Goldman Sachs Caves: Bitcoin Is Money

Bitcoin is a bubble.

Bitcoin is for criminals.

Bitcoin is penny candy and should be worth just about as much.

Call it what you want, those are — or were — the consensus views over at JPMorgan and Goldman Sachs for much of 2017. Jaime Dimon, JPM’s CEO, famously said Bitcoin was basically for corrupt money launderers and drug dealers.  Yesterday, Dimon said he regrets calling bitcoin a fraud.  (JPM will try to position itself as a future clearinghouse of sorts for cryptocurrency. Wait for it. Goldman is already setting up a trading desk. This is too legit to quit.)

On Wednesday, Goldman weighed in on the bitcoin debate with a nine-page report to clients titled “Bitcoin as Money.” They’ve caved. Cryptocurrency, with bitcoin at the helm, is going to be even bigger this year than it was in 2017. That doesn’t mean everyone is going to get rich on it. But what it means is, now that the bulge bracket banks are taking it seriously, a rules-based system is likely at least for bitcoin and trading in bitcoin. More companies will allow bitcoin as a form of payment. Expedia already allows users to make travel arrangements in bitcoin.

Can bitcoin succeed as a form of money?

“In theory, yes,” Goldman economists led by Zach Pandl in New York published today.  For them, if Bitcoin is capable of facilitating transactions at a low cost or can provide better risk-adjusted returns for portfolios, then it is as good as money.

The currencies of most developed market economies already deliver these services. Why book a flight to Seattle in Bitcoin when you can just put it on your credit card? If Bitcoin prices are rising, then customers are spending less for the flight than they would if they were paying in dollars. Problem is, these transactions are not always seamless. Even Expedia warns of this on their website.

Bitcoin as a method of payment is more likely to be used in emerging markets. You can buy real estate in Dubai with Bitcoin.

Should the blockchain technologies that are the backbone of the crypto world finally go mainstream, as seems likely, then bitcoin (and cryptocurrencies more generally) “may offer viable alternatives in countries and corners of the financial system where the traditional services of money are inadequately supplied,” Goldman authors wrote.

Since the 2008 financial crisis, the dollar has lived a double life. To some, the dollar was dying. To others, the dollar was killing their currencies in a currency war they could not win. The ups and downs were nothing like bitcoin, which was worth just $15 in 2012 and now costs around $14,000 for one Bitcoin.  Everyone knows more or less what they can expect from the dollar, as they can from the euro and the yen. For sure, the dollar will not be worth $100 euros come summertime. And for this reason, the dollar has served its purpose relatively well: consumer price inflation has averaged 2.1% over the last 30 years, and the real trade-weighted exchange rate is about 3% above its average of the same period, Goldman Sachs economists wrote.

The dollar accounts for about 65% of global foreign exchange reserves and is the dominant currency in global trade — about 30% of global trade flows excluding the U.S. are invoiced in dollars. For multinationals and state-controlled companies buying and selling goods across borders, the dollar is still king. Demand for it is always high. 

The same cannot be said for Russian rubles and Brazilian reals. In certain parts of the world, and at points throughout history, currencies have evaporated or lost half their value. In the late ’90s and early 2000s, Brazil was learning to use an entirely new currency.  In the year 2000, Ecuador simply gave up on its basket case currency, the sucre, and adopted the dollar. The economy is completely dollarized now.

But if there was such a thing as cryptocurrency back then, they might have come up with a similar plan like the one being tossed around by Nicolas Maduro, the president of Venezuela. Maduro wants his country to bypass the dollar and launch a cryptocurrency backed by oil reserves. His congress called the “petro” coin illegal on Tuesday. We will see where that goes, as Venezuela’s congress has almost no muscle…

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