Goldman Sachs proves us right: The institutions will never embrace Bitcoin

Ever since the invention of peer to peer digital assets, it has been very clear to anyone who can see the wood for the trees that a decentralized, unbacked and completely virtual currency would never be an asset class which can become mainstream.

Almost a decade has passed now since Bitcoin became a reality, albeit a virtual one, and whilst its short history is peppered with exchange demises in which customers have absolutely no recourse, various high profile site seizures by governments and law enforcement authorities due to the propagation of illicit activity on the dark web, and, not to put too fine a point on it, a litany of blatant attempts to steal from investors, whether it be via virtual exchanges in which the owner can easily blame an e-wallet hack for loss of funds whilst actually making off with customer deposits knowing that there is no path of rectification.

All of this ‘cottage industry’ style structure points to the antitheses of the ethos of most established institutions, and we have always stood by the notion that the trading in, and mainstream use of virtual currency will never come to fruition.

On the other side, however, the almost religious zeal with which many proponents of digital assets rally their cause should ring an alarm bell, as it is in many cases close to anarchic obsession which is never a good founding point for business.

Drawing further parallels with religious or political zealots, many proponents of Bitcoin often refer to recent multi-million dollar investments in the development of blockchain – the node-based database that Bitcoin’s unique mining and supply control system is built on – citing that major institutions are adopting virtual currency and investing in blockchain development, hence it will take over the world.

Take over the world it will not. Neither will it ever be a force to reckon with in major centers of the world with developed business environments.

Today, Goldman Sachs, one of the world’s largest investment banks and the fifth largest interbank FX dealer by market share, has confirmed exactly the point which we have made for several years, in that any institutional investment in blockchain development will be to completely separate the distributed ledger technology from its reliance on Bitcoin, and implement distributed ledger and automated back office systems to increase the efficiency of banking and financial services, with no intrinsic connection to Bitcoin.

Goldman Sachs stated that it has ditched its plans to open a desk for trading cryptocurrencies, in a move which yesterday sent the prices of popular coins such as ethereum and bitcoin into a downward spiral.

Sources familiar with the matter told Business Insider that Goldman Sachs was nervous to continue with the plans while future global regulatory frameworks for cryptocurrencies remain unclear.

If that is the case, it is a valid concern. During the latter part of 2017, a handful of retail FX brokerages began offering actuals on Bitcoin CFDs, losing tens of millions of dollars in just one week. At that time, one senior executive of a retail brokerage explained to FinanceFeeds “We caught a massive cold. It was around $17 million loss in the space of a week, we won’t be doing that again.”

Quite. Goldman Sachs is exponentially larger than any of those firms, and has far more market exposure, hence it is not surprising that the firm decided not to proceed.

The proof of dynamic here is that Goldman Sachs, along with several other large professional services consultancies and investment banks including Merrill Lynch, PriceWaterhouseCoopers and various venture capital groups have invested several hundred million dollars into the development of the blockchain technology which is inseparable from Bitcoin, thus the technology start-ups that initially set out to develop digital currency technology are now the darling of vast financial institutions and seasoned commercial investors due to their ability to adapt blockchain database technology to automate specific aspects of banking and create radically more efficient systems for financial markets infrastructure in future.

Those projects are well underway, but the actual trading of Bitcoin is not to be proceeded with.

Internal teams working on the proposition reportedly came to the conclusion over the last few weeks that there remains too many obstacles for a regulated bank to trade crypto, in order for the firm to move forward with such plans. Instead, it will focus on other digital asset services such as a custody product.

Custody products are of course risk free, as that would involve Goldman Sachs charging a fee to a commercial customer for custody, without taking the risk.

Bitcoin has lost almost half its value so far this year, as trading volumes on cryptocurrency exchanges have fallen by nearly 80 per cent. Its overall market value is now around $223bn, down from over $800bn at the start of the year according to Coinmarketcap.

This should be yet further warning that it is not for the gray suits of New York and London.