How Bitcoin leads other cryptocurrencies to fail investability test – Goldmans Sachs
As Bitcoin soared to new highs over the past year, many wondered if they should invest in it.
Now, a team at Goldman Sachs is telling retail investors that the digital currency isn’t worthy of most portfolios—at least not yet.
In a new report to private-wealth management clients, Goldman’s Investment Strategy Group (ISG) noted that Bitcoin and other cryptocurrencies fail to meet the criteria it believes determine whether an asset class is “investable.”
“While the digital asset ecosystem may well revolutionize the future of everything,” the team wrote, “that does not imply that cryptocurrencies are an investable asset class.”
Goldman’s ISG team applies five criteria to determine whether an asset, including Bitcoin, is a sound investment—and requires at least three to be met:
- Generate steady, reliable cash flow on a contractual basis, like bonds
- Generate earnings through exposure to economic growth, like equities
- Provide consistent and reliable diversification benefits to a portfolio
- Dampen volatility
- Provide consistent and reliable evidence of hedging inflation or deflation as a store of value
Bitcoin fell short in each criteria. And the team pointed out that data on cryptocurrency has been limited and sometimes of “poor” quality.
The note comes as Goldman is expanding its crypto offerings to institutional clients. Earlier this year, Goldman’s investment bank launched a cryptocurrency trading desk that focused on Bitcoin. In the coming months, the bank will offer ether options and futures to its clients, Bloomberg reported.
For typical investors who lack the assets or access to portfolio strategies that would allow them to stomach volatility, cryptos don’t make much sense. Nor are they likely to add value to as a strategic asset class for consumer and private-wealth clients, the ISG team wrote.
By the team’s measure, based on Bitcoin’s “risk, return and uncertainty characteristics,” a 1% allocation to the crypto in a moderate-risk portfolio would have to generate an annual return of 165% to make sense in a portfolio. A 2% allocation would require 365% annual return. But over the last seven years Bitcoin has delivered an annualized return of 69%.
Just a few months ago, Bitcoin traded as high as $60,000. The recent drops occurred even as the number of Bitcoins has increased, meaning the total market capitalization lost has been much greater.
“Someone bought Bitcoin at peak prices in April 2021 and someone sold at the lower prices later in May, so some real value was actually lost,” the team wrote.
Also of concern to the team is the security of cryptocurrencies. There have been instances where investors’ private keys have been stolen, so they can’t access their coins.
Hacking and cyberattacks occur in the so-called “traditional financial system,” too, but investors have more recourse. In the case of cryptocurrencies, once a key is stolen, the investor generally doesn’t have a central authority to appeal to to recoup their assets—in other words, “not your keys, not your coins.”
