Do you ever get the feeling that it's becoming less and less clear when and how Bitcoin is supposed to take off?
In a new 25-page note compiled by Allison Nathan, Goldman throws armfuls of kindling on this smoldering stack of doubt.
The bank polled its research units corresponding with the purported uses Bitcoin evangelists say the digital currency can have to see whether they could ever see it have a meaningful impact in their respective sectors.
And each basically comes up with the same response: for the moment, at least, it is just too volatile to be of much use to anyone.
Dominic Wilson and Jose Ursua of the firm's markets research division are first up. They argue that Bitcoin fails to meet both basic criteria of a viable currency: while there remains an outside chance for widespread acceptance as a medium of exchange, as a stable source of value, it has so far failed. That undermines the premise that Bitcoin could serve as a way of short-circuiting exchange rates in inflation-prone countries.
For most users what matters is not the comparison with other currencies, but a comparison with the volatility of the currency that they hold (dollars in the US for instance) in terms of the things that they need to buy. The volatility of consumer prices (in dollars) has been even lower than FX rates, even if measured over a period including the 1970s. Put simply, if you hold cash today in most developed countries, you know within a few percentage points what you will be able to buy with it a day, a week or a year from now.
Wilson and Ursua include this graph showing volatility of Bitcoin versus the Argentine peso, the yen, the euro, the pound, and U.S. inflation. It's not even close.
The best hope, they say, is the precedent it has set for transforming how transactions work — but that the role of Bitcoin itself will be in doubt.
the difficulties it faces as a store of value are likely to present a major roadblock to the breadth of bitcoin’s adoption as a medium of exchange. If a ledger-based technology is to succeed, the cyber-currency would very likely have to have some type of fixed exchange rate in order to overcome this obstacle.
Next up is Jeff Currie, head of Goldman's commodities research unit. He writes that it is the inconsistent demand itself that is contributing to Bitcoin's volatility.
This volatility undermines the reasons to hold bitcoin. With millenniums of history behind it as a hedge against debasement, the key to gold’s success is the stability and predictability of its demand. On net, we find that bitcoin is easier to store and transport and is potentially more difficult to counterfeit, but it is not nearly as “stable” as gold and competitors still pose a greater risk.
GS IT Services analyst Roman Leal says the digital currency currently enjoys cost advantages other wire transfer services don't, especially no transaction or currency conversion fees.
But the very success of Bitcoin could cause more established player to simply co-opt all the advantages Bitcoin has. Leal writes:
Just as a flurry of new entrants – such as Square, Groupon, and PayPal - encouraged payment networks and payment processors to develop a mobile payments strategy, we expect traditional payment players to develop digital currency strategies.
He adds that increased regulation could also close the cost advantage Bitcoin enjoys.
In the note, Goldman also interviews several outside experts to get their take on Bitcoin. They lead off with law professor Eric Posner, who finds the way Bitcoin is controlled "unsettling."
The people who maintain the Bitcoin network can change the money supply through a majoritarian process. And that means that the supply of bitcoin is a function of what the majority of these people think at any given time. They are not economists or monetary experts, but technology and programming experts, and entrepreneurs. I find that unsettling and I think most people would feel the same way.
Goldman concludes:
So where does that leave us? With the conclusion that bitcoin likely can’t work as a currency, but some sense that the ledger- based technology that underlies it could hold promise.
The common refrain from Bitcoin evangelists is almost always, "Just wait, just wait." But it seems like the wait could be longer than they think.
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