“Bitcoin is now considered an investable asset. It has its own idiosyncratic risk, partly because it’s still relatively new and going through an adoption phase,” said Mathew McDermott, Goldman Sachs’ global head of digital assets, in a new piece of research.
“And it doesn’t behave as one would intuitively expect relative to other assets given the analogy to digital gold; to date, it’s tended to be more aligned with risk-on assets. But clients and beyond are largely treating it as a new asset class, which is notable—it’s not often that we get to witness the emergence of a new asset class.”
Bitcoin prices continued to be hammered on Sunday, plummeting by more than 15% by mid-afternoon trade. Bitcoin prices have dropped approximately 50% from their peak of $64,829 in mid-April to $32,652. Ether fell another 18 percent on Sunday, bringing the total slide from its all-time high earlier this month to around 60%. Crypto made a tiny comeback early Monday morning.
‘A key concern is inconsistent regulatory actions.’
The sharp price drop in cryptos comes amid a deluge of negative news, largely from government authorities throughout the world.
Last Friday, Chinese authorities stated that cracking down on bitcoin mining and trading behavior would be necessary to reduce investment risks.
Meanwhile, in a presentation last week, Federal Reserve Chairman Jerome Powell stated that the governing body would continue to work on a digital currency. Any digital currency would very certainly dampen the positive euphoria in bitcoin and other cryptocurrencies.
“The effective functioning of our economy requires that people have faith and confidence not only in the dollar, but also in the payment networks, banks, and other payment service providers that allow money to flow on a daily basis,” Powell said. “Our focus is on ensuring a safe and efficient payment system that provides broad benefits to American households and businesses while also embracing innovation.”
Regulation of the crypto market, according to Goldman’s McDermott, is a substantial danger to further price gain.
“A key concern is inconsistent regulatory actions around the globe that impede the further development of the crypto space, or the ability of more regulated entities to engage within it. It feels like the regulatory tone has turned more constructive, but I certainly wouldn’t want to be complacent,” according to McDermott.
Despite the danger, institutional clients, according to McDermott, are still interested in adding some type of crypto exposure to their portfolios.
In general, conversations with institutional clients focus on how they can learn more about the topic and gain access to the market, rather than on what bitcoin or cryptocurrencies are, which was the dominant issue just a few years ago.
Aside from that, asset managers and macro funds want to know if crypto fits into their portfolios, and if so, how to obtain access to the physical—by trading the actual instrument on a blockchain— or exposure through other types of products, generally futures, McDermott elaborated.
Hedge funds are more active in this space, perhaps unsurprisingly, and are particularly interested in profiting from the structural liquidity play inherent in the market—earning the basis between going long either the physical or an instrument that provides access to the underlying asset on a spot basis and shorting the future.
Despite Goldman’s endorsement, bitcoin (BTC-USD) and other cryptocurrencies did not trade in May like a regular stock or bond from a reputable corporation. In reality, if bitcoin is to be called a new asset class, it shares a lot of characteristics with one segment of the stock market: highly volatile penny stocks that see massive price swings in response to even minor news.
