Cryptocurrency a bubble, values could fall to zero: Goldman Sachs

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08 February 2018

Most cryptocurrencies are likely to fail with their value falling to zero, Goldman Sachs said in a note, comparing the current market to the "internet bubble of the late 1990s".

 
Steve Strongin  

Steve Strongin, head of Goldman Sachs global investment research, said in the note dated Monday that cryptocurrencies don't have "intrinsic value" and that it is "unlikely" that any of today's digital currencies will survive in the long run.

The tumble in cryptocurrencies that erased nearly $500 billion of market value over the past month could get a lot worse.

Most digital currencies are unlikely to survive in their current form, and investors should prepare for these "coins" to lose all their value as they're replaced by a small set of future competitors, Strongin said.

While he didn't posit a timeframe for losses in existing coins, he said recent price swings indicated a bubble and that the tendency for different tokens to move in lockstep wasn't rational for a ''few-winners-take-most'' market.

''The high correlation between the different cryptocurrencies worries me,'' Strongin said. ''Because of the lack of intrinsic value, the currencies that don't survive will most likely trade to zero.

"People seem to be trading cryptocurrencies as though they're all going to survive, or at least maintain their value. Contrary to what one would expect in a rational market, new

currencies don't seem to reduce the value of old currencies; they all seem to move as a single asset class," he said.

"But if you believe this is a 'few winners take most' situation, then the potential for retirement depreciation should be taken into account. And because of the lack of intrinsic value, the

currencies that don't survive will most likely trade to zero."

The Goldman research note comes after a violent sell-off in the cryptocurrency market over the past few days, which at its lowest point on Tuesday, saw over $550 billion of value wiped

off the market. Bitcoin even dipped below $6,000 for the first time since November.

Today's digital coins lack long-term staying power because of slow transaction times, security challenges and high maintenance costs, according to Strongin. He said the introduction

of regulated Bitcoin futures hasn't addressed those concerns and he dismissed the idea of a first-mover advantage - noting that few of Internet bubble's high fliers survived after the late 1990s.

''Are any of today's cryptocurrencies going to be an Amazon or a Google, or will they end up like many of the now-defunct search engines? Just because we are in a speculative

bubble does not mean current prices can't increase for a handful of survivors,'' Strongin said. ''At the same time, it probably does mean that most, if not all, will never see their recent peaks again.''

Strongin called the current period of cryptocurrencies an experiment and compared it to the internet bubble of the late 1990s. He said that very few companies that existed then went on

to become even more valuable. Both Google and Amazon did but in a "completely different form", he added.

On a more positive note, Strongin said, ''Just because we are in a speculative bubble does not mean current prices can't increase for a handful of survivors. At the same time, it

probably does mean that most, if not all, will never see their recent peaks again."

Goldman's head of investment research Strongin was more upbeat about the blockchain technology that underlies digital currencies, saying it could help improve financial ledgers. But

even there he sounded a note of caution, arguing that current technology doesn't yet offer the speed required for market transactions.

Goldman has previously poured cold water on cryptocurrencies as an investment. In October, the investment bank released a note saying that bitcoin is not the new gold.

Other commentators have also cautioned on cryptocurrencies. Noted economist Nouriel Roubini, also known as "Dr Doom," said on Tuesday that he thinks the price of bitcoin would

crash to zero. And legendary investor Warren Buffett told CNBC in a recent interview that cryptocurrencies will "come to a bad ending."

Cryptocurrencies rebounded on Wednesday though many were still off their all-time highs. Still, according to CNBC, experts said the cryptocurrency market as a whole could hit $1 trillion this year.





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