Goldman, like everyone else in the world, is still trying to figure out what Bitcoins is and what they does.
Back in October, the crypto crowd was excited to learn that just weeks after Jamie Dimon famously called Bitcoin a “fraud”, Lloyd Blankfein was weighing the merits of starting a Bitcoin trading operation. He would walk back the speculation a few days later on Twitter as follows:
Fast forward a month (give or take) and, in an interview with Bloomberg, Lloyd came across as pretty open-minded about the crypto space. A couple of weeks after that, following a truly absurd bout of volatility that saw Bitcoin plunge more than 20% after hitting an intraday high near $11,400 (that was back when $11,000 was still a big deal), Blankfein seemed to sour on the digital currency anew. “Something that moves up and down 20 percent in a day doesn’t feel like a currency, doesn’t feel like a store of value,” Blankfein told Bloomberg in another interview. “If it works out — and it gets more established, and it trades more like a store of value, and it doesn’t move up and down 20 percent, and there is liquidity to it — we’ll get to it.”
Meanwhile, Goldman’s Jeff Currie advised everyone to just calm down. “I don’t see why there is all this hostility to it,” Currie said late last month. “Bitcoin is not much different than gold because it doesn’t have liability attached to it by definition, like a security,” he added.
Ok, so that brings us to today when, in a new note, that same Jeff Currie sets out to debunk the notion that Bitcoin is taking demand from gold. This argument has been bandied about a lot lately and for his part, Currie thinks it’s probably spurious for the following three reasons:
First, the investor pools are vastly different. Gold investors who use ETFs, futures or commodity indices are automatically covered by anti-money laundering (AML) and counter-terrorist financing (CTF) regulations which are already “baked in” to processes in these markets. Even physical trading in jewelry, bars, coins etc. has seen a huge increase in regulatory scrutiny, globally, over the last few decades. In the US, professional jewelers and dealers must have an AML program implemented, and significant cash purchases or precious metal sales require additional reporting to the IRS on a transaction by transaction basis. In contrast, there is still very little clarity on how trading in cryptocurrencies could be made to comply with AML and CTF regulations, even in theory. This creates huge regulatory hurdles for professional investors wishing to enter these markets.
Second, there has been no discernible outflow of gold from ETFs. Indeed, total known gold ETF holdings recently reached their highest level since mid-2013 (currently up 12%YTD, see Exhibit 8). This is somewhat related to the first point, as mutual funds are the largest holders of gold ETFs, but even accounting for this there is no evidence of a mass exodus from gold.
Third, the market characteristics of gold and cryptocurrencies are vastly different. Mike Hinds and Mikhail Sprogis have previously looked in detail at how the physical and economic characteristics of bitcoin and gold differ. While bitcoin has a mathematically certain total supply, and gold has a finite (but less certain) supply in the earth’s crust, even a cursory examination shows very different market dynamics. We believe the composition of demand between bitcoin and gold is the key difference in the recent price action. In our view bitcoin is attracting more speculative inflows relative to gold.
Lastly, Currie goes on to at least tacitly suggest that Tyler Winklevoss may be getting way ahead of himself with the whole “gold disruptor” narrative. To wit, from Currie:
The net effect is that bitcoin has demonstrated much higher volatility and lower liquidity / price discovery compared to gold. The market cap of bitcoin is c.$275 billion versus gold at $8.3 trillion. Even all of the cryptocurrencies combined have a market cap less than $500 billion. While the lack of liquidity and increased volatility may keep bitcoin interesting, it is unlikely to convince investors looking for the kind of diversification and hedging benefits which gold has proven to possess over its long history.
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