Yesterday, news broke regarding the investment classification of Bitcoin by Goldman Sachs, giving leeway to possibly seeing Bitcoin entering investment banking. And seeing the likes of Goldman Sachs taking an interest in bitcoin makes people, of course, particularly excited for the future of bitcoin. However, one should not be too optimistic of bitcoin as potentially being part of major investment funds; for what was released was not necessarily a confirmation as much as a mere acknowledgement of potential. However, this acknowledgement does not necessarily imply that Goldman Sachs is actually thinking of utilizing bitcoin.
There are, after all, still a few issues that prevent bitcoin from being used in the realm of institutional investment. In the paper, these issues received much consideration. In particular, three points were mentioned which not only downplayed the potential of bitcoin as an investment, but could possibly even prevent larger institutional investors from considering bitcoin as a good investment. Without further wait, here they are:
- Bitcoin regulation and the possible legal ramifications of its anonymous nature might detract investors. This point, made by Goldman Sachs’s global head of commodity research Jeff Currie as well as commodity analyst Mikhail Sprogis, has of course seen a lot of (recent) light with countries such as China and South Korea imposing strict regulation on cryptocurrencies due to the anonymous nature of transactions and the possibility for use in illegal transactions. And with the initial growth of the bitcoin for a large part being due to the use of bitcoin for underground drug markets such as the Silk Road, this is of course an issue. Whilst Goldman Sachs does point out the fact that this reputation has, by now, largely dissipated, with GS mentioning that only 1% of transactions are now illicit, the scare for implementation of regulations is still looming over the heads of many institutional investors potentially wanting to take the gamble of investing.
- The volatility of bitcoin makes it potentially not worthy of institutional investment. Whilst I have personally written about the issues with volatility before, volatility in particular is mentioned in the paper by Nouriel Roubini, an economics professor at NYU, who mentions that the volatility and risk involved would detract institutional investors. And considering the volatility over the past year, this is definitely a point to make. Institutional investors tend to be quite wary of investing in more risky asset classes, with small-cap equity often being the most volatile investments that are made by these institutions. With bitcoin being a lot more risky than even this class, with the iShares MSCI World Small-Cap Fund scoring a measly 1-year volatility rate of 17% compared to that of bitcoin, it might just be that institutional investors will not take bitcoin as a path due to it’s volatility.
- Whilst client demand exists, institutional investors are still uncertain of its value. Whilst this is not necessarily obvious from the published paper, the line “demands differ between clients and actual asset managers” by Goldman Sachs’s Global Head of Digital Assets McDermott, does implicate a certain scare held by investors. After all, with many asset managers simply not understanding the role of bitcoin and the value it holds in the eyes of people, these asset managers can seemingly not make any meaningful judgement in regards to the over- or undervaluation of bitcoin, and thereby do not know when to hold or sell; or whether to buy or not. Because of this, there is a good chance that we will not be seeing institutional investment until a proper understanding of the role and value of bitcoin is more common among these asset managers.
So, are there other coins that try to fix these issues?
Whilst the issue of anonymity and legality cannot be easily solved due to the nature of a blockchain-based currency, recent developments in the overall crypto market have tried to address the latter two aforementioned issues. Firstly, in regards to a lack of understanding of value, coins such as Synthetix have tried to peg their coins to already-established assets that hold intrinsic value. In particular, Synthetic allows for the minting of assets through synths, which represent holdings such as currencies or derivatives. This creation of value in not just projects like Synthetix but also project such as Maker DAO and various other stablecoins are particularly valuable to helping investors understand the value being placed in crypto and it’s internal economy.
Regarding volatility, however, it is still very unclear how this could possibly be solved, with many currencies still dealing with heavy volatility of their prices. One example that could hold some interest, however, might lie in Ampleforth. In essence, Ampleforth can be described as a cryptocurrency that, unlike most other cryptocurrencies, are controlled by the owners of Ampleforth wallets. This allows for a system where owners of Ampleforth are able to decide on whether to increase or decrease supply of the coin, and whether to potentially rebase it. In essence, this creates a coin with a controlling system which can decrease price volatility through in- or deflating the currency, allowing for a check on volatility in the same way a central bank or government institution stabilizes its currency, without losing the core principles of cryptocurrency as a currency not controlled or created by the government.
Whilst we may never know whether bitcoin, or for that matter any other currency will be taken seriously in the first place, looking at the amounts of project and innovation that have arisen in recent years shows how resilient the crypto community is despite slander from mainstream economists and forceful regulation and intervention in the crypto market by several governments. And with the advent of the aforementioned coins, which could help solve the core issues that have led to bitcoin not being as widely accepted as it is, it is very interesting to see how the crypto world progresses into the future.