During a recent call to investors, the Goldman Sachs Investment Strategy team stated that they do not classify cryptocurrencies, including Bitcoin, as a viable asset class. The firm gave five straightforward reasons as to why such assets do not feature a “viable investment rationale”.
Why Goldman Sachs says Bitcoin is Not a Viable Asset Class
Despite the immense progress recorded by the cryptocurrency industry, a May 27 development notes that Goldman Sachs does not endorse them. During the call to investors, the company said it does not believe that bitcoin and other cryptocurrencies are worth promoting to their clients.
This statement was accompanied by a presentation titled, “US Economic Outlook & Implications of Current Policies for Inflation, Gold and Bitcoin.” The presentation was organized by the Goldman Sachs Investment Strategy Group of Consumer and Investment Management Division, and focused heavily on cryptocurrency. The overall consensus appears to be a lack of faith in cryptocurrencies by the firm.
Goldman Sachs says Bitcoin is not a viable asset class for a number of reasons. A total of five were outlined in the presentation. The firm says Bitcoin and other cryptocurrencies:
- Do not generate cash flow in a manner such as bonds
- Do not generate earnings due to exposure to global economic growth
- Do not feature consistent diversification benefits given unstable correlations
- High volatility (historical volatility of 76%)
- No evidence of hedging inflation
Goldman Sachs’ Complex Relationship with Cryptocurrency
Even with world governments looking into creating their own national tokens, it appears that Goldman Sachs remains unconvinced. Their research team states that cryptocurrency has an unstable correlation with major assets and that it is not a good hedge against inflation. While other hedge funds, by Goldman Sachs account, choose to deal in bitcoin, they will not be recommending it to their clients.
It should be noted that the division of Goldman Sachs that conducted the presentation primarily works with wealth management. As such, they might not have a background regarding digital assets. Furthermore, their dismissals of cryptocurrency, such as its lack of hedge against inflation and lack of returns, could be applied to traditional assets such as Gold.
Another criticism brought up against cryptocurrency is its possible use for illicit activities. The presentation states that cryptocurrency infrastructure is still in its early stages, and this makes it susceptible. While there is evidence of digital assets being used for illicit activities such as on the dark web, the percentage compared to legitimate use is small.
In the past, management of large firms such as JP Morgan had criticized cryptocurrencies as a scam or a tool for crime. As time has gone on, however, many appear to be changing their tune, including Goldman Sachs. In 2018, after years of denouncing bitcoin, the investment bank finally conceded its status as a medium of exchange.
This came roughly a year after Goldman Sachs analysts had given bullish predictions regarding bitcoin. At the time, the cryptocurrency had seen an all-time high of $3,000 per BTC, and the head of technical strategy, Sheba Jafari, predicted it would hit $3,600. Since that time, bitcoin has seen an all-time high of almost $20,000 per BTC.
Goldman Sachs Envisions a Changing World Amid COVID-19
The uncertainties associated with the COVID-19 outbreak were acknowledged in the report and also spoke to the changing financial landscape. Goldman Sachs themselves have stated that unemployment is expected to remain high for the next two years. With this in mind, the bank might be less open to non-traditional assets such as cryptocurrency for their clients.
Goldman Sachs’ Co-head of global securities, R. Martin Chavez, has spoken on the blurring structures within the financial world. According to him, distinctions between buyers, sellers, and so on are not as clear-cut, and this can be attributed to the rise in fintech developments. This impact of fintech could, however, mean that digital tokens — not just for money but also in the case of tokenized securities — will be harder to ignore.
While Goldman Sachs has explored a Bitcoin derivatives product, they remain reluctant to begin handling bitcoin itself. The next few quarters as the world adjusts to the COVID-19 situation will reveal whether cryptocurrency can survive a global pandemic. It’s also possible that Goldman Sachs might even follow in JP Morgan’s footsteps and create their own digital asset.
Do you think cryptocurrencies are a viable asset class? Do think Goldman Sachs will maintain its current stance? Let us know your thoughts below.