In a lengthy report, US investment bank Goldman Sachs outlined some of its positions on cryptocurrencies and how Ethereum will surpass Bitcoin.
What do cryptocurrencies have and do they arouse investment interest?
Why will Ethereum surpass Bitcoin?
These issues are analyzed in a 40-page report by Goldman Sachs, the American investment bank.
Note that the total capitalization of cryptocurrencies on May 24, 2021 was 1.42 trillion. dollars with Bitcoin at $ 35,500 or $ 660 billion total value and Ethereum at $ 2,200 with a total value of $ 248 billion.
In total there are over 5,200 different cryptocurrencies but the first 20 Bitcoin, Ethereum, Techer, Cardano, Binance Coin, Dogecoin, XRP, Polkadot, usd Coin, Bitcoin Cash, Litecoin, Chainlink, Stellar, Solana, Theta etc. gather the most interest.
Goldman and cryptocurrencies
In a lengthy report, US investment bank Goldman Sachs outlined some of its positions on cryptocurrencies and how Ethereum will surpass Bitcoin.
For the role of Bitcoin as a macroeconomic element
Cryptocurrencies as a special category of assets
For the role of digital stores
The role of cryptocurrencies in balanced investment portfolios
In its report, Goldman Sachs seems to show its preference for Ethereum (a completely new technology platform) over Bitcoin (an asset of value and an alternative payment system) as the three biggest moves in the cryptocurrency ecosystem – payments, DeFi and NFTs – are mainly based on Ethereum.
The more people use it, the more things are built on it and the higher the price will eventually be.
And since much of the world has been heavily associated with Bitcoin over the past five years, it will take some time for many to realize that there is so much more to Bitcoin.
According to Goldman Sachs, cryptocurrencies are a new class of assets that derive their value from verified information and the size and development of their networks.
Here are the details:
The term “cryptocurrencies” – used by most people – function as a digital medium of exchange, like traditional currencies e.g. dollar or euro called fiat – is essentially misleading when it comes to estimating the value of these items.
Indeed, the Bitcoin-based blockchain was not designed to replace a fiat currency – it is a reliable payment network.
As a cryptographic algorithm creates proof that the payment was executed correctly, no third party factor is required to verify the transaction.
The blockchain and cryptocurrency were therefore designed to replace the banking system and others such as insurance that requires a trusted broker.
The blockchain differs from other “digital” trading mechanisms such as PayPal, which depends on the banking system to prevent fraud.
To be credible, the system needed to create an asset that had no liabilities or contingent liabilities, which must be a separate entity such as a commodity.
And to achieve this, blockchain technologies have used natural resources – oil, gas, coal, uranium and hydrogen – through ever-increasing computing power to create cryptocurrencies.
From this perspective, the intrinsic value of the cryptocurrency network is the reliable information that the blockchain generates through the mining process, and the cryptocurrencies are required to unlock this reliable information and make it marketable and flexible.
It is therefore impossible to say that the network has value and role in society if there is no corresponding currency or cryptocurrency in this case.
And the value of the currency depends on the value and development of the network.
Because the network is decentralized and anonymous, it faces legal challenges for the future development of cryptocurrencies.
Some people use cryptocurrencies to launder money laundering (AML or Anti Money Laundering), as evidenced by the recent ransom demanded in Bitcoin by the Colonial Pipeline and the Irish Health Service.
Regulators can prevent the use of cryptocurrencies as a substitute for the dollar or other currencies, making them non-convertible.
An item has value only if it can be used or sold.
Authorities in China and India have already challenged the cryptocurrencies for payments.
As a result, the market share of cryptocurrencies used for other purposes, such as “smart contracts” and “information badges” is likely to continue to grow.
However, even these non-monetary uses will have to be recognized by the courts in order to be accepted in business – a question we leave to lawyers.
The network creates value, unlike other products
Unlike other products, cryptocurrencies derive their full value from the network.
A Bitcoin has no value outside of its network.
The value of oil also comes largely from its transmission network, but at least the oil can burn to generate heat outside that network.
At the other end of the spectrum, gold requires no network at all.
Bitcoin holders face the growing risk of network disintegration from a competing network backed by a new cryptocurrency.
Since the demand for gold does not depend on a network, but on the unit, so you do not need a network and this is an advantage of gold.
Indeed, most of the value assets used as defensive investments – such as gold, diamonds and collectibles – only pose a risk to unit demand.
This makes them defensive assets, when there is a shock in the markets, investors turn to gold, that means defensive assets.
People may collapse around them but they retain their value.
Transactions increase value, creating risk
Cryptocurrencies are not traded like gold, nor should they be.
Using any standard valuation method, transactions or expected online transactions are the key determinant of the value of cryptocurrencies.
The more transactions the blockchain can verify, the higher the value of the network.
Trading volume and demand for commodity information are closely related to the business cycle.
Gold and bitcoin do not compete for assets, as some commonly argue, on the contrary they can coexist.
Because the value of the network and therefore the cryptocurrency comes from the volume of transactions, the storage of cryptocurrencies as an asset of value reduces the available cryptocurrencies for transactions, which reduces the value of the network.
Because gold does not have this property, it is the only asset that institutional investors hold as physical reserves.
Almost all other goods are traded or held on paper in the form of futures contracts to avoid interference with the transmission network.
Think e.g. If investors demanded deliveries of natural oil in their transactions, the world’s oil would not reach.
This suggests that, like oil, investments in cryptocurrencies should be made in the form of futures contracts.
Cryptocurrencies can be used indefinitely.
This resilience makes them an asset of value, provided that demand does not disrupt flows in the cryptocurrency network.
So what are cryptocurrencies? A strong network?
It’s all about the information
Digital economy
While there are many overpriced networks, some are likely to emerge as long-term winners in the next stage of the digital economy, just as today’s tech titans emerged from the explosion of tech companies Apple, Google and others.
This transformation is happening now – there are already about 21.2 million cryptocurrency holders in the US alone.
However, technological, environmental and legal challenges remain.
Ethereum 2.0 is expected to increase capacity to 3,000 transactions per second in Temporary Protected Status or tps, while sharding – which will escalate Ethereum 2.0’s Proof of Stake (PoS) system through parallel transaction verification – has the ability to increase the capacity to 100,000 tps.
For environmental reasons, Visa can process up to 65,000 tps but typically performs around 2,000 tps.
PoS can also significantly increase computing time for transactions per second, which will further encourage technological adoption.
While overcoming financial challenges will likely be manageable, legal challenges are the biggest for many cryptocurrencies.
They recently demanded a ransom of 75 bitcoins from the Colonial Pipeline which were actually paid.
This is a reminder that cryptocurrencies still facilitate criminal activities that have high social costs.
For Ethereum, new companies that aim to disrupt funding, legislation, or medicine by incorporating information stored on the platform into their algorithms are likely to face legal recognition issues.
If cryptocurrencies are to survive and thrive to the fullest, they must define a concept of “sufficiently decentralized” that will satisfy regulators.
Otherwise, the technologies will soon be exhausted.
In short: bitcoin is good and will be used as a “rare resource” to make PoS systems work “instead of natural resources”, but while bitcoin may end up being useful Et Ethereum – which will serve as the basis for a reliable information market, something similar to Amazon that dominates consumer goods transactions today internationally.
Ethereum will surpass Bitcoin
Goldman believes Ethereum has a good chance of overtaking bitcoin as the dominant digital cryptocurrency:
Based on the evolving blockchain technology that has the power to disrupt global funding, but with limited clear use bitcoin has been identified as a solution that seeks to solve a problem.
Many investors now see bitcoin as a digital store of value, comparable to gold, housing or fine wine. However, all real value assets in history have generated either income however bitcoin currently does not provide income and has a moderate utility.
However, unlike bitcoin, several other encryption assets have clear financial reasons for creating them.
Ethereum looks like the most likely candidate today to surpass bitcoin, but this is by no means certain.
What is stock of value?
A stock of value is anything that retains its value over time.
While value financial stocks such as stocks and bonds retain their value because they generate a given cash flow, performance is not a prerequisite for value.
Art, wine, gold and non-performing coins are widely used as a store of value.
However, all of these assets have clear material uses other than being value reserves.
This utility creates a “convenience return” – the incentive for people to own it – which reflects both the utility that a consumer derives from the use of these assets and the relative lack of that utility – a fact recorded by the famous Adam Smith’s paradoxical Diamond-Water.
The price always comes from the use
The key to value assets such as gold and real estate is that whoever invests in them has earned, that is, they retain their value in the long run.
Indeed, all significant value reserves developed real uses before they became investment assets.
For example, gold was first used in jewelry to symbolize permanence, commitment or immortality.
Gold was made through savings for many centuries.
And when societies began to grow and needed a means of standardizing international trade, gold was the natural choice to solve this economic problem, as most companies already had gold.
Actual use is important for value stocks because demand and consumption tend to be price-sensitive concepts.
For example, the demand for jewelry is the factor that affects the gold market, when the price of gold increases the demand for jewelry decreases.
Ethereum will gain Bitcoin as a stock of value
Given the importance of real uses in determining value, Ethereum has a good chance of overtaking bitcoin as the dominant digital stock of value.
The Ethereum ecosystem supports smart contracts and provides developers with a way to create new applications on their platform.
Most decentralized financing (DeFi) applications are built into the Ethereum network, and most cryptocurrency type NFTs are currently issued through Ethereum.
The higher number of transactions in Ethereum against bitcoin reflects this dominance.
As the use of cryptocurrencies in DeFi and NFTs becomes more widespread, Ethereum will gain its own momentum.
Ethereum can also be used to store almost any information securely and privately in a decentralized environment.
And this information can be identified and exchanged.
This means that the Ethereum platform has the potential to become a large market for reliable information.
We see this today with the sale of digital art and collectibles online through the use of NFTs.
But this is a small scale in its actual practical uses.
For example, people can store and sell their medical data through Ethereum to research pharmaceutical companies.
A digital profile on Ethereum could contain personal information such as property ownership, medical history and even IP rights.
Ethereum also has the advantage of operating on a decentralized global basis rather than centrally, such as Amazon or Microsoft, possibly providing a solution to concerns about the sharing of personal data.
An important argument in favor of bitcoin as a store of value is its limited supply.
But demand, not scarcity, drives the success of value stocks.
No other stock of value has a fixed supply.
The supply of gold increased by almost 2% per year for centuries and remained an acceptable value reserve.
Many rare items such as osmium are not stocks of value.
In fact, a stable and limited supply risks increasing price volatility, encouraging accumulation and forcing new buyers to create bubbles.
Bitcoin and advantages
The most common argument in favor of bitcoin that prevails over other cryptocurrencies is the advantage of the first move and the large user base.
However, history has shown that in an industry with rapidly changing technology and growing demand, the first-move advantage is difficult to maintain.
Think Myspace and Facebook, Netscape and Internet Explorer or Yahoo and Google.
For encryption networks, active user numbers were very unstable.
During 2017 and 2018, Ethereum managed to acquire an active user base that was 80% of the size of Bitcoin within a year.
Ethereum’s governance structure, with a core team of developers proposing new solutions, may be better suited to today’s dynamic environment in which encryption technology is changing rapidly and systems that do not quickly upgrade can become obsolete.
Indeed, Ethereum is undergoing much faster upgrades to its protocol than Bitcoin. Specifically, Ethereum makes the transition from Proof of Work (PoW) to Proof of Stake (PoS).
Bitcoin energy consumption is already the size of the Netherlands, ie the Netherlands, and could double if bitcoin prices rise to $ 100,000.
Goldman’s conclusion: Ethereum is the platform that solves financial problems here and now, while bitcoin is “a solution that seeks a problem”.
This is why two weeks ago, JPMorgan also took a positive approach to Ethereum.
1) The European Investment Bank (EIB) used the Ethereum blockchain to issue € 100 million in a zero-interest digital bond.
The transaction involved a series of bond tokens in the Ethereum blockchain, where investors buy and pay for security tokens using traditional fiat money
2) The first Ethereum ETF (ETHH) was released on April 20 by Purpose Investments in Canada, followed by three more Ethereum ETF releases the same month.
3) The introduction of the EIP1559 protocol in the summer of 2021 is important.
The goal of EIP 1559 is to make Ethereum transaction charges more predictable by introducing an automatically calculated base fee for all transactions depending on network activity. Once paid with ethereal, this fee will be removed immediately, which means reduced Ethereum offer in the future
4) Ethereum 2.0 is expected to become much more energy efficient by the end of 2022.
Ethereum 2.0 includes a change from Proof-of-Work Energy Intensification Mechanism to a much less Proof-of-Stake Validation Mechanism.
As a result, less computing power and power consumption would be needed to maintain the Ethereum network.
5) Rising bond yields and a possible easing of monetary policy are putting downward pressure on bitcoin as a form of digital gold, in the same way that higher real yields are putting downward pressure on traditional gold.
Some argue that bitcoin and ethereum can coexist and seemingly become even more popular and eventually hit new all-time highs.
As a reminder, FundStrat sees bitcoin rise to $ 100,000 from $ 36,000 to $ 37,000 this season and Ethereum rise to $ 10,500 from $ 2,200 this season.
