Goldman Sachs Caves: Bitcoin Is Money (2024)

Bitcoin is a bubble.

Bitcoin is for criminals.

Bitcoin is penny candy and should be worth just about as much.

Call it what you want, those are — or were — the consensus views over at JPMorgan and Goldman Sachs for much of 2017. Jaime Dimon, JPM's CEO, famously said Bitcoin was basically for corrupt money launderers and drug dealers. Yesterday,Dimon said he regrets calling bitcoin a fraud. (JPM will try to position itself as a future clearinghouse of sorts for cryptocurrency. Wait for it. Goldman is already setting up a trading desk. This is too legit to quit.)

On Wednesday, Goldman weighed in on the bitcoin debatewith a nine-page report to clients titled "Bitcoin as Money." They've caved. Cryptocurrency, with bitcoin at the helm, is going to be even bigger this year than it was in 2017. That doesn't mean everyone is going to get rich on it. But what it means is, now that the bulge bracket banks are taking it seriously, a rules-based system is likely at least for bitcoin and trading in bitcoin. More companies will allow bitcoin as a form of payment. Expedia already allows users to make travel arrangements in bitcoin.

Can bitcoin succeed as a form of money?

"In theory, yes," Goldman economists led by Zach Pandlin New York published today. For them, if Bitcoinis capable of facilitating transactions at a low costor can provide better risk-adjusted returns for portfolios, then it is as good as money.

The currencies of most developed market economies already deliver these services. Why book a flight to Seattle in Bitcoin when you can just put it on your credit card? If Bitcoin prices are rising, then customers are spending less for the flight than they would if they were paying in dollars. Problem is, these transactions are not always seamless. Even Expedia warns of this on their website.

Bitcoin as a method of payment is more likely to be used in emerging markets. You can buy real estate in Dubai with Bitcoin.

Should the blockchain technologies that are the backbone of the crypto world finally go mainstream, as seems likely, thenbitcoin (and cryptocurrencies more generally) "may offer viable alternatives in countries and corners of the financial system where the traditional services of money are inadequately supplied," Goldman authors wrote.

Since the 2008 financial crisis, the dollar has lived a double life. To some, the dollar was dying. To others, the dollar was killing their currencies in a currency war they could not win. The ups and downs were nothing like bitcoin, which was worth just $15 in 2012 and now costs around $14,000 for one Bitcoin. Everyone knows more or less what they can expect from the dollar, as they can from the euro and the yen. For sure, the dollar will not be worth $100 euros come summertime. And for this reason, the 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, Goldman Sachs economists wrote.

The dollar accounts for about 65% of global foreign exchange reserves and is the dominant currency in global trade — about 30% of global trade flows excluding the U.S. are invoiced in dollars.For multinationals and state-controlled companies buying and selling goods across borders, the dollar is still king. Demand for it is always high.

The same cannot be said for Russian rubles and Brazilian reals. In certain parts of the world, and at points throughout history,currencies have evaporated or lost half their value. In the late '90s and early 2000s, Brazil was learning to use an entirely new currency. In the year 2000, Ecuador simply gave up on its basket case currency, the sucre, and adopted the dollar. The economy is completely dollarized now.

But if there was such a thing as cryptocurrency back then, they might have come up with a similar plan like the one being tossed around by Nicolas Maduro, the president of Venezuela. Maduro wants his country to bypass the dollar and launch a cryptocurrency backed by oil reserves. His congress called the"petro" coin illegal on Tuesday. We will see where that goes, as Venezuela's congress has almost no muscle.

Abkhazia, a small, disputed region of the world located within the borders of Georgia, is supposedly toying with launching their own currency to fund its government.

Unlike bitcoin, the dollar derives some of its value from the fact that it is universally accepted and backed by the good credit standing of the United States government (and its printing press). Forbitcoin to succeed, it may require support from network externalities—a “critical mass”—but this may be challenging giventhe large number of coins now competing with it.

Most of these coins, however, are tokens that can only be used only to pay for the services of the startup company issuing the token. They are sometimes traded on thenumerous cryptocurrency exchanges by retail investors looking for the next bitcoin-like boom.

Bitcoin is still a tool of the bad guys, of course. And the tax evaders, an activity that sounds illegal, although tax avoidance is a practice taken up by every American multinational to some degree. Everyone wants to lower their tax burden, and the anonymity of Bitcoinmakesit a useful medium for tax avoidance andgetting around government-imposed capital controls. Continued growth in the popularity of cryptocurrency will ultimately attract greater regulation and law enforcement action by governments. That burden will fall on Bitcoin first.

Whether or not that undercuts gains in this new digital money is anybody's guess. Thepopping Bitcoin bubble has been called twice in the last few months, starting when China banned Bitcoin exchanges on the mainland. It's still down around $4,500 from its high point of Dec. 18, but is quadruple where it was just five months ago.

The two Goldman economistsbehind the report think bitcoin could become a portfolio asset comparable to gold. That puts bitcoin in good company. Gold, too, is not really considered money, but it can easily be converted into cold hard cash. Bitcoin isn't there yet. Transactions can take over three days to settle. Other cryptocurrencies, like red-hot Ripple coin, can take weeks just to purchase.

"Our working assumption is that long-run cryptocurrency returns should be equal to -- or slightly below -- growth in global real output," says Pandl. That's low single-digit gains, so say the economists. "Digital currencies should be thought of as low/zero return or hedge-like assets, akin to gold."

Bitcoin is no match for the dollar. The biggest rival to the dollar today, other than the euro and yen in terms of trade, is China's renminbi, not some cryptocurrency. There are only around 17 million Bitcoin in circulation. The widespread use of the dollarworldwide,and partial- to full-dollarization in some emerging markets (Argentina real estate is almost always priced in dollars) suggests there is a demand for an internationally accepted medium of exchange and store of value. In those countries wherebanking services are inadequately supplied, and dollars are hard to come by, Bitcoin could easily become a viable alternative, report authors wrote.