Cryptocurrency Not An Asset Class?


  • In a call to investors, the Goldman Sachs Investment Strategy team claimed that Bitcoin is not a viable investment vehicle.
  • The presentation lacked basic knowledge on the subject matter and was logically incoherent.

On May 27, the Goldman Sachs Investment Strategy Group of Consumer and Investment Management Division organized an investor call entitled “US Economic outlook & Implications of Current Policies for Inflation, Gold and Bitcoin.” Goldman Sachs presented a case against investing in Bitcoins “on a strategic or tactical basis,” stating that “cryptocurrencies including Bitcoin are not appropriate as an asset class”.

However, the lack of fundamental understanding of cryptocurrencies may have hindered Goldman Sachs’ credibility on crypto-related matters. The Investment Strategy Group, which is part of the bank’s wealth management division, focuses primarily on serving high net worth clients. While opinions and client advisory are respected, the commentary on Bitcoin is logically incoherent.

It asserts that cryptocurrencies do not generate cash flow or earnings, nor do they exhibit evidence of inflation hedge, and thus, are not considered an asset class. Following this line of reasoning, gold, a universally recognized asset class, ticks all the boxes. Goldman Sachs recognizes that even gold does not show consistent evidence of hedging inflation.

Source: Goldman Sachs Investment Strategy Group

Source: Goldman Sachs Investment Strategy Group

It says cryptocurrencies are extremely volatile, and the returns are no more than inflated bubbles. However, they shy away from discussing the unparalleled Sharpe ratio and the Sortino Ratio of Bitcoin, which are reminiscent of Amazon. Normally, investors do not consider volatility independently without analyzing the return.

“Although individual cryptocurrencies have limited supplies, cryptocurrencies as a whole are not a scarce resource,” Golden Sachs claims, citing Bitcoin Cash and Bitcoin SV as being “nearly identical clones” to Bitcoin. Goldman Sachs is blatantly unaware of the importance of hash power to cryptocurrencies based on Proof of Work. The aggregate hash power of BCH and BSV accounts for only 4-5% of that of BTC, rendering their networks much more vulnerable to hostile attacks than BTC. BCH and BSV can’t compare to BTC as clones, and the scarcity of Bitcoin can’t be denied.

Source: Bitinfocharts

Goldman also denounces Bitcoin as “conduit for illicit activities” including money laundering and darknet markets. According to Chainalysis, 2.8 billion USD in Bitcoin was sent to currency exchanges from criminal entities in 2019, with other data claiming that darknet market revenue which was typically exchanged through cryptocurrency reached 800 million USD in the same year.

However, illegal activities related to Bitcoins represent a very small fraction.According to the World Economic Council, ”if illicit trade were a country, its economy would be larger than Brazil, Italy and Canada – and as large as Mexico and Indonesia combined.“

People without a blockchain background often tend to believe that criminal activities are easily conducted through cryptos, but that is a misconception. In fact, it is much more difficult to trace the flow of cash than that of cryptos. On-chain ledgers are public and transparent, and on-chain analysis companies such as Chainalysis, work closely with law enforcement agencies such as the IRS, FBI, and DEA.

After all, if Bitcoin and other altcoins are fraught with risks and uncertainties, why do investors worldwide, even veteran investors such as Paul Tudor Jones, plough money and time into crypto? If an asset rises substantially and sustainably, it is better to learn the rationale behind it rather than jumping to a hasty conclusion.

Bitcoin may not have become the digital gold yet, but it may be getting there. Ultimately, only time will tell.