In a recent address, Goldman Sachs has advised clients to beware of cryptocurrency. Instead, the investment banking juggernaut favours precious metals as part of a balanced portfolio:
The use of precious metals is not a historical accident – they are still the best long-term store of value out of the known elements.
The note issued to investors this week detailed the differences between the two assets from a value perspective, concluding that gold remained the favourite. In their view, gold continues to satisfy the main characteristics of money better than Bitcoin and other cryptocurrencies. They highlight security, regulatory, and infrastructure risks, as well as the high fees associated with pre-SegWit transactions.
Using these metrics, it’s hard to see how Goldman Sachs favoured gold above crypto. Whilst it may enjoy historical precedence as a store of value, gold suffers from its own flaws making its worth just as arbitrary as Bitcoin. Both are currently backed by faith, rather than utility. Gold has had thousands of years to prove its use and, aside from a few small industrial applications, has failed to do so. Bitcoin, on the other hand, is just getting started.
The investment banking memo highlighted the risk of compromise digital wallets pose via attacks from hackers. However, if properly secured, the chances of this are immeasurably small. Most likely smaller than the chances of having a gold vault smashed into and the contents looted.
Goldman Sachs went on to highlight the steep transaction fees affecting the Bitcoin network pre-SegWit. Whilst true that earlier this summer, the price of transferring Bitcoin increased to such an extend that it was no longer usable for micro-payments, scaling technology aims to ensure that this is no longer the case. Users who’ve made a SegWit transaction already will vouch for the developers’ success in this regard. Now, compare that with gold. How much does it cost to send 10, 50, or even $100 million in gold around the world? We’ll wait…
The banking behemoth went on to claim that gold has no obvious competitors in the space. They highlight the number of cryptocurrencies currently in existence to support their case for its dominance over Bitcoin. We’re not sure what planet they’re living on when they make such arguments. Last time we checked there were many, many different metallic elements. All have value. Most even have more solid use cases. Copper might not be worth as much as gold but then again, Monero isn’t worth as much as Bitcoin. We’re at a very early stage in cryptocurrency and it’s only natural that the space would be crowded at this juncture. As the market matures, we’ll likely see a huge thinning of the number of digital assets available with only those with practical uses surviving.
Regulatory risk was another factor that the note observed. However, numerous country’s legislative have attacked Bitcoin in recent weeks, and the price showed naught but a small hiccup. The Chinese shutting down exchanges and banning initial coin offerings in September immediately caused fear in the market but investors quickly remembered that one of the central premises of Bitcoin is its government resistance.
Finally, the Goldman Sachs memo claimed that gold has much lower volatility than cryptocurrency. Whilst this is certainly true at present, basic economics suggests that if Bitcoin were to replace gold as the planet’s store of value, it would share exactly the same if not less price movement than any other commodity, share, or asset. The current extreme shifts in value are the result of Bitcoin’s relatively low market cap in comparison to the currency of countries and especially the entire worth of the whole planet’s gold market. If interest around the globe continues to grow there is no reason not to refute the central tenant of the Goldman letter from earlier this week:
Cryptocurrencies are not the ‘new gold’ despite their recent popularity.