Wall Street Bank Weighing Crypto-Trading Unit Says Gold Beats Bitcoin

Josh O'Neill Assistant Editor 20 October 2017

Wall Street Bank Weighing Crypto-Trading Unit Says Gold Beats Bitcoin

Bitcoin has been dubbed "digital gold" because of its finite supply and price swings on the back of geopolitical events.

Although Goldman Sachs is reportedly weighing a new unit dedicated to trading crypto-currencies, bitcoin is not the new gold, the bank has said, suggesting that precious metals “remain a relevant asset class” in portfolios. 

In a note to its clients sent earlier this week, the Wall Street giant penned the benefits of holding gold in a portfolio.

“The use of precious metals is not a historical accident – they are still the best long-term store of value out of the known elements," the bank said. "Crypto-currencies are not the 'new gold' despite their recent popularity.”

The note was sent just weeks after news emerged that Goldman Sachs was contemplating setting up a new trading operation dedicated to crypto-currencies, undoubtedly the most controversial “asset class” at present. The bank is considered the first blue-chip Wall Street firm readying itself to deal directly in the growing but volatile market. 

“In response to client interest in digital currencies, we are exploring how best to serve them in the space,” Tiffany Galvin, a US-based spokesperson for Goldman Sachs, told this publication at the time.

Bitcoin was conceived in 2008 in the aftermath of the financial crisis and launched the following year. It is effectively a decentralised, online-only currency that uses a technology called blockchain to enable users to circumvent banks' services and transfer holdings without any interference from a bank or third-party institution. 

In its note Goldman Sachs did, however, address the rising popularity of crypto-currencies, several of which have seen their market value balloon since the start of the year. Many commentators have dubbed bitcoin “digital gold” because its supply is finite (limited to 21,000,000) and has at times seen price fluctuations due to geopolitical tensions and on the back of comments from industry figureheads. 

Nonetheless, “gold wins out over crypto-currencies in a majority of the key characteristics,” Goldman Sachs said. 

The bank also pointed out that digital wallets, which allow users of crypto-currencies to store their holdings online, are vulnerable to breaches, and noted that that hundreds of millions of dollars' worth of digital coins have been lost to hackers over the past eight years. 

There are also “significant regulatory risks” linked to crypto-currencies. For example, China last month ordered all domestic crypto-exchanges to shut shop and put an end to initial coin offerings (ICOs), a new fundraising method used by blockchain start-ups to grow their business.

Yet other economies have embraced bitcoin: in Japan, it is considered a legal form of payment; in Switzerland, some cities and towns allow their citizens to pay some of their tax bills in bitcoin. 

Goldman Sachs acknowledged that bitcoin is more easily divisible than gold, as each coin can be broken into 100 million pieces, whereas gold is often traded in bars weighing at least 1kg. 

Although bitcoin can be fragmented with great ease, it faces stiff competition from so-called alternative coins. Bitcoin has rival crypto-currencies, such as Ethereum and Ripple, and there are over 1,000 in existence. Gold, on the other hand, has far fewer rivals. 

Goldman said that gold "is clearly better at holding its purchasing power, and has much lower daily volatility." The note said that bitcoin's volatility averaged almost seven times that of gold in 2017.

Bitcoin was up 2.92 per cent at the time of writing (14:59, 19/10/2017), trading at $5,734.77 per coin, according to CoinDesk. 

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