Goldman Sachs Had an Embarrassingly Bad Take on Bitcoin
On a May 27 video call discussing the U.S. economic outlook, Goldman Sachs tried to dismiss cryptocurrencies in general, and Bitcoin in particular.
The Goldman powerpoint slide, which made the rounds on Twitter, was titled, “Cryptocurrencies Including Bitcoin Are Not an Asset Class.”
The whole thing was deeply embarrassing — for Goldman Sachs.
In fact, the power point bullets advanced against Bitcoin (and crypto) were so lame, they almost seemed like a joke, or a high schooler’s effort to rush through an assignment on the morning it was due.
The venture capitalist Peter Thiel has a useful term, “steelmanning.”
A steel man argument is the opposite of a straw man argument. When you set up a straw man, you create a weak version of an argument that can be easily knocked down.
With steelmanning, in contrast, you lay out the strongest version of the opposing argument you can find — creating a “steel man” instead of a “straw man” — so that bringing it down really means something.
In its haughty dismissal, Goldman Sachs did not try to steelman the cryptocurrency case. Instead, they set up a row of straw men so weak a gust of wind could have blown them over.
We can have some fun dissecting Goldman’s folly, though, so let’s take a look. The following bullets, and title, were taken from the slide:
“Cryptocurrencies including Bitcoin are not an asset class.”
- 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 their 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
- 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.
- We also believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale.
The problem begins with the slide title: Of course cryptocurrencies are an asset class.
Calling something an asset class does not imply special value or status. It is just a descriptive term that is useful because it means something. Investopedia defines it like this:
“An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace.”
Does that description apply to cryptocurrency? Obviously it does, on multiple fronts.
Cryptocurrencies are by-and-large traded on the same venues (cryptocurrency exchanges). They are transferred using the same technology channels (like crypto wallets). They have comparable tax treatment. Their use cases vary widely, but most crypto assets have sibling-like similarities across a spectrum. They run on blockchains. They share a family tree. And so it goes.
Again, calling something an asset class does not imply endorsement. But for Goldman to start off by denying crypto’s asset-class status is simultaneously petty and silly.
It suggests the creator of the slide doesn’t understand what an asset class is, or doesn’t care, and thus begins from a position of ignorance.
Next the slide notes that cryptocurrencies “do not generate cash flow like bonds.”
First, technically speaking, this is false. There are, in fact, cryptocurrencies that provide yield when held in crypto wallets, just as some stock investments provide dividend yields (while others do not). There are also ways to earn a yield on crypto holdings via activities like staking or mining. So the first bullet is a howler in that it is flat-out wrong.
But then, even if it were true that cryptocurrencies “do not generate cash flow like bonds,” so what? Why would that take away from their asset-class status, or their desirability as investments?
Commodities are an asset class, and yet commodities do not “generate cash flow like bonds.” A commodity can also be an excellent investment under the right circumstances. Real estate is an asset class. Some forms of real estate generate cash flow, but other forms of real estate do not.
Next, Goldman says cryptocurrencies “Do not generate any earnings through exposure to global economic growth.” This is another falsehood.
As mentioned, there are cryptocurrencies that provide yield as well as price appreciation, where the holder receives a stream of dividend tokens in line with a fixed formula.
There are also many ways in which crypto assets participate in global growth. Not only that, some cryptocurrencies are almost entirely focused on global growth via their use case and design, in the sense of facilitating global growth even while benefiting from it — like the crypto assets aimed at smoothing the path of commerce in developing countries, for example.
Whoever made that slide seems to know almost nothing about the actual cryptocurrency space. Next, the slide says cryptocurrencies “do not provide consistent diversification benefits given their unstable correlations.”
What does that even mean?
Or rather, we know what it is roughly supposed to mean, but touting “diversification benefits via stable correlations” sounds like academic jargon-speak, not a useful rationale for actually investing in something. If an institutional asset salesman tells a pension board they should invest in XYZ fund for the sake of “diversification benefits via stable correlations,” they should probably say no.
Moving on, Goldman notes archly that Bitcoin fell 37% in one day on March 12, 2020 — while conveniently leaving out the fact that virtually all liquid-asset markets were in a state of meltdown at that point, and that markets in general experienced a kind of “global margin call” in March 2020 due to a pandemic-induced liquidity shock that destabilized the entire financial system.
That March liquidity shock was kind of a big deal, as one could tell by noting the Federal Reserve stepped in with a promise of “unlimited” bond purchases, expanding its balance sheet obligations by trillions almost overnight.
Then, too, in that same time window, the S&P 500 — which has a market cap in the tens of trillions — was in the process of falling 27% in a matter of 15 trading days.
All told, picking on Bitcoin’s volatility in the middle of a genuine liquidity shock, when roiling seas of global volatility slammed asset pools hundreds of times its size, seems a bit ridiculous.
But in terms of bad arguments, Goldman Sachs saved the worst for last.
When the slide says Bitcoin does “not show evidence of hedging inflation,” they likely mean the kind of spreadsheet-based evidence that comes in the form of academically approved correlation studies going back decades — which would be hard to provide for a 10-year-old asset.
In terms of logic-based evidence, though, we can rate Bitcoin as a high-quality inflation hedge based on the suite of durable advantages it has.
These advantages are shared by no other asset in history, other than gold — and Bitcoin has edges on physical gold to boot. We laid much of this out in our explanation why Bitcoin is the purest form of “hard money” ever created.
Goldman’s last two bullets don’t even count as real criticism. They are simply ad hominem, an “attack against the man” — or an attack against the asset, if you will.
When Goldman says, “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 are all but nakedly stating Bitcoin is a ponzi scheme.
But again, this is ridiculous, because all kinds of assets are purchased with the goal of selling them at a higher price later, including all stock investments that don’t involve a dividend yield.
We get that Goldman Sachs is attempting to imply something else — that as with a traditional ponzi scheme, the only purpose of buying Bitcoin would be assuming some “greater fool” will then buy it.
But again, the “greater fool” theory is laid low by the simple fact that Bitcoin is viewed as digital gold.
As a sovereign asset that is digital, immutable, and global, there is ample reason to see Bitcoin as a powerful store of value, which in turn qualifies it as a “forever” asset — a core holding that it is possible to hold and never sell, ever.
Goldman did not attempt to address any of these “store of value” arguments — they just tried to pretend the arguments don’t exist. Which is kind of ridiculous, in a way, because nearly all serious investors at this point have at least a passing familiarity with the Bitcoin “digital gold” base case. It is one thing to dismiss that base case or find flaws in it, and another thing to pretend it isn’t there.
Finally, Goldman finished with a parting shot that is pure snark: “We also believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale.”
There are multiple billionaires and high-end institutions, including top-tier venture capital firms and world-class macro hedge funds, who have taken substantial positions in Bitcoin, with an aim to hold for the long-term in line with the “digital gold” use case, or who have otherwise invested in various cryptocurrencies, again with a long-term view.
This has nothing to do with volatility-related trading appeal — though it should be noted that Bitcoin’s volatility goes hand in hand with being one of the best-performing assets ever, with 10X-100X yet to go in our view. (When Bitcoin finally stabilizes as a globally held asset with a multi-trillion market cap, the window of upside price appreciation will be gone.)
All in all, a grossly disappointing showing from Goldman. Whoever built that slide deck should stick with their day job — which clearly isn’t related to macroeconomics or cryptocurrency.