A Goldman Sachs client call caused outrage and confusion among blockchain investors. Below is our commentary, putting things in perspective and explaining why we strongly disagree with Goldman’s opinion.
Goldman Sachs hosted a client call in late May, in which the bank’s analysts declared Blockchain was not an asset class. Unsurprisingly, the bank’s arguments have enraged crypto evangelists. Tyler Winklevoss, the co-founder of the digital exchange Gemini, eloquently put it this way:
“What are you smoking? I thought Goldman was the bank on Wall Street for smart bankers.”
While it’s little surprising that Goldman’s conclusion doesn’t resonate well with cryptocurrency proponents, not even Wall Street and most of their clients share Goldman’s point of view – quite the opposite actually.
Just two weeks after Goldman’s rather superficial presentation, Fidelity Investments, one of the world’s largest Asset Managers, published a study with their own findings. The result speaks an entirely different language than Goldman’s slideshow:
Of 800 surveyed institutional investors, including pension funds, hedge funds, investment advisors, and family offices, 80% see the appeal of digital assets.
About one-third of survey participants have already invested in digital assets or derivatives, with Bitcoin and Ethereum being the most popular Blockchain Assets.
What’s wrong with Goldman?
D-TAP capital founder Dan Tapeio probably summarized Goldman’s motivation in the best possible words:
“Goldman does not make fees when a client buys Bitcoin. Buying Bitcoin is an implicit rejection of buying assets that Goldman Sachs sells upon which they make fees.”
True story. It’s a bit like the ongoing discussion of whether mutual funds or ETFs are the better choice for investors. While the data shows that most mutual funds fail to outperform their benchmark indices, banks keep selling mutual funds. Why? Because that’s where they make their commissions. Bankers also have to eat and pay rent.
What are Goldman’s arguments?
Goldman’s arguments were not very convincing:
“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.”
What about gold? What about the USD? And what about the stock market? Today’s stock markets seem entirely disconnected from the real economy. US GDP contracted 4.8 percent in the first quarter, yet stock markets keep soaring. Why? Because “someone else is willing to pay a higher price” based on future expectations. Bitcoin is no different.
“We also believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale.”
That is also not in-line with the facts. Hedge Funds invest in crypto because the asset class has outperformed nearly every other asset class in terms of risk-adjusted returns over the past five years and because they are uncorrelated to other asset classes. Also, as Hedge Fund Manager Paul Tudor Jones explained, hedge funds invest in Bitcoin to hedge against inflation risks.
Goldman also compared Bitcoin and the Dutch Tulip Mania of the 17th century – again an old argument that is quite far-fetched. A tulip is a non-durable good with a limited lifespan. What underpins the value of Bitcoin is that there is a strong base of anchor investors who believe in the long-term growth prospects of the asset enough that they don’t sell their coins even during economic turmoil (similar to gold). That stabilizes the price of Bitcoin at a certain bottom and minimizes the risk of total loss. Yale researchers have estimated Bitcoin’s default probability at 0.3% – much lower than with many stocks.
Altogether, Goldman’s client call was not the most glamorous moment in the company’s history. There are certainly arguments to be made against crypto-assets, but Goldman’s criticism didn’t show much depth.
By the way, many Wall Street household names don’t agree with Goldman. Fidelity and JP Morgan, for example, have both made significant investments in blockchain assets. So, our advice: Take Goldman’s opinion on crypto with a big mountain of salt.