Bitcoin not 'likely' to work as a currency – Goldman Sachs report

Bitcoin market cap

Chart from Goldman Sachs' 'All About Bitcoin' report

"[B]itcoin likely can't work as a currency," Goldman Sachs wrote in a 20-page research report titled 'All About Bitcoin' published this week.

But there's a sense that the "ledger-based technology that underlies it could hold promise," the banking giant concludes.

Some background

Before 2013, Bitcoin was on few people's radars. Designed around 2007 by someone named Satoshi Nakamoto (it's still unclear who this person actually is), the currency's value measured in US dollars went from about 5 cents per bitcoin (BTC) to around $13 in late 2012.

But the virtual currency hit the mainstream in 2013 and just a few months later was trading for more than $100 per BTC. It breached the $1,000 mark at its peak in November. Today it's valued at around $600.

Bitcoins are created with extremely powerful computers that run algorithms to 'mine' for bitcoins. Anyone with the right equipment and know-how can become a Bitcoin 'miner' but there's a predetermined number of coins that can ever be created.

The main appeal behind Bitcoin is that when you trade bitcoins you're pseudonoymous and you pay practically no fees. Most importantly, the system is safe – though this idea has been seriously challenged by the recent collapse of the currency's largest trading platform, MtGOx. The currency is also free from central bank and government control, which is why some see it as a good store of wealth.

Some, including economist Nouriel Roubini, have called the whole thing a Ponzi scheme.

'All About Bitcoin'

In its latest Top of Mind report, Goldman Sachs speaks with various experts on the topic of virtual currencies.

"[S]ome of the fiercest believers seem to grab on to the ideology of Bitcoin as providing an escape from centralized control, in particular viewing bitcoin as a new currency free from the grips of any government or central bank," Allison Nathan, editor of Top of Mind wrote.

"On the other hand, some of the deepest skepticism surrounds the viability of bitcoin as a currency."

Bitcoin volatility

Chart from Goldman Sachs' 'All About Bitcoin' report

Two interviewees, Dominic Wilson and Jose Ursua of Goldman Sachs’ markets research team point to the currency's volatility as a major issue.

"The volatility of bitcoin prices so far has greatly exceeded the volatility of other currencies and gold," the Wilson and Ursua write, "…because its supply is ultimately limited, prices will need to vary to accommodate shifts in demand, not the other way round. Unlike gold, bitcoin also has no fundamental value from alternative uses that could anchor its price."

"[I]t is much more plausible that bitcoin eventually has a significant impact in terms of its innovation on payments technology, by forcing existing players to adapt to it or coopt it," the researchers conclude.

Goldman Sachs' report on Bitcoin is extensive and offers a wide range of opinions. Read the full report here.

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