New readers often ask why I don’t talk much about Bitcoin, but long-time visitors are apprised that I actually did cover digital tulips quite extensively during the height of the mania.
That coverage was begrudging.
To be clear, you will find no one happier than yours truly at the prospect of others prospering monetarily, as long as that prosperity doesn’t stem from the dissemination of propaganda. Just about the only kind of profiteering I’m against is that which involves the monetization of misinformation, as that’s deleterious to people’s mental well-being, something I find wholly distasteful.
The point: very much unlike many (I would even venture to say “most”) Bitcoin critics, my disdain for cryptocurrencies is in no part attributable to some bizarre desire to see those who dabble in the space fail. In fact, my disdain for cryptocurrencies isn’t properly “disdain”, as it’s confined to these digital pages. Outside of my daily macro musings, I would speak of Bitcoin the same way I would speak of anything else I have no interest in – that is, in dismissive terms, but not derisive terms.
The reason I strike a derisive tone in these pages is very simple: Bitcoin is not an asset, and therefore has no place in any discussion of assets or asset prices, something Goldman drove home in a Wednesday presentation stamped for the consumer and investment management division.
The portion dedicated to crypto apparently irritated Bitcoin adherents (a bunch who are easily riled anyway), despite comprising just six of nearly 50 slides. Because the story is grabbing a few headlines, I figured it was worth fishing this thing out and hitting the high points.
It’s somewhat odd that this caused a stir, given that Goldman doesn’t say anything everyone else hasn’t already said. They begin with three simple observations about the nature of sovereign currencies. To wit:
- They are used as a medium of exchange. – To represent a medium of exchange, an instrument must facilitate the transaction of goods or services between parties (e.g., US$ are used to buy a barrel of oil).
- They serve as unit of account. – A unit of account is a measurement which allows value to be accounted and compared (e.g., a barrel of oil is worth ~$33).
- They are a store of value. – A store of value is an asset that can be saved, stored, and exchanged in the future for a predictable stable value (e.g., with 2% annual inflation, a nominal dollar today will be worth 82¢ in 10 years).
While you may be able to argue the case for the first two points, you cannot really do so for the third. No sane person would suggest they can predict what Bitcoin will do next week, let alone next year.
The case for Bitcoin as an asset class is clear – and by that, I mean there isn’t one. I’ve been over this before, and so have plenty of other people smarter than myself. Here, from Goldman, is the long and the short of it:
Cryptocurrencies Including Bitcoin Are Not an Asset Class
- Do Not Generate Cash Flow Like Bonds
- Do Not Generate any Earnings Through Exposure to Global Economic Growth
- Do Not Provide Consistent Diversification Benefits Given Their Unstable Correlations
- Do Not Dampen Volatility Given Historical Volatility of 76% – On March 12, 2020, the price of Bitcoin fell 37% in one day
- Do Not Show Evidence of Hedging Inflation
With apologies to the Bitcoin crowd (and I mean that sincerely, because I do think cryptocurrencies serve a purpose, just not this one), there isn’t much that’s debatable about those bullet points. As noted here at the outset, cryptocurrencies aren’t an asset class. Period. And discussing them in that context does a disservice both to investors and, I contend, to those who hold Bitcoin for reasons that make sense. (Basically, for any reason that doesn’t involve including it has part of an investment strategy.)
“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”, Goldman says, conjuring the greater fool theory and adding that “while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale”.
Next, the bank summarily dismisses the notion that Bitcoin, like gold, deserves a scarcity premium.
“Since Bitcoin was created in 2008, several thousand cryptocurrencies have come into existence, with a combined market cap of ~$250 billion”, the bank says. “Though individual cryptocurrencies have limited supplies, cryptocurrencies as a whole are not a scarce resource”.
I would add that all kinds of things constitute “scarce resources”, and they are not considered valuable, let alone a reliable inflation hedge. And speaking of that, I’m not a big fan of gold for the same reasons – it has value because humans have decided it does, but if our memories were all wiped clean tomorrow, we might collectively decide that some other metal (or commodity) for which there is a finite supply is desirable instead.
In any case, what really seems to have irritated the crypto crowd is the following slide which contains the infamous tulip bubble comparison.
“Cryptocurrencies moved beyond bubble levels in financial markets and even beyond levels seen during the Dutch ‘tulipmania’ between 1634 and early 1637”, Goldman points out, before noting that when you compare crypto bubbles to other historical manias… well, there really is no comparison.
“We have compared bitcoin and ether, two of the largest cryptocurrencies by market capitalization, to the Gouda variety of tulip bulbs and to the equity bubbles in the Nasdaq, S&P 500 and the TOPIX”, the bank says. They use the year prior to their respective peaks. The figure is a simpler version of the second and third charts from the triptych above.
As if all of that wasn’t enough to make the point, Goldman reminds anyone who needs reminding (which should be nobody, but alas) that the cryptocurrency infrastructure is “still young and susceptible to hacking or inadvertent loss”.
The bank even provides a handy timeline in that regard.
And that, folks, is what prompted “Bitcoiners” to “go wild”, as Bloomberg puts it.
One popular crypto proponent spoke for the whole community. “Long Bitcoin, Short the Bankers!”, he shrieked, in a silly tweet referencing Goldman’s straightforward presentation which, again, is the furthest thing from inflammatory and touches only briefly on Bitcoin.
I’m not even sure what “Short the Bankers!” means, but if you’re inclined to be long Bitcoin, go for it. And best of luck. But please, don’t tell me about it. As Jamie Dimon put it in October of 2018, “I didn’t want to be the spokesman against Bitcoin. I don’t really give a sh*t — that’s the point, OK?”