You know the banks are scared when they start backing gold.
It was only a month ago that the top brass at JPMorgan Chase, CEO Jamie Dimon, was telling the markets that he wouldn’t tolerate any of his traders buying bitcoin, saying: ‘If we had a trader who traded bitcoin, I’d fire him in a second for two reasons. One, it’s against our rules. Two, it’s stupid.’
Dimon likened bitcoin’s rapid rise to the Dutch tulip mania of the 17th century. He frames the crypto’s rise as fraudulent. He was quoted last month as saying: ‘It won’t end well. Someone is going to get killed.’
That’s a tad dramatic. But, unsurprisingly, the price of bitcoin tumbled after his statements.
Yet that was a month ago. The price of bitcoin did fall around US$200, to US$3,858, on the back of Dimon’s comments.
Clearly, though, that hasn’t hurt the price of bitcoin. Five weeks on from Dimon calling the cryptocurrency a fraud, bitcoin has climbed to US$6,098(AU$7,930) as at this morning.
But one thing banks and research firms can’t stand is to be left behind.
Hot on the heels of Dimon shouting down bitcoin’s role in the economy, another bank has come out to say that bitcoin isn’t all that it’s cracked up to be.
However, they’ve done it in the oddest way possible.
Analysts at Goldman Sachs have come out supporting gold. Normally, banks don’t support gold. They don’t like anything that can’t be twisted and controlled. However, in a note released last week, Goldman Sachs told investors that bitcoin was inferior to gold: ‘Precious metals remain a relevant asset class in modern portfolios, despite their lack of yield,’ wrote analysts Jeffry Currie and Michael Hinds. ‘They are neither a historic accident or relic.’
Having viewed the report, Bloomberg reported:
‘Investors boost the amount of gold in their portfolios as uncertainty increases, making fear the key medium to short-run driver, Goldman said. Wealth is the key long term driver, especially in emerging markets such as China, where growing income levels over the next few decades will support prices, it said in a report.’
In what looks like a ‘pros and cons’ list, Goldman tries to argue in favour of gold against bitcoin.
It’s worth pointing out too that Goldman Sachs refers to both bitcoin and gold as an ‘asset’ class. I don’t hold that view. I see gold as money. Therefore, when I talk about gold, I consider it a currency, not an asset class.
It’s the same with bitcoin. After reading Sam Volkering’s extensive research at Secret Crypto Network, it’s clear to us that bitcoin and other cryptocurrencies are money, not assets. In Sam’s view, he says cryptos should be called a currency, just like gold.
This small linguistic difference gives you some insight as to how much the mainstream doesn’t understand bitcoin and other cryptos.
But back to Goldman’s report. The report weighed up the benefits of gold and bitcoin using four points: durability, portability, intrinsic value, and unit of account (purchasing power). To spare you the suspense, Goldman concludes that gold comes out on top.
When it comes to durability, it admitted that both required long-term storage; however, bitcoin was more vulnerable to hacking than gold. Although, Goldman neglected to mention that you can store bitcoin off the web, in something Sam Volkering calls ‘cold storage’. Which is just a fancy term for keeping your bitcoin on a portable device like a USB, rather than a digital wallet.
As for portability, it did admit that bitcoin was much easier to move around. After all, gold is heavy, and, chances are, if you are travelling internationally with gold, the precious metal would come up on the scanners. With bitcoin, no problems there. No one has to know you even have any.
As far as the intrinsic value of the yellow stuff goes, in Goldman’s opinion, the limited supply of gold — both above and below ground — means gold holds its value because it’s rare and difficult to access. It argues that because bitcoin could simply be recreated, and has no supply control, there’s no intrinsic value.
And finally, to purchasing power. Like many large archaic institutions that don’t get cryptocurrencies, Goldman says that gold has much lower volatility than bitcoin, making it more reliable as a result.
To an outsider, Goldman’s points may seem valid. However, this is the problem when the big banks try and weigh in on something they don’t understand.
For now, bitcoin is extremely volatile. That’s because it’s new. Bitcoin is unlike anything the global economy has ever seen before. The short-term volatility is likely to be just that — short term. It’s easy to forget that bitcoin has only been in circulation for seven years. And, truth be told, the mainstream has only been following the rise of cryptocurrencies in earnest for less than 12 months.
Perhaps the most important point here, though, isn’t that Goldman is backing gold. It’s that, in its analysis, it is desperately looking to compare bitcoin — a disruptive currency — to what it knows.
Bitcoin and other cryptocurrencies are going to challenge mainstream thinking and banking institutions as we know it.
Much like physical gold, cryptocurrencies don’t run to a banking agenda. Their values are determined by the marketplace trading them. Leaving many to label them as volatile and unpredictable.
The big banks should be scared. The cryptocurrency revolution is here to stay.
Editor, Markets & Money