Goldman Sachs doesn’t seem very optimistic about bitcoin’s future. The multi-national investment bank recently released its mid-year report in which the bank’s management group predicted that bitcoin’s value will decline even further than it has in the past six months.
More Price Pain Ahead
Goldman Sachs’ economic report published on Friday attributed the volatility in the markets to ‘cryptocurrency mania’ which would continue to affect bitcoin’s price for the remainder of 2018. The bank’s chief investment officer, Sharmin Mossavar-Rahmani, wrote that cryptocurrencies do not fulfill the traditional criteria of a legitimate currency which is why its further decline is inevitable.
In January 2018, the Wall Street giant warned its wealthy clients against investing in bitcoin or other cryptocurrencies, claiming that the market’s meteoric rise had surged beyond bubble levels.
The hundred-page warning, issued by Goldman’s Private Wealth Management division, was aimed at investors who had investible assets of over $10 million. The firm’s analyst group, led by Brett Nelson and Sharmin Mossavar-Rahmani, had predicted that cryptocurrencies wouldn’t be able to retain their value over the long-run.
Goldman’s prediction came true and bitcoin’s astronomical rise to $20,000 by December 2017 was dwarfed to less than $7,000 on Saturday, according to CoinDesk. Wall Street analysts likened the crypto mania to the famous dot-com bubble, saying that although blockchain technology and digital currencies offer promising future prospects, bitcoin doesn’t offer any of the key advantages of the technology.
Even though the Wall Street Giant predicted the demise of bitcoin and crypto markets before their prices began to plummet, it didn’t believe that the crash would have a spill-over effect on other equities. In the analysis, Goldman wrote that unlike other historic financial crises, crypto bubble wouldn’t affect the financial markets or global economy.
In year 2000 when the dot.com bubble was at its peak, Nasdaq and S&P 500’s technology stocks had market capitalization equal to 101 per cent of the U.S. GDP and 31 per cent of the global GDP. On the other hand, the combined market cap of cryptocurrencies is just a little over 3.2 per cent of the U.S. GDP and 0.8 per cent of global GDP.
In its Friday’s mid-year report, Mossavar-Rahmani reiterated her warning from January 2018, saying that she still doesn’t believe that cryptocurrencies make valuable long-term financial assets. She added that neither do cryptocurrencies fulfill the requirements of a mainstream currency, nor do they store any real value. The Swiss investment bank, UBS, also released a similar analysis on Thursday saying that bitcoin has proven to be too unstable to be considered as a legitimate currency.
Mossavar-Rahmani said that cryptocurrencies’ current market capitalization represents less than 0.3 per cent of the global GDP, given the industry’s current valuation. Any further decline in prices will not have a meaningful impact on the aggregated financial markets. She added that bitcoin has been overhyped in traditional and social media which led to the growth of ‘crypto mania’ in the first place.
Goldman Launches Bitcoin Trading Desk
Despite Goldman Sachs’ skepticism regarding bitcoin’s future, the bank recently revealed plans for launching the first ever bitcoin trading desk on Wall Street which could be a major step towards legitimizing cryptocurrencies. The new trading option also creates a problem for Goldman which will have to use its own money to buy bitcoin-related contracts.
Although the bank isn’t planning to buy bitcoins initially, the trading desk team might go in that direction after it finds a way to minimize the risk of holding the cryptocurrency. Rana Yared, a senior analyst overseeing the operation, says that just like the rest of Goldman team, he is skeptical of Bitcoin’s future.
Buying and selling digital currency also comes with the risk of theft, which means that Goldman will have to find a way to guard its digital assets before it can facilitate bitcoin transactions. The bank has hired Justin Schmidt to oversee the digital asset markets and bring more clients towards cryptocurrency investments. The trading desk is expected to launch within the next few weeks with a small number of derivatives including Bitcoin futures and non-deliverable forward products.