Cryptocurrency from the perspective of Goldman Sachs: Criticism and dialogue

The cryptocurrency ecosystem has been quick to react and oppose public statements by skeptical and ill-informed experts in the traditional financial world who, we believe, should have a better understanding of cryptocurrencies. This reaction has been particularly evident in recent days, especially after comments made by Sharmin Mossavar-Rahmani, chief investment officer of Goldman Sachs Asset Management and Wealth Management, in an interview with the Wall Street Journal.

I’m not going to criticize her here. In fact, I’m going to defend her. I have to say that I disagree with most of her arguments — but I also think that a more comprehensive understanding of different perspectives can make us stronger advocates for cryptocurrencies. It can also reduce unnecessary anxiety and be good for our mental health. Plus, it’s an interesting mental challenge.

Let’s start with a bigger picture and some background information.

First, Mossavar-Rahmani has an impressive investment background—including 31 years at Goldman Sachs—which is no mean feat, and she has earned a lot of respect for it. Second, her views are not representative of Goldman Sachs as a whole. She is the head of asset management and wealth management, which is separate from sales trading and investment banking, both of which are involved in the cryptocurrency ecosystem. Third, some in the crypto media are making a big fuss about Goldman Sachs being “under pressure” or “under fire” for Mossavar-Rahmani’s comments. I highly doubt Goldman Sachs cares about the outrage in the crypto community, and its wealth management clients can find opportunities elsewhere if they want exposure to crypto.

However, given her influence among investment managers, especially those who are looking for an excuse not to learn about crypto assets, her comments in the WSJ interview are worth some discussion:

1) “We don’t view it as an investment asset class.”

As I emphasized above, “we” here refers to the asset management division, not the entire Goldman Sachs Group.

It’s easy to scoff at her limited understanding of digital assets, since digital assets are clearly an “investment asset class” because they trade on active markets and people invest in them. But it turns out that the official definition of the term can vary. ChatGPT’s definition is: “a group of financial instruments that have similar financial characteristics, are subject to the same laws and regulations, and are typically traded on the same financial markets.”

What Ms. Mossavar-Rahmani is probably trying to say here is the current lack of regulatory standards for crypto assets. Also, the idea that cryptocurrencies have "similar financial characteristics" is a bit far-fetched. Stablecoins are very different from Bitcoin , which is very different from AVAX, BONK, and many other digital assets.

We should keep in mind that she may be discussing category characteristics, not whether cryptocurrencies are worth investing in.

2) "If you can't determine a valuation, then how can you be bullish or bearish?"

For cryptocurrency supporters, a general consensus is that the expectation of an asset's future price increase or decrease does not require the asset to have inherent value. We all know that the valuation of crypto assets is extremely complex, and due to the many influencing factors, we will not go into detail here. But it is undeniable that the cryptocurrency market also has alternating cycles of bull and bear markets. Therefore, the view that cryptocurrencies are excluded from the investment asset class is obviously inappropriate.

Now let’s try to think from Mossavar-Rahmani’s perspective. She oversees an investment advisory division that faces intense scrutiny and bureaucracy. She has not maintained her position at a highly competitive firm for 31 years by taking unexplained risks. Traditional investment advisors need to articulate their decision-making logic to clients. They must “show their work” in case an investment goes wrong. If her team can’t determine a reasonable model-based valuation for Bitcoin (BTC), then they can’t provide a buy or sell recommendation.

Most of us don't have the same constraints as Goldman Sachs. For me, "price increase" is enough, and I have an expected number in mind, and when it reaches this number, I may take profits based on my "gut feeling". I have also been exposed to some other investment advisors who also put forward target prices, but these target prices are not based on any proven valuation method.

My point is that Goldman has many very smart investment analysts who are fully capable of constructing a reasonable valuation model. Other large firms have done so, even if the opinions are not completely consistent. The key is the reasoning. I think we have reason to expect more from Goldman. The lack of an "official" model seems a bit lazy.

Yet Mossavar-Rahmani’s job is to ensure the safety of investments, and in that context her comments do not seem out of place.

3) "Cryptocurrencies do not create value of any kind"

Indeed, this is a hard point to defend. Crypto assets provide a multitude of services and use cases that have real value. Even if we only talk about Bitcoin (BTC), it is clearly of great value to those facing currency devaluation or limited access to funding.

Yet the word “value” is actually quite misunderstood, even among investment professionals. We often associate it with usefulness, potential for appreciation, satisfaction, belonging, and a host of other pleasant benefits. Artwork has “value,” as do flowers and friendship.

But Ms. Mossavar-Rahmani may be referring to the “assigned value” we discussed earlier. Perhaps she means that if there is no accepted model to give a specific number, then it cannot be considered to have value?

I must admit that I cannot find a reasonable explanation for this view. It seems to reflect her lack of understanding of crypto assets, which I can only attribute to a lack of in-depth research. After all, no one can question her intelligence. Although I try to find rationale for this view, it is really difficult to stand up.

4) "The final decision rests with a few people"

Her point on this issue is generally valid. I would suggest adding some qualifications to the statement, such as "some major decisions may eventually be made by" or "some key decisions of the network may eventually be made by". However, I agree that the word "decentralization" is often misused.

At the same time, it’s worth noting that “decentralization” is not an absolute yes or no condition. There are different levels of decentralization. In fact, many networks are working to gradually improve their level of decentralization, as they promise.

5) "At least you can actually own gold and keep it safe, whereas cryptocurrencies don't offer that kind of physical possession."

Goldman Sachs has long been lukewarm about gold, and one theory is that this is because the investment banking division can't earn money by issuing gold, but can earn rich returns by helping companies issue stocks and bonds. Although I don't quite believe this, it is rare to see a large investment management company turn a blind eye to such an important asset.

Perhaps this is because gold itself does not generate any direct "value"? Gold has no cash flow and no dividends. If it has no specific "value", how can investment advisors hold bearish or bullish views on it? Can gold really "create" value? Obviously not.

This passage reflects the doubts of many people. It reveals Mossavar-Rahmani's understanding of the concept of "value", that is, value is something that needs to be created. For her, value seems to have specific outputs.

This also reveals a limited understanding of how crypto assets work. In fact, many assets do produce concrete outputs. I would like to point out that this comment also shows a limited understanding of gold investment, as few institutional or high net worth gold investors actually own their own gold bars.

However, taking a step back, the significance of this work is to show that not all cryptocurrency critics are wrong. It is useful to understand where the barriers to cryptocurrency adoption lie. It is also valuable to acknowledge that there are conflicting views in the market, which ultimately do not matter in the long run.

More importantly, it’s satisfying to think about the people we know who initially rejected the concept of cryptocurrency. They were smart and well-educated financial professionals, but eventually they decided to invest the time and energy to better understand what we were looking at — and they eventually changed their minds.

Maybe one day, Ms. Mossavar-Rahmani will change her mind. If she doesn’t, it doesn’t really matter. If we can expect our once-skeptical friends to be open-minded to our ideas, then we should strive to be open-minded to our critics. At the very least, doing so can help us better understand the key points we should focus on when explaining and promoting our ideas.