GOLDMAN SACHS: Bitcoin and other cryptocurrencies tend to be locked together — and that’s a big problem

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Markets Insider

Bitcoin price

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Markets Insider

When bitcoin reached its all-time high of $19,843 in December, it wasn’t long until smaller coins followed suit.

And when the flagship cryptocurrency began its 65% tumble, losing hundreds of billions of dollars in value in just a matter of weeks, so too did the other major cryptocurrencies. Since their peaks, the most valuable cryptocurrencies have lost anywhere from 52% to 79% of their value – all at the same time.

This is should be a red flag for investors, according to Goldman Sachs’ head of Global Investment Research Steve Strongin.

“The high correlation between the different crypto currencies worries me,” Steve Strongin said in a note to clients Monday, as cryptocurrencies were being wiped out alongside equity markets in a global meltdown. “Contrary to what one would expect in a rational market, new currencies don’t seem to reduce the value of old currencies; they all seem to move as a single asset class.”

Cryptocurrencies aren’t likely to be winner-take-all, Strongin says, but some level of consolidation is extremely likely. When that happens, the coins which fall out of favor will fizzle down to zero, leaving investors with nothing.

“This is actually an important distinction between cryptocurrencies and fiat currencies; if a government decides to phase out a currency, it will typically determine a residual value for that currency and exchange that currency for a replacement one,” Strongin continues.

Wall Street banks have had a complicated relationship with bitcoin and cryptocurrencies.

In January, Goldman Sachs strategists said bitcoin could become a legitimate global currency, at least in theory. The bank also cleared bitcoin futures, which launched on the Cboe exchange in December, for some of its clients.

Other competitors, like Bank of America, have said clients can absolutely buy bitcoin if they want – just not with their margin accounts.

Still, Goldman, like most firms, remains optimistic about how blockchain – the technology that underpins cryptocurrencies – can make businesses more efficient, especially banking. It’s only a matter of time, according to Strongin.

“As it relates to the underlying technology, there is clearly a role for improving the ledgers that underlie financial transactions,” Strongin said. “Substantial investment is being made in leveraging blockchain technology to more efficiently and quickly settle contracts, confirmations, and related transactions. But the current technology does not yet offer the speed that will be required for market transactions.”