Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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10 Highlights From Goldman Sachs’ June 2021 Digital Asset Thought Piece
Lou Kerner on Medium | Jun 20, 2021
In its June cryptocurrency report entitled “Digital Assets: Beauty Is Not in the Eye of the Beholder,” Goldman Sachs’ Investment Strategy Group opined for 60 pages on the cryptocurrency ecosystem with the purpose of providing “ … an objective and balanced view on the role of cryptocurrencies in a portfolio.”
While the authors of the Goldman Sachs report believe that “It is likely that blockchain technology will be as high impact in the future as the internet has been over the past several decades,” they see a much more uncertain future for cryptocurrencies and how it will be used by their clients.
For all the disappointment, I applaud the effort, and assume they’ll get it right over time. So I suggest serious crypto investors read the entire report. But recognizing that most people won’t read it, here are the 10 points made in the report that I found most telling:
1. Goldman Report Highlights A Wide Spectrum Of Thoughts On The Crypto Ecosystem
At one end of the spectrum are proponents whose basic premise is that the U.S. government is on an inexorable march to currency debasement. Hence, the the world needs trusted alternatives like Bitcoin.
See: Goldman Sachs Reconsiders Whether Bitcoin is Legitimate Asset
At the other end of the spectrum are naysayers who dismiss cryptocurrencies as having no tangible value as discerned via traditional valuation methods.
Unfortunately, Goldman Sachs is very much in the latter camp, and the report’s authors state that proponents ignore that “ … the reserve currency status of the US dollar is arrived at by world consensus and backed by a $21 trillion economy.”
3. Goldman: ‘Of the three roles that Bitcoin was purported to play in the real world, we believe that none has materialized,’ including store of value
Goldman’s report noted that the original objective of Bitcoin was a peer-to-peer payment system (i.e. a currency). However, the digital currency is too slow, and its throughput is too limited, to serve that purpose. Goldman also stated that Bitcoin is too volatile to be a medium of exchange. Its volatility also precludes the cryptocurrency from being a unit of measurement for pricing goods like crude oil.
See: ‘Last year we saw about a 300% increase in transactions just using cryptocurrency’: Coinpayments CEO
Most notably, the authors of the report don’t believe that Bitcoin’s a long-term store of value or an investable asset class for diversified portfolios. Interestingly enough, Goldman Sachs has stated before that it doesn’t believe gold to be an investable asset class either. So claiming that Bitcoin is “digital gold” doesn’t confer any value to the digital currency.
3. Goldman On The Bitcoin Blockchain: ‘Its greatest success has been in inspiring the development of blockchains with faster transaction speeds and far greater functionality’
Goldman highlighted Ethereum’s enablement of decentralized applications (DApps) on its blockchain, built to use smart contracts, which allow computer programs to be executed on the blockchain. Goldman highlighted these six blockchains but Goldman gave no insight as to why these six blockchains were highlighted, while others, like Cardano, Hedera, Stellar, Casper, and Avalanche, were not. The first section of the report (Understanding the Digital Assets Ecosystem: Bitcoin, Blockchains and Web 3.0) finishes with “Use Cases of Blockchain Technology,” with only a brief discussion of DeFi.
4. Goldman: “We do not believe that cryptocurrencies are a strategic asset class that adds value to our clients’ portfolios”
The Goldman Sachs report describes Bitcoin as “the oldest and has the largest market capitalization among cryptocurrencies.” Bitcoin was not the first cryptocurrency, as various parties worked on cryptocurrencies before the first units of bitcoin were mined in 2009. The second claim made in the report, that bitcoin is the largest cryptocurrency by market value, was true at the time of this report, according to CoinDesk data.
See: BuyProperly Raises $2M to Bring Accessible Real Estate Investing to Canada and the US
Due to bitcoin’s prominence in the word of digital currencies, Goldman focused on this particular digital asset to present the analysis that crypto is not an investable asset, as it does not meet at least 3 of the 5 criteria:
- Generate steady, reliable cash flow on a contractual basis, like bonds
- Generate earnings through exposure to economic growth, like equities
- Provide consistent and reliable diversification benefits to a portfolio
- Dampen volatility
- Provide consistent and reliable evidence of hedging inflation or deflation as a store of value
According to Goldman’s “robust optimization model,” given it’s volatility, risk premium, and Sharpe ratio, Bitcoin would need to return 165% per annum to strategically allocate 1% of a moderate-risk portfolio to Bitcoin. Since January 2014, Bitcoin has provided an annualized return of 69%, far from the levels Goldman would need to justify an allocation.
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