Updated: Jun 2, 2020
On May 27th, 2020, Goldman Sachs held an Investor Call they titled "US Economic Outlook & Implications of Current Policies for Inflation, Gold and Bitcoin," which spent time discussing their position on Bitcoin.
Leading up to the call, there was speculation that Goldman Sachs could have a favorable outlook towards Bitcoin, yet sadly their position clearly showcased yet again how institutions operate off of financial incentives, while providing an unsophisticated and underdeveloped point of view, stating over exaggerated points of view such as Bitcoin being a "conduit for illegal activity" (lets not forget that 90% of dollar bills carry traces of cocaine), Ponzi schemes (or how Goldman admitted guilt and scheduled to pay $2Billion in fees for its role in a Malaysian Investment Fund), and even compared bitcoin to Tulip Mania.
During Tulip Mania occurred in the Netherlands in the 1600s when the price of Tulips increased dramatically only to crash. Bitcoin has long outgrown this example, especially considering tulips are not indestructible, will mold and go bad if you don’t plant them in the ground after a year. Bitcoin is bound by code.
On the call, Goldman stated that Bitcoin is not an asset and does not offer cash flow, nor a hedge against inflation. "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," they said. You know who considers Bitcoin to be an asset? The IRS.
Financial Incentives of Institutions
People often forget that businesses operate off of incentives. Goldman Sachs need to be prepared to generate margin and revenue from selling Bitcoin, before it can recommend purchasing. Think of simply in a business context...why would they suggest their clients invest in an asset class they do not support?
An cryptocurrency exchange makes money during the selling and purchasing of Bitcoin by its users. If banks like Goldman Sachs begin offering Bitcoin to their clients, they would have an interesting margin opportunity.
Banks don't want to introduce their Disruptor
One possibility as to why Bitcoin is not being offered is simply they may not want to take revenue away from financial instruments in which they know and are producing significant revenue. For a bank to offer Bitcoin, they would either need partner with a major crypto institution or invest in developing the software and implementing the financial hurdles to make available. Either option is a significant investment and affects overall margin in the short term.
While Bitcoin's market cap is small compared to the entire financial sector, it is over twice the size of Goldman Sach's. For a company like Goldman, known for being conservative in its financial approach, there could be legitimate concerns over introducing an asset class which likely will disrupt you.
There are banks who have taken favorable positions to Bitcoin via working groups or even providing banking services to companies engaging in crypto currency businesses, such as JP Morgan's recent announcement in which it is working with Coinbase and Gemini. For JP Morgan, they have downgraded the risk and see the business relationship as a financial opportunity, though they are not selling Bitcoin as of yet nor are they recommending to their private clients.
Bitcoin has shown to have lasting power in the digital and new economy regardless of a bank's point of view.
On our most recent episode of the TF Podcast, we discuss the "Financial Institutions vs Bitcoin & Crypto Institutions", with the topic around Goldman Sach's POV entering the discussion.
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