Goldman Sachs hosted an investment advisory call for its clients yesterday, which re-ignited a long running dispute between the cryptocurrency and the banking community.
The investor call, dryly entitled “US Economic Outlook & Implications of Current Policies for Inflation, Gold and Bitcoin”, was announced to Goldman Sachs’ clients last week.
While the invitation gave little away around the nature of the insights the bank was going to share, some in the cryptocurrency community read between the lines, concluding that the financial services giant was about to signal to the market that the recent unprecedented economic events may have finally persuaded the bank to endorse Bitcoin given its association with being a hedge against inflation.
Nothing, it transpired, could have been further than the truth, as the select few who attended the invitation-only call were to quickly learn. Rather than endorsing Bitcoin, the analysts instead presented a scathing analysis of the cryptocurrency.
Bitcoin Is Not An Asset Class?
Almost immediately, the slides from the call were leaked to social media, causing the cryptocurrency community to erupt in displeasure.
In a slide entitled “Cryptocurrencies Including Bitcoin Are Not an Asset Class,” the bank alliterated a number of reasons to support its view that Bitcoin lacked legitimacy, stating that it provides no cash flow or earnings through the exposure to global growth, nor does it provide diversification, nor dampen volatility and has shown no evidence of being an effective hedge against inflation.
Invoking the greater fool theory, the analysts concluded; “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.”
Drugs, Guns, Tulips And Gold
The bank continued to twist the knife by then highlighting historical cases where Bitcoin has been used for illicit purposes.
Goldman analysts were also dismissive of the argument commonly made by bitcoin bulls that while Bitcoin itself does not offer dividends and coupon payments, it has value based on scarcity, in much the same way that gold does. In other words, if gold and silver can have value, then so can Bitcoin.
Tulips were scarce too and still people lost a lot of money, argued the analysts, adding that Bitcoin’s metric rise and subsequent fall were much worse, comparatively, than in Gouda tulip bubble of 1636-37.
The investment analysts also poured scorn on the notion that Bitcoin is actually scarce in the first place, explaining that while there is a fixed supply of 21 million coins, there have been various forks of Bitcoin which, in essence, demonstrates that an abundance of the the cryptocurrency can be increased with the mere click of a button (or few).
It wasn’t purely Bitcoin that received a thumbs-down from the banking giant. The bank also gave gold a short thrift, challenging conventional wisdom that it is a natural hedge against inflation.
Goldman concluded that unlike equities, gold has not consistently outperformed inflation, only doing so in rare high inflation situations. Gold, they added, also does not correlate well to inflation nor offers reliable downside protection.
Goldman, it appears, is no Goldbug.
Reaction From The Bitcoin Community
The reaction from the Bitcoin community was swift, with many taking to twitter to throw shade at the analysts’ comments.
Cameron Winklevoss, co-founder of cryptocurrency brokerage Gemini gave Goldman a lesson on a five year old ruling from the Commodities And Futures Commission.
While Meltem Demirors, Chief Strategy Officer of Coinshares, which provides professional-grade tools and services for investors seeking exposure to the digital asset class, also weighed in.
Demirors suggested that Goldman may not be in the best position to cast aspersions about Bitcoin’s role for money laundering.
Snarky tweets aside, to fully explore the perspective of the cryptocurrency community, I turned to a braintrust of the aforementioned Mrs. Demirors, Bill Baryhydt, CEO of leading cryptocurrency wallet provider Abra and Rory Manchee, Director of Business Development at Brave New Coin, a respected data and research company focused on the blockchain and cryptographic assets industry.
Demirors reminds me that Goldman isn’t infallible, and has made some spectacularly wrong calls in the past concerning massive technology based trends.
“Goldman was bearish on the Internet in 1994”, points out Demirors,”not every call is going to be the right one, and clearly there are many notable investors and institutions who are allocating to Bitcoin.”
In pointing to notable buyers of the cryptocurrency, Demirors may have been referring to Paul Tudor Jones, a leading hedge fund manager, who revealed earlier this month that he has a firm crypto investment strategy in place, allocating 1-2% of his assets in Bitcoin.
In the same vein, a recent analysis of Grayscale trust — a private issuance financial product that enables retail investors to gain exposure to bitcoin through their brokerage account — has indicated that retail buying of Bitcoin has been on a tear over the last month, significantly outstripping supply.
Suggesting that the investor presentation and the crypto community’s reaction to it may be somewhat of a storm in a teacup, Demirors goes on to highlight how the attention of the growing crypto community can magnify a fairly run-of-the-mill client investment advisory event.
“The world is quickly figuring out that the millions of active members of the crypto community and millions of eyeballs tracking crypto news are a good audience to engage for attention”, says Demirors, “and arguably Goldman received a lot of attention for a rather mundane and otherwise un-interesting report with very vanilla takes.”
Another point Demirors makes which has been echoed by many in the community is that the bank’s advice is ultimately going to be a function of who their current clients are. “As the wealth of crypto holders and crypto companies grows, just like JP Morgan and so many others, Goldman will have to start courting these clients who have vastly different preferences and needs than their legacy clients,” says Demirors, adding, “if it’s profitable, Goldman will inevitably get into the business.”
Striking a less philosophical and conciliatory tone, Bill Baryhydt, CEO of Abra was incited enough by Goldman’s analysis to dedicate a portion of the content of his regular newsletter to his Abra wallet clients where he provided a point-by-point takedown of the bank’s analysis.
Goldman Is Part Of The System
For Baryhydt, Goldman’s position in the traditional global financial system means that philosophically, the investment bank will naturally be opposed to Bitcoin, which after, all offers an alternative to Wall Street and central bank issued government backed money.
“Every government backed currency has failed, Goldman received millions from The Trouble Asset Relief Package [from the U.S. government]….they are part of the system,” stated Baryhydt during our discussion.
Turning his sights to the argument that Goldman makes that the ability to fork Bitcoin removes scarcity. It simply doesn’t wash with Baryhydt.
“If there were any validity to Goldman’s point about Bitcoin not being scarce then the creation of new coins would constantly erode Bitcoin’s market dominance within the crypto space..this [is] not the case.”
To further expand on Baryhydt’s point, cryptocurrency is not purely about code, it’s about adoption and utility. It’s certainly one thing to copy and paste open-source Bitcoin code, it’s quite another to build a community that adopts the coin through mining, investing and transferring it.
Getting more analytical, Baryhydt points to quantitive analysis of Bitcoin — “Hard money is best understood via stock to flow ratio which is an asset’s existing supply vs the relative rate at which the supply will be increased at any time in the future. Bitcoin has…potential to have the ‘hardest’ stock to flow ratio of any asset ever. But Goldman would have us believe it’s not a new asset class.”
Manchee continues the thought of Bitcoin as a new type of asset class requiring a whole new paradigm shift in thinking, stating “cryptocurrencies represent a fourth super class of assets — they can function simultaneously as Capital, Consumable/Transformable, and Store of Value Assets thanks to their permission-less, distributed, and cryptographically secure nature.”
He also takes issue with, albeit does not flatly contradict, Goldman’s assertion that Bitcoin is not an inflation hedge — “In terms of appreciation, Bitcoin has clearly outstripped inflation in recent years but that’s not been difficult in a mainly low inflation rate environment…[that said, look at the] interest that Bitcoin has achieved in countries with hyperinflation.”
He also points out that while Bitcoin itself does not generate a revenue stream, just like money, it can be lent to institutions that are prepared to pay interest. Celsius, for example is offering Bitcoin collateralized lending rates of 4-6% today.
Furthermore, points out Manchee, “there are other coins that support staking” which can generate income for token holders.
Same Bank, Many Takes
Bitcoin — and for that matter, goldbugs — shouldn’t be too disheartened by Goldman’s investor presentation, as it doesn’t mean the bank itself is necessarily against the asset class in all scenarios.
Banks are large organizations with many different lines of business and often hold multiple, seemingly conflicting perspectives simultaneously. After all, Goldman has a significant investment in a thriving Over-The-Counter Bitcoin brokerage business that services institutional clients.
And to further illustrate that point, and a twist of irony, on the same day as the Goldman briefing, a research note purportedly penned by research analyst Nikolaos Panigirtzoglou from JP Morgan started circulating on Twitter.
The report claimed that the intrinsic value of Bitcoin, if analyzed from a commodity perspective, was 25% below what it should be. That’s the same bank whose CEO in 2017 labelled Bitcoin as fraud.
It’s never a dull day in crypto.