their Unstable Correlations: Bitcoin in itself is a diversification. Although Bitcoin’s price is correlated to other cryptocurrencies, Bitcoin’s price is not correlated with equities or gold in the long-term. While Bitcoin has returned thousands of times of returns in the past decade, the same cannot be said for gold or equities.
Do Not Dampen Volatility: It would be unfair to compare the volatility of Bitcoin with a market full of circuit breakers and money printers. Bitcoin has a fixed supply, unlike fiat currencies, which can be printed at the will of regulators. Bitcoin’s volatility is a feature, not a bug. This is precisely how an unregulated market should behave. There are also days when Bitcoin price increases by double digits percentage. And while discussing the volatility of the asset, we must not forget that in March, oil showed more volatility than Bitcoin ever did by trading in negative prices.
Do Not Show Evidence of Hedging Inflation: While the rest of the world is betting on Bitcoin as a hedge to inflation, Bitcoin’s astronomic rise to USD is insufficient to convince large banks of its nature. Bitcoin is virtually the only large asset class whose volume is known and is fixed. Few years down the line, it’s possible vast unknown reserves of gold are discovered which make gold worth a lot less than what it is or in a few decades. Asteroid mining might become economically viable, which would make gold nearly worthless due to huge supply. Bitcoin.
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. : It’s an old age knowledge the price of anything is worth what someone is willing to pay for it. Think of it for a moment — What is the worth of an ounce of gold? The prices are decided by the market, which has both buyers and sellers. The price of anything is what someone is willing to pay for it. There would be no appreciation of equity or metal either if no one else is willing to pay a higher price for it.
Bitcoin was declared a commodity by CFTC in 2015, so indeed it is a commodity whose price is determined by supply and demand.
Goldman Sachs also wrongly compared Bitcoin to forks like Bitcoin SV, whereas it’s open-source, and anyone can fork their chains. The chain with the largest hashrate is considered to be the real one. Bitcoin has a fixed maximum supply of 21 million coins. It is scarce. Bitcoin represents nearly 65% of the entire cryptocurrency market. If a fork of Bitcoin is not scarce, it does not imply that Bitcoin is not scarce.
Goldman Sachs has decided to take a single-sided view of Bitcoin, which is the best performing asset of the last decade. Bitcoin’s permissionless nature is unappealing to large investment banks because the non-red tape nature of the Bitcoin does not give them additional leverage.
Goldman Sachs has as much right to Bitcoin as does someone living in a third world country, but the same is not the case with other priced equities to which large investment banks enjoy exclusive access.