《加密货币是新的资产类别？》-高盛-2021.5正式版

gabe.liptongalbraith@JennyGrimberg|jenny.grimberg@

THEROLEOFCRYPTOINBALANCEDPORTFOLIOS

ChristianMueller-Glissmann,GSMulti-AssetStrategyResearch...AND

MORE

Note:ThefollowingisaredactedversionoftheoriginalreportpublishedMay21,2021[41pgs].

GlobalMacro

Research

ISSUE98|May21,2021|6:00PMEDT

TOPof

MINDCRYPTO:ANEWASSETCLASS?

Withcryptocurrencypricesremainingextremelyvolatileevenasinterestincryptosfromcredibleinvestorshasbeenrising,andlegacyfinancialinstitutions—includingourselves—havebeenlaunchingnewcryptoproductsandservices,cryptoisundoubtedlyTopofMind.Amidtherecentvolatility,weaskexpertswhethercryptoscanandshouldbeconsideredaninstitutionalassetclass,includingGalaxy’sMichaelNovogratz(Yes;themerefactthatacriticalmassofcredibleinvestorsisengagingwithcryptoshascementedthis),NYU’sNourielRoubini(No;cryptoshavenoincome,utilityorrelationshipwitheconomicfundamentals),Grayscale’sMichaelSonnenshein(Yes;theirstrongreboundin2020reassuredinvestorsabouttheir

resiliencyasanassetclass),andGS’sownMathewMcDermott(clientsincreasinglysay“yes”).AndGSresearchanalystsalsoweighin.WethenspeaktoformerSECadvisorAlanCohen,TrailofBits’DanGuido,andChainalysis’MichaelGronagertoexploretheregulatory,technological,andsecurityobstaclestofurtherinstitutionaladoption.

We’venowhitacriticalmassofinstitutional

WHAT’SINSIDE

engagement[incrypto].Everyonefromthemajorbanks

INTERVIEWSWITH:

toPayPalandSquareisgettingmoreinvolved,whichisa

MichaelNovogratz,Co-founderandCEO,GalaxyDigitalHoldings

loudandclearsignalthatcryptoisnowanofficialasset

class.

NourielRoubini,ProfessorofEconomics,NewYorkUniversityStern

“

-MichaelNovogratz

SchoolofBusiness

Bitcoinandothercryptocurrenciesaren’tassets.Assets

MichaelSonnenshein,CEO,GrayscaleInvestments

havesomecashfloworutilitythatcanbeusedto

MathewMcDermott,GlobalHeadofDigitalAssets,GoldmanSachs

determinetheirfundamentalvalue...Bitcoinandother

AlanCohen,formerSeniorPolicyAdvisor,USSecuritiesand

cryptocurrencieshavenoincomeorutility.

ExchangeCommission

-NourielRoubini

DanGuido,Co-founderandCEO,TrailofBits

MichaelGronager,Co-founderandCEO,Chainalysis

BITCOINASAMACROASSET

Ihaveyettofindsomebodywhohasreallydonetheir

ZachPandl,GSMarketsResearch

homeworkoncryptoassetsthatisn’ttrulyamazedbythe

CRYPTOISITSOWNCLASSOFASSET

potentialfortheassetclass.

JeffCurrie,GSCommoditiesResearch

-MichaelSonnenshein

WHATISADIGITALSTOREOFVALUE?

MikhailSprogisandJeffCurrie,GSCommoditiesResearch

“

AllisonNathan|allison.nathan@ GabrielLiptonGalbraith|

Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.ForRegACcertificationandotherimportantdisclosures,seetheDisclosureAppendix,orgoto/research/hedge.html.

TheGoldmanSachsGroup,Inc.

TopofMind Issue98

MacroElnewsandviews

Weprovideabriefsnapshotonthemostimportanteconomiesfortheglobalmarkets

US

LatestGSproprietarydatapoints/majorchangesinviews

WenowexpectcorePCEinflationtopeakat2.8%inMayandfallto2.25%byyear-end2021afterthestrongAprilCPIprint.

Datapoints/trendswe’refocusedon

Tapertimeline;wethinktheFedwillonlystarttohintattaperingin2H21andbegintotaperinearly2022.

Fedliftoff;ifourtapertimelineisright,thenliftoffwillprobablynotbeonthetableforabouttwoyears.

Unemployment;weexpectasomewhatlessfront-loadedjobsrecovery,butstillseeunemploymentat4%byyear-end2021.

Japan

LatestGSproprietarydatapoints/majorchangesinviews

Weloweredour2Q21andCY21realGDPgrowthforecaststo1.8%qoqann.and2.6%,respectively,aftertheimpositionofathirdstateofemergency,andseeamoreback-loadedrecovery.

Datapoints/trendswe’refocusedon

Pent-updemand,whichshouldboostspendingby¥3.1tn(1%ofconsumption)and¥3.9tn(1.3%)inthefirstandsecondyearsafterreopening,respectively.

Fiscalpolicy;additionalsupportisapossibility.

BoJpolicy;weexpectthestatusquoinpolicytoremainforalongtimewithlittleimpactfromtheinflationoutlook.

Pandemicdistortionstocoreinflationshouldpeaksoon

CorePCEandcontributionstoits2020-22deviationfromtrend

Stimulus-Sensitiveand/orBottleneckedCoreGoods

Virus-SensitiveServicesandApparel

CombinedImpulseonYoYCorePCEInflation

3.0

CorePCEInflation(YoY)andGSForecast

2.5

2%InflationTarget

2.0

Forecast

1.5

1.0

0.5

0.0

-0.5

-1.0

Oct-19

Apr-20

Oct-20

Apr-21

Oct-21

Apr-22

Oct-22

Note:Virus-sensitivecategoriesincludeairfares,hotels,recreationadmissions,andgroundtransport.Stimulus/bottleneckedcategoriesincludenewcars,usedcars,appliances,electronics,recreationvehicles,andmiscellaneouscoregoods.Trendcalculatedasthe2015-2019categoryaverage.April2021reflectsGSnowcastbasedonavailablesourcedata.

Source:DepartmentofCommerce,HaverAnalytics,GoldmanSachsGIR.

Thirdstateofemergencydelaysrecovery

Aggregatemobilityindex,index(1/3-2/6/2020=100)

100

90

80

Secondstate

ofemergency

Thirdstate

ofemergency

70

Firststate

ofemergency

60

Mar-20May-20Jul-20Sep-20Nov-20Jan-21

Mar-21May-21

Source:GoogleLLC"GoogleCOVID-19CommunityMobilityReports";

/covid19/mobility/.Accessed:5/20/21.GoldmanSachsGIR.

Europe

LatestGSproprietarydatapoints/majorchangesinviews

Weraisedour2021UKGDPforecastto8.1%basedonupwardrevisionstoGDPandstrongergrowthmomentum.

Datapoints/trendswe’refocusedon

Euroarealockdowns,whichshouldcontinuetoloosenaheadofasummerreopening,supportingagrowthsurge.

Tourismseason;delayingint’ltravelintoearlyAugustwouldreduceav.growthinSouthernEuropeby0.25ppinQ2/Q3.

Vaccinepace,whichhasmorethandoubledsinceMarch,puttingtheEuroareaontracktovaccinate50%ofthepop.bymid-June.

EmergingMarkets(EM)

LatestGSproprietarydatapoints/majorchangesinviews

WeloweredourQ2andfull-year2021IndiarealGDPgrowth

forecaststo-20.5%qoqann.and9.7%yoy,respectively.Datapoints/trendswe’refocusedon

Virusgrowth,whichremainshighinIndiaandpartsofLatAm.

Chinaturningpoint;withtheV-shapedrecoverycomplete,thepolicyfocusisshiftingtolong-termstabilityandgrowth.

ImpactofrisingUSyields,particularlyrisingrealrates,whichremainsakeyriskforEMs.

Risingoilprices;weseeBrentcrudepricesrisingto$75/bblover3m,whichshouldsupportEMHYoilexporters.

EuropestillfacingmuchtighterrestrictionsthanUS

GSEffectiveLockdownIndex,index

100

UnitedStates

UnitedKingdom

Spain

Germany

France

Italy

90

80

70

60

50

40

30

20

10

0

Jan-20Mar-20May-20Jul-20

Sep-20Nov-20

Jan-21Mar-21May-21

Source:UniversityofOxford,"GoogleCOVID-19CommunityMobilityReports";

/covid19/mobility/.Accessed:5/20/21,GoldmanSachsGIR.

ACOVID-19tidalwaveforpartsofEMDailychangeinconfirmedcases(7dma),thousands

80

Brazil(Left)

400

70

Russia(Left)

350

MainlandChina(Left)

60

300

SouthAfrica(Left)

50

India(Right)

250

40

200

30

150

20

100

10

50

0

0

Mar

May

Jul

Sep

Nov

Jan

Mar

May

Source:JHU,GoldmanSachsGIR.

GoldmanSachsGlobalInvestmentResearch

2

TopofMind Issue98

Crypto:Elanewassetclass?

Withcryptocurrencypricesremainingextremelyvolatileonnewsaboutregulatorycrackdowns,environmentalconcernsandheightenedtaxscrutinyevenasinterestincryptoassetsfromcredibleinvestorshasbeenrisingandlegacyfinancialinstitutions—includingourselves—havebeenlaunchingnewcryptoofferings,cryptoisundoubtedlyTopofMind.Wefirstwroteaboutbitcoinin2014andcryptosmorebroadlyin2018,exploringthepotentialandrisksofthecryptoecosystem.Amidtherecentvolatility,herewefocusonwhethercryptoassetscanbeconsideredaninstitutionalassetclass.

WestartbyspeakingwithMichaelNovogratz,Co-founderandCEOofGalaxyDigitalHoldings,whichisactiveincryptoinvestingandtrading,assetmanagement,andventurefinancing.Hearguesthatthemerefactthatacriticalmassofcredibleinvestorsandinstitutionsisnowengagingwithcryptoassetshascementedtheirpositionasanofficialassetclass.And,despitethepricevolatility,hedoesn’tseetheinstitutionalinterestinbitcoin,whichheprimarilyviewsasaconvenientstoreofvalue,waningaslongasthecurrentmacroandpoliticalbackdrop—inwhichthegovernmenthasnoimperativetostopspendingonsocialissuesthattheFedislargelyfinancing—continues,andcryptoremainsintheadoptioncycle.

MichaelSonnenshein,CEOofGrayscaleInvestments,theworld’slargestdigitalassetmanager,agreesthatinstitutionalinvestorsnowgenerallyappreciatethatdigitalassetsareheretostay,withinvestorsincreasinglyattractedtothefinitequalityofassetslikebitcoin—whichisverifiablyscarce—asawaytohedgeagainstinflationandcurrencydebasement,andtodiversifytheirportfoliosinthepursuitofhigherrisk-adjustedreturns.Eventhoughcryptoassetshavebehavedasanythingbutadiversifieroverthepastyear—sellingoffmorethantraditionalassetsastheCOVID-19pandemicsetin—hesaysthattheirfasterandstrongerreboundin2020onlyreassuredinvestorsabouttheirresiliencyasanassetclass.

Butwhatmakesacryptolikebitcoin—whichhasnoincome,nopracticalusesandhighvolatility—agoodstoreofvalue?Novogratz’sanswer:because“theworldhasvotedthattheybelieve”itis.ZachPandl,GSCo-HeadofGlobalFX,Rates,andEMStrategy,largelyagrees,arguingthatbitcoin’spotentialforwidespreadsocialadoptiongivenitsstrongbrandontopofitsotherproperties,suchasitssecurity,privacy,transferabilityandthefactthatit’sdigitalmakesitaplausiblestoreofvalueforfuturegenerations.Andhebelievesthatinstitutionalinvestorstodayshouldtreatbitcoinasamacroasset,akintogold.

GScommodityanalystMikhailSprogisandJeffCurrie,GlobalHeadofCommoditiesResearch,fortheirpart,arguethatcryptoscanactasstoresofvalue,butonlyiftheyhaveotherrealworldusesthatcreatevalueandtemperpricevolatility.This,theysay,bestpositionscryptoswhoseblockchainsofferthegreatestpotentialforsuchuses,likeether,tobecomethedominantdigitalstoreofvalue.Morebroadly,Curriecontendsthatcryptosareanewclassofassetthatderivetheirvaluefromtheinformationbeingverifiedandthesizeandgrowthoftheirnetworks,butthatlegalchallengestotheirfuturegrowthloomlargeduetotheirdecentralizedandanonymousnature.

AndNourielRoubini,professorofeconomicsatNYU’sSternSchoolofBusiness,entirelydisagreeswiththeideathatsomethingwithnoincome,utilityorrelationshipwitheconomicfundamentalscanbeconsideredastoreofvalue,oranassetat

all.Despitetherecentcryptomania,hedoubtsthewillingnessofmostinstitutionstoexposethemselvestocryptos’volatilityandrisks,whichthevolatilepriceactioninrecentdayshasservedasastarkreminderof.

ChristianMueller-Glissmann,GSSeniorMulti-AssetStrategist,thenmakesthecasethatforanassettoaddvaluetoaportfolio,ithastooffereitheranattractiverisk/rewardorlowcorrelationswithothermacroassets,andpreferablyboth.HefindsthatasmallallocationtobitcoininastandardUS60/40portfoliosince2014would’veledtostrongoutperformance,owingbothtohigherrisk-adjustedreturnsforbitcoincomparedtotheS&P500andUS10ybonds,aswellasdiversificationbenefitsfromrelativelylowcorrelationsbetweenbitcoinandotherassets.Butwiththisoutperformancelargelyowingtoonlyahandfulofidiosyncraticbitcoinrallies,heconcludesthatbitcoin’sshortandvolatilehistorymakesittoosoontoconcludehowmuchvalueitaddstoabalancedportfolio.

Butbeyondthedebatableroleofcryptosasastoreofvalueandinvestibleasset,doesthebroadercryptoecosystemprovidepromiseforinvestors?NovogratzandSonnensheinstronglybelievethattheanswerisyes,givenamyriadofpotentialusecasesforcryptoassets.Inparticular,Novogratzseesthethreebiggestdevelopmentsinthecryptoecosystem—payments,DecentralizedFinance(DeFi),andnon-fungibletokens(NFTs)—mostlybeingbuiltontheEthereumnetwork,whichsuggestssubstantialupsideforitandvariousDeFiapplications.ButRoubinicontendsthatfewsuccessfulapplicationsofblockchaintechnologyexisttoday.Andheseesmanypotentialcorporateusesofitas“BINO”—BlockchainInNameOnly.Inshort,he’sskepticalthatblockchaintechnologywillproverevolutionarybecause“theideathattechnologycanresolvethequestionoftrustisdelusional.”

MathewMcDermott,GSGlobalHeadofDigitalAssets,thenexplainswhyGShas(re)engagedinthespace—intwowords:clientdemand—andhowinterestincryptosdiffersbetweenclienttypes—fromassetmanagerswhoareseekingportfoliodiversification,tohigh-net-worthclientswhoareincreasinglylookingforexposuretobroadercryptousecases,tohedgefundsthatarelargelyaimingtoprofitfromthebasisbetweengoinglongthephysicalandshortthefuture—anarbitragethatreflectsthedifficultiesthatstillpersistinaccessingthemarkettoday.

Beyondthisissueofmarketfragmentation,weconcludewithalookatsomeoftheothermainobstaclestofurtherinstitutionaladoptionofcryptoassets.AlanCohen,previousseniorpolicyadvisortoformerSECChairmanJayClaytonandformerGSGlobalHeadofCompliance,explainshowregulatorsarelookingatcryptoassetstoday.MichaelGronager,Co-founderandCEOofblockchaininvestigationsfirmChainalysis,explainswhatis—andisn’t—includedintheiranalysisthatfindsthatlessthan1%ofallcryptocurrencyactivityisillicit.AndDanGuido,Co-founderandCEOofsoftwaresecurityfirmTrailofBits,discussestheblackswantechnologicalandsecurityscenariosthatallinvestorsinthecryptoecosystemshouldbeawareof.

AllisonNathan,Editor

Email:

allison.nathan@

Tel: 212-357-7504

GoldmanSachsandCo.LLC

GoldmanSachsGlobalInvestmentResearch 3

TopofMind Issue98

InterviewElwithMichaelNovogratz

MichaelNovogratzisCEOofGalaxyDigitalHoldingsLtd.Below,hediscussesthepotentialforcryptoassetsandtheirabilitytotransformthefinancialsystemandbeyond.

TheviewsstatedhereinarethoseoftheintervieweeanddonotnecessarilyreflectthoseofGoldmanSachs.

AllisonNathan:HowdoesGalaxyinvestinthecryptouniverse?

MichaelNovogratz:GalaxyDigitalgrewoutofmyfamilyoffice,whichoperateslikeamerchantbank,andhasbecomeanearlyfull-servicebusinessforthedigitalassetandblockchaintechnologycommunities.Beinginvolvedacrosstheecosystem

isimportanttous,namelysothatwecanbepositionedtohelpgrowtheindustrythatwebelievewilltransformthewayweliveandworkglobally.Weownandtradecoins,havealargeventurebusiness,andinvestinthevirtualworldthatwillbeusednotbyfinance,butbyconsumers—themetaverse,gamingstudios,andnon-fungibletoken(NFT)projects.Webelieveyoulearnbybeingatthefrontierandthat’swhywestartedthecompany—tolearnaboutthecryptospaceandsharethatknowledgewithourinstitutionalcustomersaswecreatethenextgenerationoffinancialservicescompanies.

AllisonNathan:You’vebeeninvolvedinandexcitedaboutthecryptospaceforawhilenow,butit’shadfitsandstarts,includingthedramaticpriceriseandcollapsein2017/18.Whatmakesthistimedifferent?

MichaelNovogratz:2017/2018wasthefirst-evertrulyglobalandretail-drivenspeculativemania.Itwasblindexcitement.It’snotthattherearenoexcesses,knuckleheadedTwittercomments,cheerleading,ortribalismtoday,butthat’salltherewasbackthen.Andcrypto’smarketcapcratered98.5%.Butoutofthatmaniagrewamuchsmarterinvestorbasethattookthelessonslearnedandismorewillingtodifferentiatebetweenthedifferentusecasesforcrypto—fromstoresofvaluetodecentralizedfinance(DeFi)tostablecoinsandpaymentsystems.Andinturn,thecommunityhasbuiltupamorelogicalinvestmentprocess.

Importantly,thatpricedownturndidn’tresultinadownturnininvestmentsbeingmadeintheunderlyingcryptoinfrastructure,sothecustodyandsecurityinfrastructurenecessarytoattractinstitutionshasbeenbuilt.Asaresult,we’venowhitacriticalmassofinstitutionalengagement.EveryonefromthemajorbankstoPayPalandSquareisgettingmoreinvolved,whichisaloudandclearsignalthatcryptoisnowanofficialassetclass.There’sstillalotofvolatility,sopeoplewillwashinandout.Butcryptoisnotgoingaway.Andacoregroupofcryptopeopleseethisas—andIquotetheBluesBrothershere—“amissionfromgod”.Theywanttorebuildtheinfrastructureofthefinancialmarketsinawaythat’smoretransparentandegalitariananddoesn’trelyongovernmentswhomakebaddecisionswithourfinances.Theywillneversell.Andbecauseofthat,bitcoinandethercan’tgotozero.

AllisonNathan:Butcanthecryptoecosystemsurviveifitisn’tintertwinedwiththetraditionalfinancialsystem?

MichaelNovogratz:No.Institutionsneedtoparticipatebecausetheyhavemostofthemoneyintheworldandthere’sactuallyasymbioticrelationshipbetweenthetwo.TheadvisormodelthatGalaxypossessesisimportantbecausemanypeopledon’thavetimetolearntobecomeinvestors.Andastraditionalfinancialadvisorsandassetmanagersunderstandthespaceandbecomecryptopreachers,theybringmorepeopleintothetent,whichiskeyforthefutureofcrypto.

Thatsaid,paymentswillbeaninterestingbattleground.Themoneytransferbusinessisaveryhighmarginoneforlegacyfinancialinstitutionsandit’sunderthreatfromnewpaymentsystemsthatarefaster,moretransparent,andcheaper.

FacebookiscomingoutwiththeirDollar-basedpaymentsystem,theChinesegovernmentiscomingoutwiththeirs,andstablecoinsaregainingtraction.Atsomepoint,Ibelieveourphoneswillhavecryptowalletsthatwillreplacebankaccounts.Thecompetitiontoseewhodominatespaymentsisjuststartingalongwiththecompetitionbetweenexchangesandderivativemarkets.Sothequestionis,howfastwillbanksiterateandcompete?

Acoregroupofcryptopeopleseethisas—andIquotetheBluesBrothershere—“amissionfromgod”…Theywillneversell.Andbecauseofthat,bitcoinandethercan’tgotozero.”

AllisonNathan:Butwillitbebitcointhat’stransformativeinpayments?

MichaelNovogratz:No.Bitcoinisn'tsetuptoprocessthousandsoftransactionspersecond.Payingforadietcokewithbitcoinwouldbelikepayingforitwithgold.Thatwon’thappen.Butpaymentrailswillbebuiltonotherblockchains.Rightnow,ifIwanttosendmoneytomysisterinHolland,itwouldbepainful,costly,andslow.Butsoon,I’llbeabletosendheraDollarstablecoinandtransferringmoneywillbecomefree.MostofthiswillbebuiltontheEthereumnetwork,whichiswhyethereumpriceshavebeenrising.Thethreebiggestmovesinthecryptoecosystem—payments,DeFi,andNFTs—aremostlybeingbuiltonEthereum,soit’sgoingtogetpricedlikeanetwork.Themorepeoplethatuseitandthemorestuffthatgetsbuiltonit,thehigherthepricewillultimatelygo.

AllisonNathan:What’sthevaluepropositionofbitcoin,then?

MichaelNovogratz:Bitcoinisareallyconvenientwaytostorevalue.Oneofthemainreasonspeoplehavegottenexcitedaboutbitcoinrecentlyisthatthey’reworriedthatwecurrentlyhaveanunsustainablebalanceofmonetaryandfiscalpolicy

GoldmanSachsGlobalInvestmentResearch 4

TopofMind Issue98

El

thatwilleventuallysetoffaninflationaryspiral.Andthatworryisn’tgoingawayanytimesoon.MoreandmoreAmericansareinfavorofpayingforcollegeforpeoplewhosefamiliesearnlessthan$100kannually.PresidentBidenjustgavehalfofthe$1.9tnfiscalpackagedirectlytopeoplewhoneededit,whichwasverywell-received.Someversionofuniversalbasicincome(UBI)iscoming;itmaynotbecalledUBI,butcapitalwillbetaxedandgiventolabor.Noneofthatisfiscallyprudent,butthere’snopoliticalimperativetosaystopspendingmoney.EvenbeforeCOVID-19,deficitswerebad,butnowthey’reinsane.Andmonetarypolicymakersarefinancingeverythingthegovernmentwantstospend,notjustintheUSbutallovertheworld.Sothemainreasoneveryonegotintobitcoinisthesamereasontheygotintogold—thecurrentmacrobackdropistailor-madeforit.And,aslongasthatmacroandpoliticalbackdroppersistsandcryptoremainsintheadoptioncycle,it’scrazytogetout.

Thethreebiggestmovesinthecryptoecosystem—payments,DeFi,andNFTs—aremostlybeingbuiltonEthereum,soit’sgoingtogetpricedlikeanetwork.Themorepeoplethatuseit,themorestuffthatgetsbuiltonit,andthehigherthepricewillultimatelygo.”

AllisonNathan:Butwhyisbitcoin,whichhasnoincomeandnootheruses,agoodstoreofvalue?

MichaelNovogratz:Bitcoinisoneofthefewuniformstoresofvalueintheworld.It’sthemostwidelydistributedassetinhistoryoutsideoftheDollarandEuro;140millionpeopleownsomebitcoin.Andit’seasilystoredandtransported,unlikegold.Storesofvaluearesocialconstructs—theyhavevaluebecausewebelievetheydo.Therehasneverbeenamoresuccessfulbrandcreatedinsuchashortperiodoftime.It’sliketheyfloatedthebabyintheriverandthecommunityraisedthebaby,andnowit’swortharound$1tn.Today,it’srecognizedandbelievedinbyexceptionallycrediblepeople.Sotheworldhasvotedthattheybelievebitcoinisastoreofvalue.Peoplestillmakestubbornargumentsagainstit,buteverysinglebankweknowofisbuildingawealthchannelforcrypto,14entitieshavebitcoinETFsinlineattheSEC,andmosttechcompaniesarebuildingbitcoinintotheirwalletandinterface.Tothinkwe’regoingtohavelesspeoplebelievinginbitcoinisn’tlogical.

AllisonNathan:Haven’tpeoplebeenbuyingbitcoinandothercryptosjustbecausetheirpriceswererising?

MichaelNovogratz:Ofcoursethat’spartoftheequation.Peopleingeneralaremomentuminvestors.Allgreatfortunesonthisplanethavebeenmadebytrends—IlearnedthatfromPaulTudorJonesthirtyyearsagoandJeffBezosandBillGatesareproofpointstothisaswell.Bitcoinadoptionandthemacrofactorsbehinditareamegabulltrend.

AllisonNathan:Sowhataretheremainingroadblockstofurtherinstitutionaladoption?

MichaelNovogratz:Institutionsneedalittlemoreregulatoryclarity,whichthey’lllikelygetsoon.FormerSECChairJay

Claytondidn’twantcryptotobehislegacy,andsohepunted.ButGaryGenslerisveryknowledgeableaboutandinterestedinthecryptospace.Withinhisfirstninemonths,aclearregulatoryframeworkwilllikelyemergethatwillmakeiteasierforinstitutionstogetinvolved.Forexample,institutionshaveahardtimeusingDeFiproductsrightnowduetouncertaintyaroundhowKnowYourCustomer(KYC)requirementsareappliedtosmartcontractsandDeFicompaniesthatarecomprisedofcode.Withalittlemoreinnovationandregulatorunderstandingoverthenextfewyears,DeFiprotocolsandprojectswillprobablyexplode.UniswapcouldbecomeabiggerexchangethantheCMEortheNYSEwhichwillpullpeoplein.Moreclarityonthetaxsidewouldalsobehelpful.Butpolicymakerstodayarerationalandhavehighintellectualintegrity,soIdon’tseethemsinglingoutcryptocurrenciesanddoexpecttheywillbetaxedlikeanyotherasset.I’mmuchmoreconfidentthanI’veeverbeenthatthisisinevitable.

AllisonNathan:WhatdoyoumakeabouttheriseofDogecoinandothermemecoins?

MichaelNovogratz:Dogecoinisaveryspeculativeasset,muchmoresothanbitcoin.Itlikelydoesn’thavelong-termlegsbecausenoinstitutionisbuyingitandatsomepoint,retailwillloseinterest.Dogecoinstartedasajokeandgrewfortworeasons.Firstandforemostistribalismintheinvestingcommunity.It’sthesamethingwesawwiththeriseinGameStop,whichwasdrivenbyayoungcommunityofinvestorswhohavebeenempoweredasfinancialplayersthroughtradingappsandsocialmediaplatforms.Second,valueisshowingupinnewplacesbecausethegovernmentisprintingalotofmoney.It’simportanttokeepthatinmindwhenthinkingaboutsomecryptoassetsandequitieslikeGameStopthathaveshort-termpotentialbutnolong-termviability.

Peopleingeneralaremomentuminvestors.Allgreatfortunesonthisplanethavebeenmadebytrends…Bitcoinadoptionandthemacrofactorsbehinditareamegabulltrend.”

AllisonNathan:Whatwouldmakeenthusiasmfortheassetclassdiminish?

MichaelNovogratz:Iamnotsurewhatcoulddententhusiasmforthebroaderecosystematthispoint.But,atleastforbitcoin,thebiggestriskinthiscycleis,inthewordsofRayDalio,abeautifulde-leveraging.IftheFedsuccessfullytapsthebrakes,pullsbackliquidity,andslowstheeconomydownjustenoughtoensureinflationdoesn’trunawayanddeficitscomedown,thentheimpetusforhavingastoreofvaluewillfall.Butthisisthehardestmacroenvironmentpolicymakershaveeverdealtwith,andonlyatinywindowexiststogetitright.Andeveniftheydo,bitcoinwon’tjustcollapseintooblivion.Whyhasgoldbeenamediocreassettoownthisyearandbitcoin’sgenerallybeenagreatone?Becausegoldisn’tintheadoptioncycle.Bitcoinis.

GoldmanSachsGlobalInvestmentResearch 5

TopofMind Issue98

Cryptos:Elsizingthesurge

BitcoinandetherhaveperformedstronglyYTD

TotalreturnsYTD,%

300

250

200

150

100

50

0

-50

German30yUS30yUS10yGSCIGoldEUR/USDTopixUSHYMSCIEMMXAPJMSCIWorldS&P500Stoxx600GSCIIndMetals10yInflationBitcoinGSCIEnergyEther

Note:TotalreturnsinUSD;allmarketpricesasofMay19,2021.

Source:Bloomberg,GoldmanSachsGIR.

Andothercryptocurrencieshaveseenevenlargerrallies