The Evolution of Cryptocurrencies

The article below is from our BRIEFINGS newsletter of 18 February 2021

Could bitcoin replace gold as a store of value? According to long-time cryptocurrency enthusiast Mike Novogratz, founder of Galaxy Investment Partners, bitcoin, blockchain and decentralized finance are poised to disrupt the payment and financial services ecosystem. Goldman Sachs Asset Management’s Katie Koch, co-head of the Fundamental Equity business, and Nora Creedon, global head of REIT and infrastructure strategies, spoke with Novogratz, a former Goldman Sachs partner, at a recent GSAM Forum event. 

Katie Koch: So Mike, in the GSAM Forum, we love to speak to early adopters of disruptive trends and you were among the first institutional investors to focus on cryptocurrencies. Given market attention on the first and most popular cryptocurrency, bitcoin, how should we view it relative to a traditional currency – is it a store of value and efficient medium of exchange like fiat currency? 

Mike Novogratz: Bitcoin should be viewed as a store of value, akin to a “digital version of gold.” Its value amounts to 6% of gold today but could rise to 10% by the end of the year and surpass gold in value at some point in the next three to four years. There are 118 elements in the periodic table, yet gold is the only element to be designated safe-haven status. The same designation can extend to bitcoin in a digitized world, especially given growing risk of debasement of fiat currencies and raised prospects of a higher inflation regime – the political environment is in favor of lower inequality even if it entails higher inflation. Scarcity will also reinforce its value given there is a finite amount of bitcoins, around 21 million, though 2 to 3 million are thought to have been misplaced. 

Nora Creedon: The COVID-19 pandemic has accelerated digital payment adoption and in turn the pace of digital currency development, including at central banks which are focused on benefits including broader financial inclusion and potentially improved transmission of monetary policy. What are your thoughts on central bank digital currencies (CBDCs) and which cryptocurrencies and technologies should we be focused on? 

Mike Novogratz: The DNA of bitcoin—blockchain—is revolutionary and will be the foundation for both private and public digital payments efforts. Last year, the People’s Bank of China launched pilot programs for a digital currency. Central banks in Europe and Japan are also exploring their own CBDCs. There are more $100 denomination bills held outside the U.S. than $1 bills in domestic circulation, making it critical for the U.S. to consider a digital currency if the dollar is to retain its reserve currency status. In the private space, Venmo is essentially a digital currency, though transaction values are capped, and there are other digital currencies in the works such as Facebook’s Diem. For cryptocurrencies, Ethereum blockchain is essential to facilitating payments in a decentralized manner; it can be thought of as a supercomputer that processes and authenticates data—call it Web 3.0. More broadly, decentralized finance is set to disrupt many corners of traditional finance and at a faster rate than I could have imagined.

Katie Koch: Enthusiasm for bitcoin is evident among millennial and Gen Z generations, perhaps given their familiarity with the digital world, but we’ve also seen high-profile institutional investors get involved. Given baby boomers have adopted millennial behaviors such as online shopping and streaming this past year, should we expect them to venture into bitcoin also? 

Mike Novogratz: That’s the hope! Demand from baby boomers has potential to be a significant tailwind for bitcoin in 2021 as private wealth managers launch bitcoin funds. In my view, it’s not a matter of will it happen, it’s a matter of when it will happen.