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Bitcoin “Not a Suitable Investment” Says Goldman Sachs, Are They Right?

Bitcoin “Not a Suitable Investment” Says Goldman Sachs, Are They Right?

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There’s little more bitcoiners love than bankers bashing them. Goldman Sachs being the latest and this time in what can appear to be with a fairly convincing statement:

“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 say, referring to bitcoin as a security when it is classified as a commodity.

That’s an old argument and a fairly strong argument in regards to why you should be buying Goldman Sachs stocks, or stocks from companies they bring to market, instead of bitcoin from which they don’t quite profit.

The argument being stocks generate revenue through profits which they pass on to shareholders in dividends or buy-backs, and therefore you’re investing in an enterprise whose share price both funds and is derived from this usually productive economic activity.

That’s the fundamentals. The price of these abstract assets does of course have a very speculative element to it that can completely detach it from fundamentals in boom and bust cycles that occasionally see stocks crash 70% or more.

The Dotcom bubble saw Google’s share fall 90% for example in what can be called as a bears over-exuberance.

Nowadays it is the opposite. Completely blind bulls fully ignore all the anti-trust lawsuits that may have significant repercussions over Google’s profits arguably derived from monopolistic behavior.

Twitter is kind of at war with the president, for example, and yet pre-market data says it will rise by 0.5%.

When facts change and suddenly, you’d expect a rapid response from the market. The lack of it suggests real economic activity has far less to do with price than speculative elements.

There are countless of examples we can find from stocks where the price is completely detached from fundamentals because ultimately price depends on supply and demand.

The supply of Twitter is arguably infinite in as far as you can easily copy clone it and thus bankrupt Twitter corp same way Digg or Myspace went to the dust.

The demand of course is based on real factors, like user growth, but also on predictive or speculative elements that dismissively can be described as “whether someone else is willing to pay a higher price for it.”

A more correct description would be whether growth is likely to continue and thus whether demand will rise and thus price.

With Twitter now fairly mainstream in as far as even the president uses it, or Facebook, where is growth going to come from?

With everyone already having usually two or more iPhones, who is going to buy new ones?

And yet the price of these assets just rises. There won’t be any dollar dilution, Sachs says, perhaps speaking in relative terms because all other fiat money is also being diluted. A dilution that gives these assets an artificial price.

Including for bitcoin, although in different ways like for houses and other assets that do not fully respond to fundamentals because a key fundamental is the dollar dilution.

Another fundamental for bitcoin is demand which comes from utility like facilitating international trade. Instead of going through Goldman Sachs for example, you can just have the bitcoin network move value to the tune of billions.

Unlike with stocks where economic activity is indirectly reflected in the stock price through the company executives deciding how much to give in dividends or how much to buy back – after taking their own massive paychecks or even corruptly pocketing some of it or after deciding how much to store with Goldman Sachs – in bitcoin economic activity is directly reflected.

You don’t buy a share to have an iPhone. Thus in some ways the price of Apple shares and the sales of iPhones have nothing to do with each other because it’s a manual process where the ‘market’ decides whether they do or do not have much to do with each other, and if so how much.

You do however buy a bitcoin if you want to move or store value. Thus the price of bitcoin has no manual process, no third party if you like, no artificiality fundamentally speaking in as far as the economic activity is not manually injected by the board deciding how many stocks to buy back and when.

Obviously there are speculative elements and there can be manipulation as with Libor and other price manipulations that Goldman Sachs or other banks have been convicted of.

Yet if we analyze the nature of the asset, bitcoin’s appreciation or lack of it depends directly on real economic productivity and/or utility, while the price of stocks does so only indirectly.

Both have the speculative element of whether someone will pay more for it, but if bitcoin had only this element then it wouldn’t be so valuable decades on.

The Tulip bubble for example, which bankers love to mention, lasted for only one year from 1636 to 1637.

If bitcoin was an asset that depended on only some delusional belief that others will pay more for it, then we wouldn’t be speaking about bitcoin as it would have vanished in the 2011 ‘bubble’ when its price rose from cents to as much as $20 or so before crashing following a hack of the then main bitcoin exchange, MT Gox.

Had things been different, then if we had mentioned bitcoin at all we would have said after the hack people came out of this delusion with bitcoin becoming some story in a dusty library to replace the Tulip bubble one.

Yet bitcoin didn’t go anywhere because it found utility. That is people who wanted it not in the belief they can sell it higher to some fool, but because they wanted to use it.

People who didn’t care about what the price was or will be, but cared about what they can do with it, or learned how it can give them access to something, or it can perform something more easily, or cheaply. In short people who engaged in economic activity.

Goldman of course spues in their report all sorts of bad ‘economic’ activities, and of course there are those elements as there are with any other money or tool, but it is quite disingenuous and it does a significant dis-service to their clients to not mention the ‘good’ economic activity.

Bitcoin’s rising popularity in Venezuela, for example, is not a coincidence. Had burning Lebanon diversified from banks like Goldman Sachs then it might have been burning a bit less. In the continuing inflationary devastation of Argentina, arguing bitcoin is some fools gold would be very difficult because they can’t take their bitcoins, but they can take the fiat in their bank accounts.

Then there is what is developing more and thus explains why bitcoin is becoming more valuable. That being actual trade.

Finalizing a shipping deal from China for example or any other country is a lot quicker with bitcoin, about ten minutes for the payment, than with national money which may take weeks or months to transfer, if it is allowed to transfer at all.

As that is an obvious competitive advantage you’d expect banks to move to make such international transfers a lot quicker, but the nature of the banking system where you have correspondent banking and a lot of complication, means ten minutes to transfer $1 billion through the banking system probably won’t be on offer any time soon.

Naturally as bitcoin competes with Goldman Sachs in some ways, you’d expect them to be biased, but it is quite curious that now a decade on they are so simplistically biased because there are actual points that can be made in evaluating the asset.

One point can be that bitcoin doesn’t get propped up by the fed, while stocks do. That can make stocks more appealing as an investment, but while feeling a bit dirty about it for participating in this massive manipulation and wealth transfer from the poor to the rich, so you may make a value judgment to support bitcoin instead.

For traders that makes bitcoin more appealing because they don’t get called out from their position by Fed suddenly buying up tons of stocks, albeit indirectly and somewhat by hiding it in all sorts of bureaucratic language.

One can also say your money in banks or bonds is safer because they both are guaranteed by the American government, and thus the American economy. Yet that would reveal you receive nothing for others using your money, and nowadays you even legally get some of your money taken away in negative interest rates.

A stronger argument may well be that banks will try and close any competitive advantage bitcoin may have, thus reducing bitcoin’s utility, but that would require banks improving aspects which don’t necessarily serve their bottom line.

On the other hand a strong argument against stocks is that they are monopolistic by nature. You need about $10 million or more – much of it pocketed by Goldman Sachs – to have an Initial Public Offerings (IPO), that is to have your stocks in the stock market.

For that price you then access pension funds money and much else which gives you the resources to grow to a global mammoth that gradually becomes a monopolistic bureaucracy bossing customers and employees around (featured image relevant) without you having much say because only other global mammoths can really compete due to employees not quite having access to such money they can use to go on a venture unless they become effectively VC’s employees. From the frying pan, to the fire.

Changing this century old system through political means by pressuring for increased access to capitalism to all by allowing people to tap into these markets is proving to be very difficult. Yet with bitcoin you can see it in a way as an investment in the entire bitcoin economy which indirectly feeds into it as well as the actual real economic activity in value transfers and the like.

Thus with bitcoin one can well ask not how much someone else will pay for it, but what’s the price for freedom? $10,000 might sound cheap to plenty, or expensive to others, with the ones deciding being those that are using this freedom coin.

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