Goldman Sachs’s investment management arm has issued a warning stating the sharp swings of digital currencies, specifically Bitcoin, over the past year “has pushed it into bubble territory.”
The news preceded a 30% reduction in Bitcoin’s price last week, which has since recovered over the course of the weekend to resume recovery attempts as the price hovers in the region of $11,000.
The firm went on to say that Bitcoin reminds of the tulip mania in Holland in the 1640s, adding that it doesn’t believe the cryptocurrencies will retain their value in the long run in their current incarnation.
The price surge has also fuelled concerns among Goldman’s analysts of a bubble and drawn comparisons with the dotcom mania of two decades ago, and cautioned that the bubble may burst.
“Bitcoin’s meteoric rise in a short time has dwarfed the rise seen during the dot-com bubble. We also believe that cryptocurrencies have moved beyond bubble levels in financial markets, and even beyond the levels seen during the Dutch ‘tulipmania’ between 1634 and early 1637,” Goldman wrote.
Tulip mania was a craze in the Netherlands in the 17th century which saw the price of the flower skyrocket, and ultimately resulted in a crash of that market.
The warning was prefixed by a statement: “We think the concept of a digital currency that leverages the blockchain technology is viable given the benefits it could provide: ease of execution globally, lower transaction costs, reduction of correction since all transactions could be traced, safety of ownership, and so on. But bitcoin does not provide any of these qualities.”
Despite pessimism, Goldman opens a crypto trading desk
Big banks have dabbled in blockchain technology, which underpins Bitcoin, and acknowledged its potential to reshape the investment and banking industries. But they were mostly wary of venturing directly into making markets for such digital assets that have been used extensively on darkweb marketplaces.
Goldman’s comments follow similar warnings from several banks and regulators, that cautioned investors that they should be prepared to lose everything if they bought Bitcoin.
Nevertheless, Goldman Sachs was reportedly opening a trading desk dedicated to Bitcoin and other digital currencies by the end of June, if not earlier. The action also makes the investment bank the first blue-chip Wall Street firm opening a dedicated cryptocurrency trading desk. This openness to deal directly in this burgeoning yet controversial market is also quite interesting, especially considering that Goldman Sachs’ CEO Lloyd Blankfein repeatedly stated that he is still not a believer in Bitcoin technology.