Most digital currencies are unlikely to survive in their current form, and investors should prepare for them to lose all their value as they are replaced by a small set of future competitors, said Goldman’s Steve Strongin in a note.
“The high correlation between the different cryptocurrencies worries me,” he said, adding: “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.”
According to the expert, cryptocurrencies aren’t likely to be winner-takes-all but some level of consolidation is extremely likely. When that happens, the coins which lose popularity will diminish in value to zero, leaving investors with nothing, Strongin explained.
“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,” he said.
Strongin also said that today’s virtual currencies lack long-term staying power because of slow transaction times, security challenges and high maintenance costs. He added the introduction of regulated bitcoin futures hasn’t addressed those concerns.
“Are any of today’s cryptocurrencies going to be an Amazon or a Goggle, or will they end up like many of the now-defunct search engines? Just because we are in a speculative bubble does not mean current prices can’t increase for a handful of survivors.
“At the same time, it probably does mean that most, if not all, will never see their recent peaks again,” said Strongin.
He added that Goldman remains optimistic about how blockchain could make businesses more efficient, especially banking. “It’s only a matter of time,” Strongin concluded.
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