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Goldman Sachs predicts crypto drops while mulling custody solutions

Posted: 7 August 2018 11:37 am
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Goldman Sachs' simultaneously hot and cold relationship with cryptocurrency is par for course.

Goldman Sachs' relationship with cryptocurrency has been bipolar for a while. The bank's general view on cryptocurrency might be broken down as extremely sceptical, but willing to get into the space if it means better serving its customers.

The usual routine to date has been for Goldman Sachs to simultaneously predict dour turns for cryptocurrency, and offer bitcoin trading solutions for its interested clients. The same disparity is on show once again, with the bank simultaneously making dire cryptocurrency predictions and moving to offer a wider range of crypto services for clients.

"We expect further declines in [bitcoin and Ether prices] in the fuutre given our view that these cryptocurrencies do not fulfill any of the three traditional roles of a currency: they are neither a medium of exchange, nor a unit of measurement, nor a store of value... we believe that they garner far more traditional media and social media attention than is warranted," Goldman Sachs said in its atypical midyear market report (PDF).

At the same time, Bloomberg cites anonymous insiders to report that Goldman Sachs is also considering a plan to offer cryptocurrency custody solutions.

Fortunately, these disparate outlooks aren't mutually exclusive. Despite the lack of confirmation it's reasonable to expect Goldman Sachs to continue moving towards custody solutions and a wider range of cryptocurrency services, while remaining sceptical of cryptocurrency and continually predicting its collapse.

Sticking to the plan

In early May it was reported that Goldman Sachs was on the verge of getting into the bitcoin game by offering trading solutions in the form of contracts linked to bitcoin prices, rather than actually buying, selling or holding the "physical" cryptocurrency itself. The reason it gave for the move was straightforward client demand including inquiries from hedge funds, and foundations that received cryptocurrency donations from newly-minted bitcoin millionaires but had no idea how to best store, trade, sell or invest the stuff.

A lack of reliable custody solutions was almost certainly one of the reasons for offering bitcoin price-linked contracts rather than handling the coin itself, and reports at the time suggested that custody solutions were on the roadmap and would be coming in the near future. From a technical perspective, Goldman Sachs also has access to a lot of experience in the space through heavy investments in cryptocurrency companies such as Circle.

Regardless of Goldman Sachs' scepticism, its current and prospective clients have a real need for cryptocurrency solutions. Plus, all signs point at clear demand from institutional investors, especially as prices drop. In that respect, a pessimistic outlook on future price movements might be a solid reason to get into the game.

The midyear market report

Goldman Sachs' pessimistic outlook might not last though, and it isn't necessarily the most informed take either. Where it briefly touched on cryptocurrencies, the Goldman Sachs report had the usual hallmarks of a cursory take by experienced economists who don't know the space - a narrow focus on bitcoin and complete failure to differentiate between the functions of digital assets and money.

Which is perfectly fair. As the report says, cryptocurrencies only accounted for 0.3% of the global GDP as of midyear 2018 and there's an awful lot going on elsewhere. The report was mostly occupied by predictions of the impacts of tariffs, straining international relations, the global rise of populism and the unpredictability of the current US administration.

But these are also worth considering in the context of cryptocurrencies.

According to a GapGemini survey, more than half of the world's millionaires are at least somewhat interested in owning cryptocurrency, with over 70% of younger millionaires saying it was very important that they receive cryptocurrency advice from their wealth management firms, and those from less politically and economically stable areas being much keener.

On the whole US economists tend to see fiat currencies as reliable because of their government backing, while millions of people from less politically-stable regions see them as unreliable for the very same reason.

In an unpredictable environment cryptocurrencies are arguably a mathematically sensible portfolio addition to help mitigate risk. The Goldman Sachs report unintentionally said as much, happily noting that cryptocurrency declines are unlikely to affect the wider markets. In a similar way, wider market mishaps might be unlikely to hurt cryptocurrencies too badly.

Goldman Sachs analysts might not think too highly or deeply of cryptocurrency at the moment, but many of its clients are, and it aims to please.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, ADA

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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