Goldman Asks The Big Question: Can Bitcoin Succeed As Money?

Goldman Asks The Big Question: Can Bitcoin Succeed As Money?

On Tuesday, the world learned that while Goldman may need cryptocurrencies, cryptocurrencies don’t need Goldman.

And no, that’s not because cryptocurrencies don’t need the support of blue chip Wall Street banks.

Rather, it’s because someone (and by “someone” we mean Mike Novogratz) is hard at work building “the Goldman Sachs of crypto.”

 

So by the time Lloyd Blankfein’s Goldman gets around to launching that crypto trading desk they’re reportedly scrambling to get off the ground, Mike will have already recreated Goldman in his own image, an image which is rapidly becoming indistinguishable from a Bitcoin logo with eyes, ears, and a mouth.

You’ll recall from our Tuesday post that absolutely nothing could go wrong with Mike’s plan for building the “Goldman Sachs of crypto.” It’s an ironclad, foolproof scheme that will be implemented by way of these simple and not-at-all-dubious-sounding steps:

  1. buy a Canadian crypto startup called First Coin Capital Corp.;
  2. conduct a reverse merger with a Canadian shell company called Bradmer Pharmaceuticals Inc.;
  3. roll them up;
  4. rename the combined entity “Galaxy Digital Holdings”;
  5. raise $200 million in a private placement;
  6. list Bradmer Galaxy Digital Holdings (which will have a stake in a crypto merchant bank Mike will establish) on the TSX

See what we mean when we say nothing could go wrong?

In light of the fact that Mike’s reverse-merger-pharmaceutical-merchant-bank-crypto-Goldman will undoubtedly be up and running in no time, we’re not entirely sure why that “other” Goldman (i.e. the real one) is even bothering with cryptocurrencies anymore.

But they are.

And I guess, for now, we’ll have to settle for analysis from the smartest guys on Wall Street while we wait on Bradmer Pharmaceuticals to start making markets in Dogecoin.

On Wednesday, Goldman is out with a new piece called “Bitcoin as money” and it’s definitely worth a read.

First, Goldman reminds readers what money actually is (because it’s readily apparent that a lot of people have either forgotten what money is or else didn’t have a firm grasp on it in the first place). To wit:

At the root of much of the debate about Bitcoin is confusion about the nature of money. In the textbook treatment, money in an economy serves as (i) a medium of exchange, (ii) a unit of account, and (iii) a store of value. Or, in everyday language, money is the item that we offer or receive for the purchase or sale of goods, services or assets–it is simply a device that facilitates transactions in a market economy. The confusion arises because the physical properties of money are practically arbitrary– paper bank notes, gold coins, digital tokens or stone disks could all serve the purpose. Instead, the value of money derives from its usefulness. Therefore, digital currencies like Bitcoin could prove to have value, if they can demonstrate their usefulness relative to existing forms of money.

Got that? Great. Next, the bank goes over the sources of demand for money:

Demand for money comes from two sources: transaction demand and portfolio demand (Exhibit 1). Economists have a number of theories for the transaction (or liquidity) demand for money, but they all boil down to the same thing: we cannot easily exchange (non-monetary) financial assets (“assets”) for goods and services, so we tend to hold some amount of monetary assets (“money”) to facilitate consumption.

GSMoney

Ok, so what exactly is wrong with the dollar? That is, why the fuck do we need make-believe space tokens? The short answer, much to the chagrin of some in the crypto crowd, is that nothing is really wrong with the dollar. Here’s Goldman:

To a modern American observer, cryptocurrencies can seem like a solution in search of a problem. In recent decades the US Dollar has served its purpose relatively well: consumer price inflation has averaged 2.1% over the last 30 years, and the real trade-weighted exchange rate is about 3% above its average of the same period. It is true that the US financial system wobbled during the financial crisis, but the underlying problem was not the currency per se: the Dollar actually appreciated 16% between June 2008 and March 2009. The Dollar accounts for about 65% of global foreign exchange reserves and is the denominate currency in global trade–about 30% of global trade flows excluding the US are invoiced in USD. In other words, transaction and portfolio demand for the Dollar are very high.

That said, when people find themselves living under unstable currency regimes and/or in countries where the capacity to own foreign assets (and by extension, outside currencies), is curtailed by government regulation, Goldman notes that “a decentralized currency such as Bitcoin could attract significant demand, especially if it is not (yet) legally recognized as a currency.”

Indeed there’s myriad evidence to suggest that cryptocurrency demand is linked to people getting fed up with fucked up systems or with situations that prevent them from diversifying their holdings when they think currency depreciation might be in the cards. What say you, Goldman?…

For instance, a Google Trends search shows that the highest search intensity for “Bitcoin” over the last five years (scaled to overall search volumes in the country) came from Nigeria, South Africa and Ghana, all countries with currency instability and/or restrictions on the use of foreign exchange– places where alternative forms of money might see natural demand. In addition, Bitcoin exchange volumes in China rose sharply following the tightening of capital controls in 2016.

ChinaBTC

That said, Goldman goes on to remind you that “other data look more consistent with a classic speculative bubble [as] Bitcoin exchange volumes are now dominated by investors in Korea and Japan–countries with no recent history of monetary instability and/or unmet portfolio diversification needs.” Here’s the chart on that:

GSVolBTC

When it comes to whether Bitcoin and other cryptocurrencies will ever truly be “money,” the answer is: “yes” in theory, “no” in practice.

“Yes” in theory because (to quote Goldman):

  • The widespread use of the Dollar outside the US– and full Dollarization in some countries–suggests there is already demand for an internationally accepted medium of exchange and store of value. In those countries and corners of the financial system where the traditional services of money are inadequately supplied, Bitcoin (and cryptocurrencies more generally) may offer viable alternatives.

“No” in practice because (again according to Goldman):

  • Transaction costs are relatively low, exchange rates and price inflation are broadly stable, precious metals can be used for portfolio diversification, and governments place few restrictions on holding foreign currency or foreign assets

In other words: we simply don’t need cryptocurrencies and the fact that interest is so high in two countries (South Korea and Japan) that definitely aren’t Venezuela suggests this is pure, unadulterated speculation.

Of course at the end of the day, the bottom line on this is the same as it ever was. Namely that something which exhibits the kind of volatility shown in the chart below can never be a store of value:

GSBTCMoney

And even if it could, it won’t matter because as Goldman points out, “some features of cryptocurrencies that might make them competitive with alternative stores of value are also features that are likely to attract government scrutiny.”

Government scrutiny = regulation = (eventually) law enforcement actions.

Any questions? If so, please direct them to Mike Novogratz and/or Bradmer Pharmaceuticals Inc.

 

 

11 thoughts on “Goldman Asks The Big Question: Can Bitcoin Succeed As Money?

  1. You guys are missing the forest for the trees, or is it the other way around? This is beyond your control. You can’t control everything. Who understands why you would even want to. You’ve done a pretty deplorable job thus far. You’ve left things generally worse than when you got them and very much on course for a bad 3rd act. Its not gonna be your choice. These pieces make it clear you don’t even have the right lense for this. Legacy everything, but especially ‘money’, is cooked because it won’t align with millennial values. Get over it and get into it or you’re gonna be under it.

  2. Oh Heisy, we millennials aren’t buying Bitcoin because it’s needed now. No shit it’s not needed now. No, we’re buying it because your generation continues to screw us with increased debt-to-GDP/deficit spending, so we think it’s going to be needed pretty darn soon. Potentially even within my lifetime (and I’m old, at 33, or at least I feel old). Look at how the PIGS fared when debt reached a tipping point. Oh, but we have a recourse that Spain, Italy and Greece didn’t have? Wait, we can print money? Well, there you have it Heisy, absent some miracle sorcerer of sheer political will, that’s what’s coming: helicopter money, high inflation, currency instability, etc.

    Any questions?

  3. Actually, what millenials don’t get is:

    1. The value of critical thinking skills which they are somehow self-deprived of – in spite of more educational opportunities than any generation in history and access to information and data that no previous generation ever had. All provided to them by those lazy good for nothing boomers and the generations contributing to advancing computer technologies before them.

    2. Due to their general broad lack of critical thinking skills (I speak from too many of their graduate research papers), millenials can’t grasp that it isn’t the digital crptographic or blockchain technologies that the real world has a problem with – its the “private” part of current cryptocurrencies that are the problem. As an example, after more than 5,000 years of monetary history and development – and 1,000s of private currencies – not one survives today – whether made out gold or silver or paper. Even bearer bonds have fallen by the way side in recent years. Since mid-December – looking at GBTC and NYXBT Index and following news of the various national treasuries moving against private cryptocurrencies – current private digital currencies are already following the historic path of all private currencies – digital, encrypted in blockchain, or not.

    3. Extending the lack of critical millennial insights – they also don’t get that most informed people regardless of age – don’t believe that cryptocurrencies are going away. Only the private ones. The “powers that be” see the advantages of cryptocurrencies and block chain technology in a far more utilitarian light than millenials and will surely incorporate them in their own national cryptocurrencies and avoid the liabilities of the private forms of cryptocurrencies.

    National cryptocurrencies and a wide variety of blockchain applications will continue to develop as new revolutionary products and tools to improve transactional security and just fine even without private cryptocurrencies. Private cryptocurrencies on the other hand – will end up in the same dust bins of history as Green Stamps (which actually had far greater commercial merchandise transaction usage than BitCoin.

    Millenials will eventually mature, move out the shelter of their parents homes, move past the limited quality and circular informational resources of their social media accounts and gain broader understandings of economics, monetary and other realities.

    One piece of advice though, you had better get a move on it.

    1. 100% correct. I believe the main attraction for millennials is that they believe that it belongs to their generation and they can make a lot of money without much effort. The millennial “disruptive” technologies are no more than existing paradigms using new technology, in much the same way that “ride sharing” is just a taxi service using an app instead of telephone or raising a hand on the sidewalk.

    2. Oh god i lost so many brain cells reading this, this is why i think cryptocurrencies should be called cryptocommodities instead. Maybe then boomers would get it.

      In the future, “currencies” like ether,waltonchain,wabi will be looked upon as commodities. If you want to render an movie, it will be cheaper to do it on the golem network than to do it on a server farm, which means you need to use GNT tokens.

      If you want to protect your product against counterfeiting, you might need some wabi tokens in order to manage your supply chain properly.

      If you want to measure the grab rate for the clothes you’re selling, waltonchain tokens might come in handy.

      MOST people who know how the tech works are not thinking its gonna replace fiat. Your comment just reads like the typical millenials killed this,millenials killed that article from mainstream media.

      1. Indeed, you do appear to have lost some brain cells and exhibit those critical thinking deficits I pointed out above. Everything you speak of can be accomplished with blockchain based public/national cryptocurrencies whose value will be predictable, mediated to economic basics such as GDP and especially in the short term – so settlement values are predictable and therefore projectable for accurate accounting needs. Then you won’t have companies like NewEgg who says they take BitCoin backing out of BitCoin transactions because the value of the transaction changes too much during the settlement between NewEgg and their drop ship associates.

        Why would you complicate your business with an infinite variety of tokens that compete against each other, have no legal recourse, and no verifiable value other than uninformed public perspective? It’s not only economically self-defeating, its as ludicrous as comic book (pardon me “graphic novels'”) super powered, super heroes. Not only is it fantasy, it’s economically self-annihilating.

        1. “Why would you complicate your business with an infinite variety of tokens that compete against each other…”

          Errrr… Because businesses already do that?

  4. Old man shakes fist at cloud… I wonder why the central bank’s best friend doesn’t like digital disruption in the central banks business? So long as there are people fighting against better solutions, there are opportunities for the rest of us.

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