Goldman has long had a love, hate relationship with bitcoin: while JPM’s Jamie Dimon was slamming it and threatening anyone caught trading it with termination, Lloyd Blankfein was planning the rollout of a cryptotrading desk. While other brokerages were shunning futures trading, Goldman told clients “your money is welcome here.” On the other hand, from a purely fundamental standpoint, Goldman was more ambivalent, unwilling or unable to embrace the currency, yet laying out under what conditions it may succeed as money, which nonetheless was a far cry from JPM’s blanket determination that bitcoin is a pyramid scheme.
Then, this morning, the market awoke to a Goldman report that was released on Monday evening, in which as we reported earlier, Steve Strongin – Head of Goldman’s Global Investment Research – said that the current generation of cryptocurrencies is unlikely to survive even if blockchain technology endures:
Whether any of today’s cryptocurrencies will survive over the long run seems unlikely to me, although parts of them may evolve and survive…. To my eye, they still seem too primitive to be the long-term answer.
Asked if the market is accurately pricing the likelihood that several—if not most—of the current cryptocurrencies will ultimately fail?, his answer was surprisingly pessimistic:
I don’t believe it is. People seem to be trading cryptocurrencies as though they’re all going to survive, or at least maintain their value. The high correlation between the different cryptocurrencies worries me. Contrary to what one would expect in a rational market, new currencies don’t seem to reduce the value of old currencies; they all seem to move as a single asset class. But if you believe this is a “few-winnerstake-most” situation, then the potential for retirement depreciation should be taken into account. And because of the lack of intrinsic value, the currencies that don’t survive will most likely trade to zero.
To be sure, Goldman did highilight some of the notable highlights of bitcoin, chief among which is the unprecedented value storage density, which is why Goldman’s commodity chief proposes calling them not cryptocurrencies but rather cryptocommodities.
Despite being called cryptocurrencies, bitcoin and other digital assets are better described as “cryptocommodites.” A financial security—currencies included—has a claim or liability attached to it, as it is “secured” to an underlying real asset. Just as equity is secured to the future earnings of a real company, a dollar bill is secured to the US government and its tax revenue. In contrast, commodities have no obligation or liability to any government, company, or other entity. Given that bitcoin has no liability to any entity, it is a good like any other commodity. Bitcoin just happens to be the first digital commodity—in contrast to financial assets and money, which have long been digitized.
In most economies, a standard digital bank account provides ease of storage, secure transactions, and a positive carry. However, it is still a claim on a bank, and the funds cannot be concealed and transported without alerting regional authorities. To the extent that this is a problem, bitcoin solves it better than any other commodity (although other cryptocurrencies are starting to offer superior privacy and anonymity). This suggests that black markets and less developed regions without a reliable banking system would be the obvious sources of demand for cryptocurrencies.
But the most remarkable feature of cryptos: how much value they can concentrate in virtually no physical space.
Unlike other storage commodities like oil, gold, platinum, diamonds, and even cash, there is no need to hold much physical material to own bitcoin; even a technology as obsolete as the 3½ inch floppy disk can hold almost 30,000 private keys. There is no theoretical upper limit to the value of bitcoins in a wallet, but if we assume each wallet secured by this disk contains as much as the largest wallet today (180,000 BTC), this single disk could “hold” all bitcoins in existence and remain less than 0.5% full. Assuming a bitcoin market cap of roughly $190bn (as of late January), this disk would be the equivalent to either: 95% of the 4,583 tons of gold in Fort Knox, or 1,344 Very Large Crude Carrier supertankers of oil.
On net, cryptocurrencies have superior physical attributes relative to other commodities for concealing and transporting large amounts of wealth, which could be valuable in dark markets and some areas that lack reliable banking systems. But a long list of hurdles remains for cryptocurrencies to reach the equivalence of precious metals in financial markets, and these will be difficult to overcome anytime soon. In the meantime, we believe gold still offers the best store of wealth given how institutionalized it has become over 3,000 years of active trading versus five years for bitcoin.
So bitcoin… or gold? To Goldman that is the question. Meanwhile, for your viewing pleasure, here is Goldman’s chart showing the annotated history of bitcoin’s Rise… and recent fall. The question is what happens next.