Rising Adoption of Crypto Will Not Gurantee Increase Prices: Goldman Sachs

Goldman Sachs Group Inc. voiced concern about cryptocurrency, saying investors should not be easily convinced about the narrative that a rise in the adoption of digital currencies will lead to higher prices.

Goldman strategists Zach Pandl and Isabella Rosenberg said the growing mainstream appeal of tokens such as Bitcoin has increased correlation with other macro assets. Henceforth, crypto has become the centre of rotations across asset classes.

The strategists also added that bitcoin’s price has positive and negative correlations. While positively correlating with proxies for consumer-price risks like breakeven inflation and crude oil prices and “frontier” technology stocks, it has a negative correlation with real interest rates and the U.S. dollar.

According to the strategists, crypto’s recent selloff underscores that “mainstream adoption can be a double-edged sword. While it can raise valuations, it will also likely raise correlations with other financial market variables, reducing the diversification benefit of holding the asset class.”

In the past few months, digital tokens and high-priced technology stocks were affected after the recent move by the U.S. Federal Reserve and other central banks to tighten monetary policy. 

The overall crypto market capitalization shrank to about $1.76 trillion, from more than $3 trillion at the peak in November.

“Over time, further development of blockchain technology, including applications in the metaverse, may provide a secular tailwind to valuations for certain digital assets. But these assets will not be immune to macroeconomic forces, including central bank monetary tightening,” the strategists said.

However, Goldman Sachs saw a rise in client demand for bitcoin early last year.

According to March 2021 report by Blockchain.News, Goldman Sachs Group Inc said it was examining how it can meet increasing client demand to own and invest in Bitcoin while still staying on the right side of the law.

In a Wolfe Virtual Fintech forum event, Goldman Sachs bank president and chief operating officer (COO), John Waldron, said: “Client demand is rising. We are regulated on what we can do. We continue to evaluate it...and engage on it.”

The report added that Waldron stated that Goldman Sachs could keep digital assets “but can’t principle” them and talks with central banks and regulators on how banks should be regulated when dealing with digital assets.