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Goldman Sachs to UHNW Clients: Bitcoin Is a Bubble

January 26, 2018

Goldman Sachs is warning its private wealth management clients that cryptocurrencies have moved far past bubble territory, Yahoo Finance reports.

Price gains in the digital currencies Bitcoin and Ethereum have far outpaced the dot-com bubble as well as the 17th century tulip bubble, Sharmin Mossavar-Rahmani and Brett Nelson write in Goldman Sachs’ annual outlook letter directed at its wealth management clients with at least $10 million in liquid assets, according to the website.

The authors say the “mania” around cryptocurrencies is even more obvious when looking at price gains in companies announcing some sort of affiliation with cryptocurrencies or blockchain technology, the distributed ledger system that records cryptocurrency transactions, Yahoo Finance writes. For example, the Crypto Company surged more than 17,000% in the last four months of 2017 after going public — following its purchase of shares in “an early-state sports bra company,” according to the website. Another firm that saw a price surge was the Long Island Ice Tea Corp, renamed Long Blockchain to focus on “exploration of and investment in opportunities that leverage the benefits of blockchain technology,” Yahoo Finance writes.

Goldman Sachs says digital currencies relying on blockchain technology have the potential to lower transaction costs, boost safety of ownership and ease global execution — but Bitcoin doesn’t do any of that, the authors write, according to the website.

Settlement in Bitcoin can take up to 10 days, price discrepancies in late 2017 were as high as 31% across 17 U.S. exchanges, and regular cyberattacks have erased entire wallets and destroyed exchanges, according to the report cited by Yahoo Finance.

Goldman Sachs doesn’t believe the current value will hold long-term, nor that the U.S. dollar will be replaced by cryptocurrencies as the global reserve currency, the website writes.

But the authors also believe a bitcoin collapse isn’t likely to affect financial markets. In the lead-up to the dot-com collapse the combined capitalization in Nasdaq and S&P 500 technology stocks was 101% of the U.S. GDP, they write, according to Yahoo Finance. But the combined capitalization of all cryptocurrencies is just 3.2% of the U.S. GDP, according to Goldman Sachs, the website writes.

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And Bitcoin could experience a “massive” price drop as a result of increased regulation, UBS Group AG chairman Axel Weber told Bloomberg at the World Economic Forum in Davos, Switzerland. He added that once the market for Bitcoin implodes, investors will question who sold them the cryptocurrency, according to the news service. The Swiss bank neither offers Bitcoin to its retail clients nor trades it, while the European Commission said earlier this month indications of a pricing bubble may lead it to boost regulation of virtual currencies, Bloomberg writes. Meanwhile, Bitcoin’s supply has little elasticity, Weber told the news service, which means any increase in demand leads to price increases, and presumably the reverse holds true as well.

By Alex Padalka
  • To read the Yahoo Finance article cited in this story, click here.
  • To read the Bloomberg article cited in this story, click here.