Hedge funds may find cryptocurrencies like Bitcoin appealing because of their high volatility but that doesn’t constitute a viable investment rationale.
This is what a Goldman Sachs official concluded during a client-facing call on May 27, 2020 effectively dismissing digital currencies as a worthwhile and emerging class that deserves to be considered.
Following their conclusion, Bitcoin prices soared above $9,000 as the total crypto market trading volumes rose $11 billion.
The Central Bank Money Minting
As reported by CoinGape, the crypto community was keen to see whether the investment bank would endorse Bitcoin considering the current monetary policies adopted by central banks as the effects of COVID-19 push economies to the edge.
To stimulate economic activities and shield companies from its adverse effects, central banks have announced aggressive—sometimes unlimited—quantitative easing programs where trillions would be re-injected to the global economy.
This can drastically affect inflation due to high money supply consequently draining the purchasing power of fiat currencies like the USD or the Euro.
Bitcoin and Crypto Don’t Cut It Says Goldman Sachs
Bitcoin, dubbed the digital version of gold, given its scarcity element can be an alternative to gold as a safe haven asset.
However, because it remains unregulated without a robust market, its price tend to heavily fluctuate. It is this high volatility Sharmin Mossavar-Rahmani, the chief investment officer for wealth management at Goldman Sachs, took an issue with before dismissing Bitcoin as an inappropriate asset class.
Some cryptocurrencies, the bank said, were securities dependent on someone else buying at a higher price, insinuating that digital assets have no utility and drive action conforms to a phenomenon called the Greater Fool theory.
Combined with the low cash flow, lack of correlation with other markets, and the absence of evidence to support Bitcoin as an hedge against inflation, were enough reasons to dump crypto.
“We believe that a security whose appreciation primarily depends on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients.”
The Response From The Crypto Community
Still, the crypto community is confident of digital currencies and some were expecting Goldman Sachs to conclude as they did and thrash cryptocurrencies.
In their argument, they view cryptocurrencies as disruptive agents whose widespread adoption portends the demise of investment banks like Goldman Sachs.
Bitcoin adherents add that Goldman Sachs analysts failed to do their homework and seem to have dusted off some of their old talking points, literally hitting the replay button.