Cryptocurrencies and other crypto assets have no shortage of doubters. Despite the rapidly rising Bitcoin and Ethereum price, over the past two years, Wall Street has continually bashed cryptocurrencies and warned investors to stay away.
However, despite these warnings, cryptocurrencies have become a hot investment around the world, and the price of Bitcoin, as well as its lesser peer Ethereum, has become a front page news story on more than one occasion.
Unfortunately, for Bitcoin’s most prominent supporters, the crypto story has started to unravel this year. The Ethereum price has plunged over the past week from a high of $1,372 on January 13, to $946 at pixel time. The cost of Bitcoin has fallen from a high of $19,000 in mid-December to less than $10,000 today.
Bitcoin‘s volatility is its Achilles heel. As supports have tried to build infrastructure around cryptocurrencies, wild price swings have hampered these efforts. Also, the lack of regulation (a selling point) is causing regulators and authorities to hold back Bitcoin-based products. This was one of the reasons cited by the Securities and Exchange Commission as reasons why it was unlikely to approve an exchange-traded fund related to bitcoin soon.
In an open letter, the regulator posed five questions to Bitcoin proponents, which it requires answers to before it can approve any cryptocurrency based fund:
“We are not aware of a custodian currently providing fund custodial services for cryptocurrencies. In addition, how would a fund intend to validate existence, exclusive ownership and software functionality of private cryptocurrency keys and other ownership records? To what extent would cybersecurity threats or the potential for hacks on digital wallets impact the safekeeping of fund assets…” — SEC Letter.
According to a new report from Goldman Sachs’ investment management division, there is “no doubt” that the cryptocurrency’s astronomical rise over the past year “has pushed it into bubble territory.”
This isn’t the first time a Wall Street institution has called Bitcoin a bubble, but this damning indictment comes at a time when many investors are questioning if the cryptocurrency will even return to its previous highs.
Ethereum Price: A bigger bubble than Bitcoin
Goldman’s analysts note that “meteoric rise in a short time has dwarfed the rise seen during the dot-com bubble.” In fact, the bubble dwarfs anything ever seen before. “We also believe that cryptocurrencies have moved beyond bubble levels in financial markets, and even beyond the levels seen during the Dutch ‘tulipmania’ between 1634 and early 1637” the report continues.
As shown in the chart below, the Ethereum price has put in a similar bubble-busing performance:
Goldman’s criticism of Bitcoin does not stop at the price. The report from the bank goes on to say that while blockchain (the technology underpinning the cryptocurrency) has the potential to change the world, Bitcoin does display any similar traits:
“We think that the concept of a digital currency that leverages blockchain technology is viable given the benefits it could provide: ease of execution globally, lower transaction costs, reduction of corruption since all transactions could be traced, safety of ownership, and so on. But Bitcoin does not provide any of these key advantages. Quite the contrary. Not only is there no ease of execution, but settlement often takes as many as 10 days. In late 2017, the price discrepancies among 17 US exchanges for one Bitcoin amounted to $4,156, or about 31% difference between the high and low prices.”
Goldman’s investment management division does not like Bitcoin, and they think that Ethereum could be even worse. The Ethereum price was trading around $10 a year ago, at $943 today. As shown in the charts above, when compared to all other assets bubbles, including Bitcoin, Ethereum’s price surge has been nothing short of astonishing.
Over the long-term, Goldman is unconvinced that this will continue. “While we do not know if Bitcoin or any other cryptocurrency will double or triple from prevailing prices” the report opines, “we do not believe that these cryptocurrencies will retain their value in the long run.”
Not a replacement for the dollar
One of the main bull arguments for Bitcoin and its peers is that cryptocurrencies could one day replace the US dollar as the global reserve currency of choice. With so much friction in the transaction process, Goldman sees this as unlikely. “Since the GFC” the report notes, “many pundits have put forth arguments about the end of the US dollar.” However, despite their global appeal “we view the unsteady cryptocurrencies as no match for the ‘Steady as She Goes’ dollar” the report concludes.