Goldman on Bitcoin: “I got this…”
The head of JP Morgan, Jamie Dimon’s rants against Bitcoin are legendary. Some of the graphics from sites like Marketwatch.com are worth the quick Google search.
But there was a method to Mr. Dimon’s madness. Blockchain technology was launched on the world with Bitcoin as its lead proof of concept. It did not take long for bankers to see the potential existential threat to banks, money transmitters, payment providers, credit card companies and all sorts of other financial institutions all the way up to and including central banks.
The noise started in early 2014, reached a fever pitch when crypto went crazy in 2017 and now places like JP Morgan and the People’s Republic of China are trying to sort out how to follow the shining example of Venezuela (Petros, anyone?) to issue their own coins.
In addition to JP Morgan, China and Venezuela, the IRS and even the SEC have largely found peace and clarified where they stand on the issue of Bitcoin and all the other crypto currencies that have followed.
So, one really has to wonder what more needs to be said on this subject. The only explanation I can come up with is summed up by the well trodden meme referred to at the top.
That’s right, a slide from a Goldman Sachs presentation has made it to social media:
Now, it takes a true believer (Bitcoin maximalist, in the jargon) to suggest that one should only invest in Bitcoin. Given the well observed volatility, one may want to start one’s investment journey with low cost ETFs and a robo-advisor like Betterment to automate asset allocation and tax harvesting. And, I have read through the decision as to why the SEC has determined that Bitcoin and Ethereum are “not securities”. But to suggest that Bitcoin is not an asset class and therefore not an investment is a big one to swallow. And not just because these seven bullet points start with a Strawman setup and end up with a bit of No True Scotsman hectoring. No, the irony is a rich creamy sauce that needs to be explored because the finger wagging comes from none other than Goldman Sachs.
Point one is important not for what it says but because of the potential securities violation that it represents. As every FINRA registered principal is aware, directly comparing unlike asset classes in sales/research material is dangerous. If an analyst declares that a triple-A municipal bond is safer than a double-A municipal bond, the world will not tremble in awe but the analyst is coloring within the lines. If, on the other hand, the analyst takes that double-A municipal bond and tries to compare it directly with a double-A corporate bond for the purpose of suggesting one over the other, that analysis would probably not make it to print. Because the premise of this slide is that bitcoin isn’t even an asset class, the potential apples to oranges comparison will probably slide by but the analyst who prepared the slide and the supervising principal who approved it should not make a habit. FINRA thinks this is a misleading practice because, well, it can be used to mislead. Mission accomplished.
Point two is true, but this is where the strawman hits his stride. Since Goldman clients skew more hedge fund than widows and orphans, it is hard to see why point two is relevant to Goldman clients. In a world of high frequency trading bots, dark pools, and the illusive search for investment alpha, I am pretty sure that avoiding dependence on “Exposure to Global Economic Growth” is precisely what clients of Goldman (and the clients of those clients) are paying for.
Point three should get some people laughed out of the room. Investment correlations are unstable? Really? Is this something we are we just finding out? Was LTCM and the 2008 financial meltdown really all that long ago? Wait, I think we can trade on that…
Point four is a head scratcher. For the new investor or the conservative investor, this makes sense. But, and I could be wrong, I don’t think that’s the profile that one would associate with Goldman clients. If this bullet said: “ 76% volatility, whoo-hoo! what could you do with that kind of rocket fuel?” that would be a better fit. Besides, I thought the point was that crypto currencies were not an asset class. Moving on.
Point five is kind of true but so what? If protecting against inflation is a high priority then there are plenty of investments and products that are purpose built to help investors directly address that risk.
When I got to point six, I paused to worry that this might be a send up. So, if it is indeed a fake, then I will happily admit that I got punked and well done to the hoaxers. The suggestion that an investment is not an investment because you can only profit by selling it at a profit is…well, maybe this is a hoax after all.
Point seven reveals more about Goldman Sachs than it does about Bitcoin. In the bullet, they acknowledge that their sophisticated client base of hedge funds might find crypto attractive because of the volatility (what? no time to edit point four?). But, dear reader, this is all shiny nonsense, someone is going to get hurt and you know the rest. It’s almost as if no true Scotsman would…oh, I have already mentioned that one.
One could conclude that a senior director type at Goldman was asked to justify why he recommended that the firm not pursue a crypto currency trading strategy that the clients had been asking for. So, he told some poor underling to cook up some bullet points for why Bitcoin was not even an investment to start with. OK, I guess.
There are problems with Bitcoin as an investment. The mechanics of how to mesh the cryptographically secure blockchain with a securities custody and clearing system based primarily on 70’s era COBOL is but one issue. But the problems vary with the audience, particularly with respect to sophistication, risk tolerance and compliance. If a primarily retail investor focused firm had prepared this slide, I wouldn’t have given it a second glance. After all, there are options and future strategies (dare we say asset classes?) that should not be the first step on most people’s investment ladder either.
So, JPM’s Jamie Dimon has left the field after a string of poorly timed rants against Bitcoin and the realization that his bank’s energy is better spent trying to address the potential existential threat.
The story could have ended there until someone said: “Oh yeah? Watch this, hold my beer…”