Bitcoin can be an international form of money in theory, Goldman says

REUTERS/Yuriko
Nakao

• Bitcoin
  can serve as a global currency in theory, according to Goldman
  Sachs strategists. 
• The reality is that much of the developed world already
  has stable monetary systems, alternative stores of value, and
  the US dollar for foreign trade and
  reserves.  
• Cryptocurrencies may be useful in parts of the global
  financial system where the traditional functions of money don’t
  work as well. 

Bitcoin
can be a legitimate and widespread form of money but mostly in
theory, for now, according to Goldman Sachs strategists. 

That’s because the key functions of money that bitcoin can serve
are already well handled across much of the developed world. Many
countries had stable currencies and inflation rates before
bitcoin came along. The dollar is the standard for international
trade, and for foreign-exchange reserves. Investors wanting
to diversify their portfolios could use precious metals like
gold.   

And so, cryptocurrencies seem to be trying to solve problems that
don’t exist — at least in the developed world. 

“The widespread use of the dollar outside the US — and full
dollarization in some countries — suggests there is already
demand for an internationally accepted medium of exchange
and store of value,” said Goldman’s Zach Pandl and Charles
Himmelberg in a note on Wednesday. 

“In those countries and corners of the financial system
where the traditional services of money are inadequately
supplied, bitcoin (and cryptocurrencies more generally) may offer
viable alternatives.”

The strategists said there’s evidence that demand for cryptos is
related to regions where there’s already a dissatisfaction with
the existing monetary system. For example, bitcoin exchange
volumes surged in China after the country started clamping down
on capital outflows in 2016.

Goldman
Sachs

In that sense, there’s demand for bitcoin as a form of money to
make transactions. But as part of a currency portfolio,
cryptocurrencies are “more consistent with a classic speculative
bubble,” the strategists said. They noted that Korea and
Japan dominate bitcoin exchange volumes, but are also
countries with stable monetary systems. 

The reality is that cryptocurrencies still have a high regulatory
bar to clear in most places, the strategists said. To start with,
governments can’t track who’s paying or receiving digital
currencies. And as traders well know, cryptos are vulnerable to
wild price swings that are rare with fiat currencies, making them
bad stores of value.   

Goldman Sachs is reportedly preparing a
cryptocurrency trading desk.