Goldman Ethereum Prediction: Will It Eclipse Bitcoin?

Goldman Ethereum Prediction: Until recently, Goldman Sachs (GS) has declined to say many favorable things about digital currencies like bitcoin and ether (ether is the native cryptocurrency used by the Ethereum platform).

Very few investment banks have been willing to take a firm position. Those that do tend to emphasize the volatility of crypto, which makes it a dangerous option for anyone who cannot afford to lose their investment money.

That position has potentially changed after a leaked document from Goldman Sachs predicts that ether will eclipse bitcoin.

(Perhaps importantly, plenty of Redditors believe that no one leaked the document. According to some posting in r/CryptoCurrency, Goldman released the news in an attempt to manipulate the market and convince investors to buy ethereum. So far, this is all speculation.)

What Is Cryptocurrency According to Goldman? 

Generally speaking, any digital currency counts as a cryptocurrency when it requires computer processing power to break a cryptographic problem to earn coins. Some people believe that the “crypto” aspect of “cryptocurrency” applies to the anonymity they get from using digital currencies. Quite the contrary, all transactions are stored in public ledgers. The currencies offer considerably less anonymity than many believe.

For Goldman Sachs, the underlying technology (called blockchain) that makes cryptocurrencies possible doesn’t seem to play a significant role in how the assets are defined. Instead, Goldman Sachs sees them as pretty much any other physical asset that holds value.

This is perhaps the most radical change in Goldman’s perspective. For the first time, Goldman Sachs looks like it’s embracing crypto as an inevitable technology that presents many of the same investment opportunities as stock and index funds.

Not surprisingly, the bank doesn’t view bitcoin, ether, and other digital currencies the way that developers and miners see crypto. From Goldman Sachs’ perspective, it makes sense to see digital coins as physical, value-retaining assets that can fit into the average person’s investment portfolio.

Finally, investors need to recognize that Goldman Sachs does not see crypto as a replacement for the dollar.

While crypto will not replace traditional money, it could replace traditional banks and other intermediaries. Thanks to blockchain technology, crypto offers a way for people and organizations to exchange value without an intermediary that charges for its services.

Are Crypto Smart Contracts the Amazon of Information?

It’s a little silly to compare crypto smart contracts to Amazon (AMZN). You can potentially compare them by saying that crypto smart contracts will soon become as ubiquitous as Amazon. You might even say that crypto smart contracts and Amazon share traits like fast access, connectivity, and reliability.

Smart contracts, however, are a revolutionary use of blockchain technology. They deserve to stand on their own without comparisons to a single company. 

Smart contracts have the ability to:

  • Use computers all over the world to verify transactions without human involvement.
  • Automate many of the business processes that currently require a lot of manual oversight.
  • Use self-reinforcing rules to ensure trustworthiness and security.
  • Create unchangeable agreements that must remain in place once executed.

Currently, Ethereum has one of the best crypto smart contract platforms. Several organizations use similar technology, though. It’s probably better to describe it as a useful blockchain application instead of pigeonholing its potential by comparing it to a single company.

Why Ethereum Could Beat Bitcoin? 

Supply-Driven Value

Bitcoin enthusiasts often point to the currency’s limited supply as a demonstration of value. Bitcoin has a 21-million coin limit.

Without significant changes to the currency’s core, it’s impossible for more than 21 million bitcoins to be mined. Some economic theories posit that limited supply adds value to an asset. For example, the price of land tends to increase because there is a limited amount for people to own. From this perspective, cryptos that do not have reasonable limits should not retain their values. (Economists call this “supply-side economics.”)

Ethereum has never proposed giving miners access to unlimited coins, but it has a cap that’s about six times higher than bitcoin’s. When you look at the two currencies from a supply-drive perspective, you would probably think that bitcoin’s lower availability makes it more valuable.

Goldman Sachs does not take this view. Instead, it approaches cryptocurrencies from the perspective of demand-driven economics.

Demand-Driven Value

While it makes sense that a limited supply should increase value, prices only increase when people want to buy the product. (Economists call this “demand-side economics.”)

Picture a desert island without a source of water. No one wants to buy land on the island, so it’s practically worthless. Now, imagine a beautiful field surrounded by mountains and natural resources. A lot of people want to buy the land. High interest from consumers increases demand, which drives up the price of the land.

That’s basically how demand-driven value functions.

Increasing Demand for Ether

When you look at the current value of bitcoin and ether, bitcoin looks like the clear winner. After all the price of a single Bitcoin is far higher than that of a single ether.

The options volume of bitcoin and ether, however, tell a different story. Ether’s trading volume has increased rapidly. Recently the number of contracts through Ethereum eclipsed the number through Bitcoin.

In other words, consumers and investors seem to prefer ether over bitcoin. Several factors could influence this choice, including lower prices and more diverse applications for developers.

In reality, demand-driven and supply-driven values influence how much something costs. At this moment, it looks like ether’s higher demand could make it more valuable even though it has a larger supply than bitcoin.

Ethereum 2.0 Offers “Proof of Stake”

One of the problems with cryptocurrencies is that a company can sell them to earn money, then let their values fall without putting any sincere effort into making the coins more popular.

Look to SpaceCoin for an example. It came out in September 2015 and completely failed by the end of October 2018. Over three years, the coin barely gained any value. It was a mess that attracted little attention other than ridicule. At the end, everyone just walked away from it.

Very few people believe that bitcoin has a similar fate in store. Companies like Coinbase (COIN) and Binance have spent too much money on bitcoin to walk away from it. Doing so would ruin thousands of people who have invested millions of dollars in the technology.

Bitcoin has demonstrated proof of stake from its major hard forks, including Bitcoin Cash and Bitcoin Gold.

Ethereum began demonstrating its proof of stake in 2020 when it began the transition to Ethereum 2.0. Ethereum still has two more phases to complete before it completes the transition. The effort and money invested so far, however, gives enough investors confidence that ether will last.

How Much Portfolio Exposure To Crypto Does Goldman Recommend?

Goldman Sachs (GS) recognizes that a small number of cryptos have performed better than indexes over the last year or so. Noticing that trend, however, does not mean that Goldman recommends investing a lot of money in ether, bitcoin, or other coins. 

Indeed, Goldman really stands out by recommending cryptocurrencies at all. Investment banks are conservative by nature. They tend to mitigate risk-taking or volatility where possible. “Risky” and “volatile” are two of the best ways to describe cryptocurrencies.

While you could consider investing in ether—and maybe bitcoin—but you should not invest more than you feel comfortable losing. 

Yes, any investment could go south, leaving you with nothing. Even the most reliable company’s stock price could fall. With crypto, though, you’re still investing in relatively new technology. Take a conservative, long-term approach. That’s probably the most effective way to get strong returns from your investment.

Network Effects Are Key To Crypto Success

It’s clear that network effects are key to crypto success. (For those who do not know, the phrase “network effect” describes the value that a user gets from a product or service.)

Network effects play critical roles in success in many industries. It plays a special role in crypto, though, because blockchain technology relies on a community of users. The larger the community grows, the more utility ascribed to the cryptocurrency. 

Specific coins typically attract users in two primary ways. One, coins attract investors who want to earn profits from buying cryptocurrencies at low prices and selling them for higher prices. Two, it attracts people and organizations that want to benefit from blockchain technology. Other utilities exist, such as privacy coins like Monero and even meme coins like Dogecoin.

Interestingly, using coins as an investment opportunity makes the networks more effective and secure. From a developer’s perspective, coins exist to get more people connected to the network. It isn’t just about growing wealth. It’s also about growing decentralized platforms.

What Does Goldman Forecast Mean For Ethereum?

Small crypto traders have seen growing enthusiasm and increased contracts for Ethereum for months. The average crypto trader reading blogs and Reddit threads daily shouldn’t have been surprised by Goldman Sachs ethereum forecast. 

That doesn’t make Goldman’s forecast meaningless, though. A lot of major investors and economic advisors, including Jamie Dimon, still have skeptical views of bitcoin, ether, and other cryptos. These are the people who have enough capital to raise the coin’s value significantly. 

When Goldman Sachs shows interest in ether, more of those top investors will listen. It could influence the coin’s short-term and long-term behavior as more people realize that they need to take Ethereum seriously.

Is Goldman Crypto Trading Desk A Bullish Sign For Crypto?

A lot of people will see the report from Goldman Sachs as a reason to take a bullish approach to crypto. There is a very good chance that Goldman’s interest will encourage more people to buy ether and bitcoin. They might also start exploring smaller coins (dogecoin always remains a favorite underdog).

That doesn’t mean you should throw caution to the wind and pour more than you can afford into crypto. If investors become too bullish, they will probably push the prices of ether and bitcoin above their fair values – admittedly a hard calculation to assess for bitcoin. Eventually, a correction will happen. Anyone holding on to large amounts of crypto during the correction could see returns dwindle within days or hours but so too is that the opportunity for new investors to scoop up cryptocurrencies at allow prices and HODL (hold long-term).

Again, when it comes to crypto, only invest money you can afford to lose. You could certainly make money from your investment. There is a chance, though, that the coin you choose could lose enormous value over a short time. Even Goldman’s seal of approval doesn’t stop that fact about investing.

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