Goldman Sachs, without taking a strong position on the future of Bitcoin, released a discussion paper that acknowledges that we are “in the first innings of a shift to natively digital transactions,” report John Biggs and Jonathon Shieber for TechCrunch. While the Goldman paper doesn’t advocate holding Bitcoins for value, it notes that there is a growing financial ecosystem growing up around Bitcoin and other digital currencies, and investors can increase exposure by getting involved in companies that offer related services.
Hard to separate Bitcoin hype from fundamentals
Bitcoin’s value is based largely on speculation right now, and high volatility is the rule rather than the exception. The stock price has soared at times, but will then lose a large percentage of its value in minutes or hours – the infamous flash crash – sometimes without any obvious catalyst.
There's a gold rush coming as electric vehicle manufacturers fight for market share, proclaimed David Einhorn at this year's 2021 Sohn Investment Conference. Check out our coverage of the 2021 Sohn Investment Conference here. Q1 2021 hedge fund letters, conferences and more SORRY! This content is exclusively for paying members. SIGN UP HERE If you Read More
“2013 was the year when Bitcoin became a mainstay in mass media, to the extent that it has become hard to separate the effect of hype surrounding the currency from its fundamentals,” says the Goldman paper.
Bitcoin is also less liquid than the name currency would suggest, and there is no derivative market available for hedging investments. More online stores are starting to accept Bitcoin (Overstock.com is one of the few big names), and real world ATMs are opening, but Bitcoins are still limited in their use as a source of payment. Merchants who would like to accept Bitcoins are faced with the difficult choice between selling goods for an effectively uncertain price, or immediately exchanging Bitcoins for fiat currency, paying regular fees, and reducing margins in what can already be a very competitive market.
Value-added services are a key Bitcoin investment strategy
If Bitcoin, or some other digital currency, becomes more widely accepted and merchants are able to both accept Bitcoin as payment and then use it to pay their own costs, the value of Bitcoin will likely become more stable as it will relate to actual goods and services instead of being an almost purely speculative asset. When this happens, the companies that handle transactions and manage Bitcoin Wallets will have the potential for strong growth.
“Positioning investments in the companies striving to provide value-add services around cryptocurrencies will be key to participating in this cycle of value creation,” says the paper.
The Goldman paper also mentions the possibility of getting involved in Bitcoin mining, but with so much computational power already being thrown at this problem, anyone with the resources and computing power to compete probably has other interesting investment opportunities open to them.