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Are Most Cryptocurrencies Headed for Zero? Goldman Sachs Believes So

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Extreme volatility, high correlation and a lack of intrinsic value all spell trouble for the cryptocurrency market, according to Goldman Sachs. In a carefully worded research note on Wednesday, the Wall Street behemoth warned that most of the world’s 1,500+ cryptocurrencies were headed for zero.

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Grim Future for Most Coins

Investors should expect the vast majority of cryptocurrencies to fall to zero, with only a small handful dominating the market, Goldman analyst Steve Strongin said in a Feb. 5 report. Although Strongin didn’t speculate about a timeframe, he said massive price swings in the digital asset class are a clear sign the market is in a bubble.

“The high correlation between the different cryptocurrencies worries me,” the analyst said, according to Bloomberg. “Because of the lack of intrinsic value, the currencies that don’t survive will most likely trade to zero.”

The cryptocurrency markets have experienced a chaotic selloff this week, with the total market cap falling some $550 billion from its peak.

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In the research note, Strongin added the following:

“Are any of today’s cryptocurrencies going to be an Amazon or a Google, or will they end up like many of the now-defunct search engines? Just because we are in a speculative bubble does not mean current prices can’t increase for a handful of survivors. At the same time, it probably does mean that most, if not all, will never see their recent peaks again.”

Strongin’s firm has  expressed keen interest in cryptocurrencies. Goldman is expected to launch its own bitcoin trading desk as early as June, making it the first Wall Street bank to make markets in the highly controversial asset class.

Paradigm Shift

The views expressed by Goldman are in line with previous comments made by Vitalik Biturin, the founder of Ethereum. About four months ago, Buterin told a crowd at ETHWaterloo that 90% of initial coin offerings (ICOs) built on the ether protocol will fail. This paradigm, referred by Buterin as “Tokens 1.0,” could experience a cataclysmic end before the market transitions to higher quality projects. This era is referred to as “Tokens 2.0,” and could be here sooner than most realize.

Whereas Tokens 1.0 was characterized by hasty projects, bad ideas and even scams, the second generation of token sales will build off the previous era’s mistakes. Buterin said he believes this market will begin mobilizing as early as this year. That could be just in time for his new DAICO fundraising model, which combines the current ICO template with a Decentralized Autonomous Organization. DAOs rely on smart contracts to implement rules, a feature that many believe will be an integral part of future crowdraises.

Buterin’s outlook is clear: cryptocurrencies will need to evolve to remain feasible both as an investment asset and unit of transaction. It is the latter that presents the biggest challenge.

That being said, the era of Tokens 1.0 is still generating record revenues, with recent data showing $1.2 billion flowing into ICOs during the month of January.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 403 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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2 Comments

2 Comments

  1. ridge195

    February 8, 2018 at 4:17 am

    So all the ones that don’t succeed will fail. Except no time frame so that could be 10 years from now. Thanks Goldman. Your research is mind blowing.

  2. ronaldo18

    February 8, 2018 at 11:17 am

    Yeah actually no info. I suppose Sam has no idea either, since he gives us no hint.

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Opinion

How Monetary Goods Compare: Bitcoin, Gold and the U.S. Dollar

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One of the most common arguments against the value of cryptocurrencies, and monetary ones like bitcoin in particular, is how they compare to current assets. Gold and the U.S. dollar are the two counter-examples which get used the most, which is why it can be helpful to compare each of their attributes to figure out where each one shines.

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Monetary goods can be compared on a few different terms. Gold was the original “money,” but we presently use fiat currency, and are talking about the bitcoin as being the future of monetary assets.

Scarcity and Verifiability

The first thing that needs to be compared is whether they are scarce or not. In this regard, fiat currency is actually the least scarce. The last few decades have seen many politicians print more money to create short-term solutions, but this means the scarcity is almost non-existent.

Gold fares better, as there is a limited amount available at any time, but if there were any innovations in mining technology, the supply could increase immediately. Bitcoin is actually the most scarce (despite what detractors might say) because there will only ever be 21 million bitcoins and the schedule of their mining is relatively fixed.

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In terms of verifiability, bitcoin also beats both gold and fiat currency. Counterfeits of both exist, but there are no passable counterfeits for bitcoin. In terms of durability, gold triumphs over all since it is relatively robust, but fiat can be destroyed quite easily. Bitcoin falls in the middle, as it can be destroyed if the network is destroyed or the private keys are lost.

Portability

This plays in a bit with being scarce and verifiable, but is most of all about the ability to cross borders with the coin or send money all the way across the world. It is hard to argue that gold or fiat currency are easier to do either of these with.

The capital controls and government regulations present in the world make it very hard to send fiat currency to other countries. However, with cryptocurrency, you can just put the money on a USB drive and go anywhere.

Censorship Resistance

One of the key factors that makes bitcoin so powerful is its inability to be censored or controlled. The First Amendment is all about free speech and the right to say what you want, and there needs to be a corresponding right that applies to currencies. Being able to fund what you wish without gaining the permission of another entity is what makes the network so valuable.

The presence of gatekeepers in the fiat system is a lot of what has created such strong demand for a censorship resistant currency. Governments have outlawed certain uses of currency (e.g. illicit drugs or sex trafficking), which is clearly a good for the world. But at the same time, if one was trying to flee China, it would not be possible to do so while maintaining a hold on all their fiat currency. This is where the opportunity for bitcoin begins.

Understanding Monetization

Now that we’ve compared these goods on several different dimensions, we can see that bitcoin has merit compared to gold or USD in some respects. The only thing that it lacks is an established history, having been created in 2009. This is important because it enables the path from inception to widespread use. which is referred to as monetization. The process can take a long time, but there are a few things we can expect.

The prices will naturally continue to go up above the intrinsic value of the good, as a monetary premium is necessary. Monetary premiums are the difference between the market value and intrinsic value of a cryptocurrency. A dollar is worth far more than the paper it is printed on and the utility of a bar of gold is less than 10% of its current market value.

The increases in price are expected, since each monetary good must rise above its intrinsic value to a market derived value. Bubbles are a standard part of the monetization process, which is counter-intuitive to what we’ve heard so far. This can look like a bubble to doubters, but it is only a bubble if it pops. If it doesn’t it is just the market searching for an appropriate monetary premium for the cryptocurrency. In the end, there is no objectively correct monetary good in the world and network effects and evangelization are key.

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Opinion

The Principles of Money and How You Should Think of Bitcoin

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To really understand bitcoin and what it aims to do, you need to understand what money is. The two terms that get thrown around a lot in regards to whether bitcoin or any other digital currency is a good investment are “medium of transfer” and “store of value”. These are important components of monetary assets, but aren’t the end of the conversation.

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What Makes a Monetary Good

There are three main purposes you need to think of when you determine how useful a monetary good is: medium of exchange, store of value and unit of account.

Store of value means that users are comfortable storing their wealth in terms of that monetary good. This is generally a sign of stability and trust in the long-term value of the monetary good.

Next, you have medium of transfer, which is basically a “cash” use case. Everyone is willing to transfer value to each other by using the asset. They might not necessarily hold this for long, but it is widely used enough that you can trust in its usefulness.

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The less heard of quality for a currency to have is being a unit of account. This means that people value their goods in terms of that particular currency. If you were to ask someone how much something costs, chances are they would quote the value in terms of their local currency. That makes the local currency the unit of account.

Right now, bitcoin is not a unit of account because there is no set bitcoin price a good would be sold in. Instead, you have values quoted based on the current BTC/USD exchange rate, which is very different.

The Path of Monetary Evolution

It can take decades for a good to go through the full evolution of its use as a monetary good, and that use can change with shifts in the economy. For example, gold would have been used for all three purposes, but is now only used as a store of value. Similarly, PayPal captured the medium of transfer use case, but never developed a meaningful solution to become a unit of account or store of value.

So where is bitcoin now? Based on the way it is being traded, it is mostly a store of value. In the beginning, there were lots of situations where users would spend bitcoin on trivial objects, but now with the meme “HODL” and the number of rabid bitcoin supporters, it is mostly a long-term investment.

This is the standard path a new monetary good takes. Nobody would want to use it as a medium of transfer because the value is fluctuating so much that it is infeasible for daily use. Until the equilibrium amount of demand for the good comes online and the price somewhat stabilizes, it is unlikely to become a medium of transfer. The same applies to unit of account, as mentioned above.

No Defined Outcome

A common gripe against bitcoin is that it is not a useful currency because it does not fulfill the store of value condition, but this ignores the shortcomings of fiat currency. Nobody holds more than a small proportion of their net worth in fiat, because it is not a good store of value. Inflation is constantly eroding the value of the currency and that is its core weakness.

Additionally, when you look at unstable countries, such as Argentina, there are multiple monetary assets in use. They use the Argentinian peso as a medium of transfer, but opt for the US dollar as a store of value.

So there is no defined outcome for bitcoin’s evolution. It doesn’t have to fulfill all the use cases for it to be useful, it just has to be better than our current options for a use case.

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Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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Opinion

Institutional Interest in Cryptocurrency Is Rising, and It Is Not Surprising

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The multi-week rally in cryptocurrencies has not gone unnoticed by the world’s major financial institutions. According to a recent survey conducted by Thompson Reuters, one in five traditional financiers is considering cryptocurrency trading as early as this year.

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A Compelling Study

In a survey of more than 400 financial firms, researchers at Thompson Reuters concluded that institutional trading of cryptocurrencies could rise substantially this year. Among those that indicated a willingness to trade digital assets, 70% are planning to do so in the next three-to-six months. An additional 22% is planning to enter the market between six and 12 months from now.

The survey provides actual figures on a phenomenon we’ve observed since the cryptocurrency market bull rally began – namely, that banks are closely examining client interest in the digital asset class to determine an appropriate entry point. Some are farther along than others, such as hedge funds already trading cryptos and Goldman Sachs, which is already building its digital asset division.

Interest is likely to rise further as cryptocurrencies appreciate in value. The market peaked at $437.4 billion on Tuesday, a gain of nearly $190 billion from the Apr. 6 swing low. At current levels, the cryptocurrency market is at roughly half of its all-time high.

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Changing the Conversation

The results of the survey also challenge the underlying assumption that banks are only interested in blockchain and not the currencies that run on them. While this may have been true 12 months ago, cryptocurrencies have emerged as a viable asset class that provide alternatives to the current system.

However, opponents of cryptocurrency still get hung up on arguments over the intrinsic value of digital assets. They often invoke rhetorical questions like what’s bitcoin actually worth?  Of course, the same question can be directed at fiat currency, whose authority rests with the state but whose value depreciates almost yearly due to inflation.

That’s the conclusion researchers at the Federal Reserve Bank of St. Louis reached three months ago in a primer on cryptocurrencies. In addition to arguing that bitcoin “could over time assume a similar role as gold,” researchers Aleksander Berentsen and Fabian Schar reminded readers that “state monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either.”

While bitcoin’s short history has been filled with wild swings, the history of “state monopoly currencies” isn’t much different when taken as a whole. (An extreme yet true example: Zimbabwe’s national currency got inflated out of existence a few years ago.) As we’ve seen repeatedly throughout history, states can’t always convince the public that their currency is worth more than the paper or cotton it is printed on.

“This is why decentralized cryptocurrencies are a welcome addition to the existing currency system,” the researchers said.

The findings of the Reuters survey may not amount to much in the grand scheme of things, but in the meantime do provide a new starting point for how we debate institutional interest in cryptocurrency.

Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.5 stars on average, based on 403 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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