Goldman Sachs: Bitcoin will eventually lose its crown! Instead, Ethereum will take its place

Text | Xu Chao

Goldman Sachs believes that considering multiple factors such as real use, user base, and speed of technological iteration, Ethereum is likely to replace Bitcoin and become the mainstream cryptocurrency.

In terms of market trends, Goldman Sachs emphasized that the key difference between the current cryptocurrency market and the bull market of 2017-2018 is the participation of institutional investors. However, with the recent slowdown in the participation of institutional investors (decreased inflows of funds into cryptocurrency ETFs) and the emergence of alternative coins, the market is once again dominated by retail investors.

Goldman Sachs said this shift from institutions to retail investors is increasing the likelihood of a market crash. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of their prices.

Ethereum has great potential

Goldman Sachs said that the Ethereum system supports smart contracts and provides developers with a way to create new applications. Currently, most decentralized financial (DeFi) applications are built on the Ethereum network, and most non-fungible tokens (NFTs) are also purchased using Ethereum.

Compared with Bitcoin, Ethereum has a larger transaction volume. As Ethereum is used more and more in DeFi and NFT, it will establish its first-mover advantage in applying encryption technology.

Goldman Sachs emphasized that Ethereum can also store almost any information securely and privately on a decentralized ledger . This information can be tokenized and traded. This means that the Ethereum platform has the potential to become a large trading market for trusted information.

Investors can already use NFTs to sell digital art and collectibles online, but this only scratches the surface of its actual uses.

Goldman Sachs believes that in the future, individuals can store and sell their medical data to pharmaceutical research companies through Ethereum. Digital archives on Ethereum may contain personal data, including asset ownership, medical history, and even intellectual property.

Ethereum also has the benefit of being a decentralized global server infrastructure , which could offer a solution to sharing personal data, as opposed to centralized servers like Amazon or Microsoft.

Bitcoin’s scarcity is not enough to support its function as a store of value

The main reason for Bitcoin's value storage function in the market is its limited supply. However, Goldman Sachs believes that it is demand, not scarcity, that drives the success of value storage.

The main price storage assets on the market currently have a stable supply: the supply of gold has been growing at a rate of nearly 2% for centuries, but gold is still recognized as a means of preserving value. However, rare elements such as osmium are not a means of storing value.

Goldman Sachs emphasized that a fixed and limited supply may stimulate hoarding, forcing new buyers to outbid existing buyers, thereby driving up price volatility and creating financial bubbles. Compared with limited supply to maintain value, it is more important to reduce the sharp and unpredictable growth of new supply. Currently, there is no upper limit on the total supply of Ethereum, but there is a limit on the annual supply growth, which meets this standard.

Rapidly evolving technologies disrupt first-mover advantages

Supporters of the view that Bitcoin will dominate the cryptocurrency market believe that it has a first-mover advantage and a huge user base.

But Goldman Sachs points out that history has proven that first-mover advantage is difficult to maintain in industries with rapidly changing technology and growing demand. If established companies fail to adapt to changing consumer preferences or technological advances by competitors, they may lose their dominant position (Yahoo vs. Google).

The number of active users in the cryptocurrency market is currently very volatile. In this environment, encryption technology is also changing rapidly, and systems that cannot be upgraded quickly may become obsolete.

In terms of user base, Ethereum gained a large active user base in 2017, and its current user base has reached 80% of the size of Bitcoin .

In terms of technology, Ethereum is currently upgrading its protocol rapidly (faster than Bitcoin), transitioning from Proof of Work (PoW) to Proof of Stake (PoS).

Goldman Sachs said that the advantage of PoS is that it can greatly improve the energy efficiency of the system , rewarding miners based on the amount of Ethereum they choose to hold (rather than their processing power), which will end the power-burning race for miner rewards.

Currently, Bitcoin's energy consumption has reached the energy consumption of the Netherlands. If the price of Bitcoin rises to $100,000, its energy consumption may double. From an ESG perspective, this makes Bitcoin investment challenging.

In terms of security and stability, Goldman Sachs said that all cryptocurrencies are still in their early stages, with rapid technological changes and an unstable user base.

Although there are security issues in the Ethereum PoS protocol verification process, Bitcoin is not 100% safe. Currently, the top four Bitcoin mining pools control nearly 60% of the Bitcoin supply, and the high concentration leads to the possibility of false transactions.

Ethereum also faces many risks, and its dominance is not guaranteed. For example, if the Ethereum 2.0 upgrade is delayed, developers may choose to move to competing platforms.

The market will continue to fluctuate until real use value emerges

Goldman Sachs pointed out that the key difference between the current cryptocurrency market and the bull run of 2017-2018 is the presence of institutional investors: this is a sign that financial markets are beginning to embrace cryptocurrency assets.

Bitcoin volatility has remained high, with prices dropping 30% in a single day over the past week.

At the same time, the recent slowdown in institutional participation (decreased inflows into cryptocurrency ETFs) and the proliferation of alternative coins suggest that the market is once again dominated by retail investors.

Goldman Sachs believes that this shift from institutions to retail investors is increasing the likelihood of a major market crash. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of prices. This will usher in a new era of cryptocurrencies.