Goldman Sachs Advises Against BTC?

28 May 2020 by rate3

Goldman Sachs' 'Cryptocurrencies including Bitcoin are not an assets class' slide, taken from a deck shared with an GS internal call participants a couple of days ago, has produced so much commotion within our ranks that, despite its hype nature, I couldn't resist to add my two satoshis to this noise.

So, here are five arguments, which attributed to GS analysts (cited as listed in the availably copy of GS presentation's one slide):

"Do Not Generate Cash Flow Like Bonds";

"Do Not Generate Any Earnings Through Exposure To Global Economic Growth";

"Do Not Provide Consistent Diversification Benefits Given Its Unstable Correlations";

"Do Not Dampen Volatility Given Historical Volatility Of 76%

- On March 12, 2020, the price of Bitcoin fell 37% in one day";

"Do Not Show Evidence of Hedging Inflation".

First, lets us have a look at some popular definitions of what is an 'assets' and what is an 'asset class'.

Extract (wiki): 'In financial accounting, an asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset.'

Extract (wiki): "In finance, an asset class is a group of financial instruments which have similar financial characteristics and behave similarly in the marketplace."

Extract (Investopedia): "An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Equities (stocks), fixed Income (bonds), cash and cash equivalents, real estate, commodities, futures, and other financial derivatives are examples of asset classes."

As we can see, an 'asset' (as an apposite to a 'liability') is, primary, an accounting term and everything, which we can assign (as producing a 'positive economic value') to a 'left side' of our balance sheet statement is an asset by definition. An 'assets class' is, of course, just a grouping of similar assets.

I do not think that GS analysts are unfamiliar with those trivia. Imho, what they intended to communicate to their clients in this infamous presentation is, simply, that 'Cryptocurrencies including Bitcoin are not an assets class according to GS's balance sheet'.

GS own list of assets classes (taken from their site) contains the following: Bank Loans, Hedge Funds, US Aggregate Bonds, Cash, High Yield, US Large Cap Equity, Commodities, International Equity, US Municipal, Emerging Market Debt, International Real Estate, US Real Estate, Emerging Market Equity, International Small Cap Equity, US Small Cap Equity.

Obviously, there are so many more assets in this world (including cryptocurrencies), which can be added to this list (for example, what about 'EU Bonds'?). That GS handlers have decided to not extend their internal, limited classification of 'asset classes' shouldn't at all cause so much of emotional reaction from our part.

As to their 'why' argumentations we shall consider it contextually.

"Do Not Generate Cash Flow Like Bonds": yes, some tokens / coins do generate cash flow (staking etc) but absolutely not like 'US Aggregate Bonds' or 'US Municipal' (those have much more consistent history than cryptocurrencies of producing stable returns);

"Do Not Generate Any Earnings Through Exposure To Global Economic Growth": yes, sure, some cryptocurrencies, issued outside of US, produce some earnings, but, certainly, not like GS' 'International Real Estate';

"Do Not Provide Consistent Diversification Benefits Given Its Unstable Correlations": well, although non of GS' own internal assets classes can be deemed uncorrelated with the rest, that shall not prevent GS analysts from believing that cryptocurrencies are also correlated with the global markets. Btw, after March 12 many among us have also started to express their doubts on this regard;

"Do Not Dampen Volatility Given Historical Volatility Of 76%": its true;

"Do Not Show Evidence of Hedging Inflation": it obviously depends on GS portfolio's life-time. If GS analysts mean that the great bulk of GS clients crypto-holdings (if any) is dated back to January 2018 - then, yes, as of May 28, 2020 those 'bags' have depreciated almost 50%, and turned to be not the appropriate hedge strategy :)

Overall, although GS analysts perspectives on cryptocurrencies are absolutely not sympathetic with my owns, I believe that we need to be more factually objective in our attempts to publicly discredit this grossly outdated and inherently corrupt banking system.