Bitcoin Bubble Surpasses Tulip Mania, Says Goldman Sachs

FinTech, Investing, News | January 24, 2018 By:

Goldman Sachs’s investment management arm said that bitcoin’s astronomical rise over the past year “has pushed it into bubble territory.”

In a research letter to investors, the firm compared bitcoin’s meteoric rise to the renowned dot-com era of the late 1990s and the Dutch “Tulip Mania” of the 17th century. The banking firm’s analysts believe that this “bitcoin bubble” could get much bigger than its historical comparables.

‎“Bitcoin’s meteoric rise in a short time has dwarfed the rise seen during the dot-‎com bubble,” the firm said. “We also believe that cryptocurrencies have moved beyond bubble levels in financial markets, ‎and even beyond the levels seen during the Dutch ‘tulipmania’ between 1634 and early ‎‎1637.”

The analysts indicated that while cryptocurrency and blockchain technology might be valuable, bitcoin, the biggest cryptocurrency by market cap, does not actually fulfill the role it sets out to do.

“We think the concept of a digital currency that leverages blockchain technology is viable, given the benefits it could provide: ease of execution globally, lower transaction costs, reduction of corruption since all transactions could be traced, safety of ownership, and so on. But bitcoin does not provide any of these key advantages.”

According to the report, a single bitcoin transaction can take up to 10 days to process, and the value of a single bitcoin varies depending on which exchange a user conducts their transaction through. In late 2017, the price discrepancies among 17 US exchanges for one bitcoin amounted to $4,000, or about a 31% difference between the high and low prices.

The analysts added that while they do not know if bitcoin or any other cryptocurrency will double or triple from prevailing prices, they do not believe that these cryptocurrencies will retain their value in the long run in their current incarnation.

The analysts concluded that cryptocurrencies are too volatile to function as a store of value, and too inefficient to replace traditional currencies. However, they suggested cryptocurrencies could be a viable alternative in frontier markets, where traditional services of money are inadequately supplied.