Why do both Goldman Sachs and JPMorgan prefer ETH?

Ether is the platform for solving economic problems today, while Bitcoin is “finding solutions to problems”.

Author | TYLER DURDEN

When Goldman Sachs officially announced two weeks ago that it was relaunching a previously rumored cryptocurrency trading team on May 6, some joked that it was a big volatility signal for the crypto space: after all, the last time Goldman launched its bitcoin trading platform, the crypto space crashed and months later, Goldman canceled its expansion plans in the space, sending cryptocurrencies plunge further and kick off a crypto winter that lasted more than two years.

Why do both Goldman Sachs and JPMorgan prefer ETH?

In September 2018, the crypto market crashed as Goldman Sachs announced its plan to suspend its cryptocurrency trading desk

In retrospect, such cynicism is not quite outrageous, as bitcoin has indeed fallen by more than 40% since the day Goldman Sachs decided to restart its trading operations.

Why do both Goldman Sachs and JPMorgan prefer ETH?

 

Above: Goldman Sachs announced the relaunch of its cryptocurrency trading team on May 6, the day (position of the yellow arrow in the chart) since Bitcoin experienced a plunge.

However, as bad as the recent price action has been, we suspect that Goldman Sachs will not let itself remain indifferent to the recent catastrophic cryptocurrency collapse once it officially gets involved. Confirming this is a comprehensive Goldman Sachs report released late last Friday (May 21), which included not only some “pro” cryptocurrency interviews (including one with bitcoin bullish Mike Novogratz) and “anti “(including an interview with “Dr. Doom” Nouriel Roubini), but more importantly, Goldman Sachs disclosed its views on the following issues in the report.

Bitcoin as a macro asset.

Cryptocurrencies as their own asset class.

what is a digital means of storing value, and

the role of cryptocurrencies in balancing portfolios

Why do both Goldman Sachs and JPMorgan prefer ETH?

Above: On May 21, Goldman Sachs released a 40-page comprehensive report on cryptocurrency assets

One notable thing we’d like to highlight in this 40-page report is that the bank’s preference for ethereum (a new technology platform) over bitcoin (a value store and alternative payment system) is not surprising: as bitcoin bullish Mike Novogratz pointed out in an interview “Most of the three major initiatives in the crypto ecosystem – payments, DeFi and NFTs – are built on top of ethereum, so ethereum pricing has a network effect. The more people who use it, the more products based on it, and ultimately the higher the price will be.” And because so much of the world has associated cryptocurrencies with Bitcoin over the past five years, it will take a while for established perceptions to realize that cryptocurrencies include more than just Bitcoin.

This begs the question of what cryptocurrencies are. Jeff Currie, head of commodities at Goldman Sachs, devotes an entire section of the report to this question, which also reveals how Goldman Sachs understands the various components of the crypto space: Jeff sees cryptocurrencies as a new asset class whose value comes from verified information and the size and growth of the network. Here are the details.

Most people think of crypto assets as digital mediums of exchange, like fiat currencies, but the term “cryptocurrency” is fundamentally misleading when it comes to assessing the value of these assets. In fact, the blockchain underlying Bitcoin is not designed to replace fiat currency, but is a trusted peer-to-peer payment network. Because the cryptographic algorithms are able to generate proof (proof) that the payment was executed correctly, there is no need for a third party to verify the transaction. Therefore, the blockchain and its native coin are designed to replace the banking system and other intermediaries like insurance that require trust, rather than replacing the US dollar. In this sense, blockchain is different from other “digital” transaction mechanisms like PayPal, which rely on the banking system to prevent fraudulent practices like double-spending.
To ensure reliability, blockchain systems need to create an asset with no liabilities or contingent claims, which can only be an actual asset like a commodity. To achieve this goal, blockchain technology exploits the scarcity of natural resources (oil, gas, coal, uranium, water, etc.) by “mining” a bit version of the natural resource through an ever-increasing consumption of computing power.
From this perspective, the intrinsic value of the network is the trustworthy information generated by the blockchain through the mining process, and the network’s native coins are needed to unlock this trustworthy information (i.e., to incentivize miners to generate it) and make it tradable and fungible. Thus, if blockchain networks have value and a role in society, so do such native coins. The value of native coins depends on the value and development of the blockchain network.
That said, the legal challenges to the future growth of crypto assets are highlighted by the fact that blockchain networks are decentralized and anonymous. Coins that attempt to replace the U.S. dollar can go straight into anti-money laundering laws (AML), as recently exemplified by Colonial Pipeline (the largest operator of refined oil pipelines in the U.S.) and Irish Health service being (hacked) for ransom payments in Bitcoin. Regulators can prevent crypto assets from becoming substitutes for dollars or other currencies by making them non-convertible. An asset only has value if it can be used or sold. Chinese and Indian authorities have already launched challenges to the use of cryptocurrencies in payments.
As a result, the market share of coins used for purposes other than cryptocurrency, such as “smart contracts” and “information tokens,” is likely to continue to grow. However, even the use of these non-monetary coins requires court approval before they can be accepted in commercial transactions – a problem we leave to lawyers.
Unlike other commodities, blockchain networks create the value of native coins
Unlike other commodities, native coins derive their entire value from the blockchain network. btc has no value outside of its network because it is native to the bitcoin blockchain. Oil also derives much of its value from the transportation network it fuels, but at least oil can generate heat by burning outside of the transportation network. Another extreme example is that gold doesn’t need a network at all.

Why do both Goldman Sachs and JPMorgan prefer ETH?

Above: The trend of the ratio of the volume of transactions in the Ethernet blockchain to the volume of transactions in the Bitcoin blockchain (blue line), corresponding to the figures on the left; the trend of the ratio of the number of active nodes in the Ethernet network to the number of active nodes in the Bitcoin network (red line). Corresponds to the number on the right.

Derived demand puts holders of a commodity at risk of network obsolescence – a lesson being learned by holders of oil reserves: decarbonization is accelerating the decline of transportation networks, which in turn will hurt oil demand. . Similarly, bitcoin holders face the risk that a competing network backed by a new cryptocurrency (i.e., ethereum) will accelerate the decline of the bitcoin network.
Since the demand for gold is not dependent on a particular network, it will eventually outlast oil and bitcoin – the entropy value of gold exists at the unit level, not the network level. In fact, most means of storing value that are used as defensive assets – such as gold, diamonds and collectibles – do not have derived demand and are therefore only at risk of entropy at the unit level. This is what makes them defensive assets. They retain their value even if the world around them falls apart. While they have no derivative demand, they do have other uses to determine their value, for example, gold is used as jewelry and a means of storing value.
Trading drives value and creates a risky asset
Cryptocurrencies are not traded like gold, nor should they be traded like gold. Based on any standard valuation method, the transactions or expected transactions on the network are the key determinant of the value of the network. The more transactions the blockchain can verify, the greater the value of the network. Transaction volumes and the demand for commoditized information are roughly correlated with the business cycle; therefore, cryptocurrency assets should be traded as pro-cyclical risk assets as they have been for the past decade. Thus gold and bitcoin are not competing assets as they are often misunderstood, but can coexist with each other. Because the value of the network and native coins comes from the volume of transactions, hoarding native coins as a means of storing value will reduce the number of coins in circulation available for trading, which will reduce the value of the network. Because gold does not have this property, it is the only commodity that institutional investors hold in their physical inventories. In contrast, almost all other commodities are held in paper inventories in futures form to avoid disrupting the network. This suggests that, as with oil, if cryptocurrency investments are to be used as a store of value, they need to be held in futures contracts, not in physical form.
Crypto assets are also not digital oil, as they are not non-durable consumer goods and therefore can be reused. This durability makes them a store of value, as long as this demand does not disrupt network flows. Crypto assets with maximum utility may also be the dominant means of storing value – their high utility reduces the cost of carrying costs.
So, what is a cryptocurrency? A powerful network effect
Blockchain networks provide cryptocurrencies with extremely powerful cascading externalities that other commodities do not have. Operators (such as miners, exchanges, and developers) are receiving payments through native coins, which puts their hopes squarely on the success of the blockchain network. Likewise, users (such as merchants, investors, and speculators) are all completely vested. This gives Bitcoin holders an incentive to buy their own products with Bitcoin, which in turn creates more demand for the Bitcoin they already own. Similarly, ETH holders have an incentive to create apps and other products on the ethereum network to increase the monetary value of ETH.
Because holders are tied to the blockchain network, speculation spurs adoption; even in a recession, holders are motivated to create the next new boom. After the dot-com bubble burst, shareholders had no commodity to market. In cryptocurrency assets, on the other hand, holders have a commodity (i.e., cryptocurrency) to market even if prices plummet. They (the cryptocurrency holders) will always live for another boom, just like the oil speculators.
It’s all about information
Because the value of a coin depends on the value of trusted information, blockchain technology has been attracted to industries where trust is paramount – finance, law and medicine. For the Bitcoin blockchain, this (trusted) information is a record of every balance sheet in the network, and the transactions between them – a role that would have been played by banks. In the case of smart contracts (i.e., a piece of code executed according to predetermined rules), the terms of the smart contract (the code) and the status of the contract (whether or not it is executed) on the ethereum are information that is verified on the ethereum blockchain. Therefore, in the absence of a consensus in the network that the contract is actually executed, the counterparty to the contract cannot access a transfer of funds. In our view, the most valuable crypto assets will be those that help validate the most critical information in the economy.
Over time, the decentralized nature of the network will reduce concerns about storing personal data on the blockchain. A person’s digital profile may contain personal data, including asset ownership, medical history, and even intellectual property. Because this information is immutable – it cannot be changed without consensus – trusted information can be tokenized and traded. Blockchain platforms like Ether could become a huge marketplace for trusted information providers, much like Amazon is today for consumer goods.
Cryptocurrencies transcend boom and bust cycles
Cryptocurrency assets are currently in bubble territory according to metcalfe’s Law or the Network Value to Transactions (NVT) ratio. But can the demand for “commoditized information” create enough economic value at a low enough cost to scale in the long run? If the legal system can accommodate these assets, we think it can. While there are many overvalued blockchain networks, there are a few that may emerge as long-term winners in the next phase of the digital economy, just as today’s tech giants emerged from the dot-com bubble and bubble burst. That shift is happening now – there are an estimated 21.2 million cryptocurrency owners in the U.S. alone. However, technical, environmental and legal challenges remain prominent.
Ether 2.0 is expected to increase capacity to 3,000 transactions per second (TPS), while sharding (the PoS system that scales Ether 2.0 with parallel verification of transactions) has the potential to increase capacity to as much as 100,000 TPS. The PoS mechanism is designed to make crypto assets more ESG-friendly by allowing validators to pledge scarce and valuable coins to incentivize them to act properly, rather than having miners consume energy to mine new blocks as in PoW (note: ESG is environmental, social, and governance). PoS could also significantly increase computation time (transactions per second, TPS), which would further spur adoption of the technology.
But legal challenges are the biggest challenge facing many crypto assets. In the past week, cryptocurrency assets have faced challenges as Colonial Pipeline has confirmed a ransom payment of 75 BTC. This is a reminder that cryptocurrencies continue to facilitate some criminal activity that has a huge social cost.
For Ether, new companies that work to transform finance, law or medicine by integrating information stored on the platform into algorithms may have problems gaining legal recognition. If cryptocurrency assets are to survive and reach their maximum potential, they need to define concepts that are “decentralized enough” to meet the requirements of regulators; otherwise, these technologies will soon be useless.
Meanwhile, since this is a Goldman Sachs report, it is naturally full of charts and images, and we have copied a few of the main ones below, starting with a focus on the chart for Bitcoin ……

Why do both Goldman Sachs and JPMorgan prefer ETH?

… Then there are the charts about the Ether…

Why do both Goldman Sachs and JPMorgan prefer ETH?

… A snapshot of all cryptocurrencies…

Why do both Goldman Sachs and JPMorgan prefer ETH?

… and historical price performance.

Why do both Goldman Sachs and JPMorgan prefer ETH?

Based on this background information, Goldman Sachs believes that “ETH has a great opportunity to overtake Bitcoin as the dominant digital store of value.” Here is Goldman Sachs’ explanation of what a digital store of value is.

Based on emerging blockchain technology (which has the ability to disrupt global finance, but currently has limited explicit use), Bitcoin is seen as “a solution looking for a problem”. Many investors now see bitcoin as a digital store of value comparable to gold, real estate or fine wine. But historically all true stores of value have either provided income or utility, and Bitcoin currently provides no income and very limited utility.
However, unlike Bitcoin, there is a clear economic logic behind the creation of several other cryptocurrency assets. Bitcoin’s first-mover advantage is also tenuous; cryptocurrencies are still an emerging field with changing technology and consumer preferences that could lose its leadership position if the network does not adjust quickly. As a result, we believe it is highly likely that Bitcoin will eventually lose its crown as the primary means of storing digital value and be replaced by another, more practical and technologically agile cryptocurrency. ETH looks like the most likely candidate to replace Bitcoin at this point, but that outcome is far from certain.
What is a store of value means?
A store of value (store of value) is anything that preserves its value over time. While stores of value like stocks and bonds can retain their value because they generate a given cash flow (i.e., income), income is not a prerequisite for being a store of value. Art, wine, gold, and non-revenue currencies are also widely used as stores of value, and all of these non-revenue assets have an obvious and substantial use beyond being stores of value. This usefulness generates a “convenience gain” – the motivation for people to hold these assets – reflecting both the utility consumers derive from using them and the The relative scarcity of this utility – a fact captured in Adam Smith’s famous “diamond and water paradox”.
Value is always derived from use
The key to past stores of value, such as gold and property, is that someone needed these assets in the past (utility) and gave them value by exchanging them for something of value (usually money). In fact, all important non-revenue means of storing value had a practical use before they became investment assets.
When different societies began to subjugate each other and needed a means to regulate international trade, gold was the natural choice to solve this economic problem because most societies already owned gold and it was divisible. Practical use is important for a means of storing value because consumer demand tends to be price sensitive, thus offsetting to some extent the volatility of investment demand and thus moderating price fluctuations. For example, jewelry demand is a volatile factor in the gold market, and when investment demand for gold pushes up the price of gold, jewelry demand falls, and vice versa.
ETH Beats Bitcoin as a Means of Storing Value
Given the importance of real use in determining the means of storing value, ETH is likely to replace Bitcoin as the dominant means of storing digital value. The ethereum ecosystem supports smart contracts and provides developers with a way to create new applications on its platform. Most decentralized finance (DeFi) applications are built on the Ethernet network, and currently issued NFTs (non-homogenized tokens) are purchased using ETH. This dominance is reflected in the greater trading volume of ETH compared to Bitcoin. As cryptocurrencies become more widely used in DeFi and NFTs, ETH will establish itself as a first mover in the application of crypto.
Ether can also be used to store almost any information securely and privately on a distributed ledger. This information can be tokenized and traded. This means that the Ether platform has the potential to become a huge marketplace for trusted information. We can see this through the current use of NFTs by people selling digital art and collectibles online. But this is only a small part of what Ether can actually be used for. For example, individuals could store and sell their medical data to pharmaceutical research companies through Ether. Digital archives on Ether may contain personal data, including asset ownership, medical history, and even intellectual property. Ether also has the benefit of being a decentralized global underlying server, rather than a centralized server like Amazon or Microsoft, making it possible to provide a solution for sharing personal data.

Why do both Goldman Sachs and JPMorgan prefer ETH?

The actual demand for gold is a powerful tool for its price to become more stable

One of the main arguments in favor of Bitcoin as a store of value is its limited supply. However, it is demand, not scarcity, that drives the success of a store of value. No other means of storing value has a fixed supply. The supply of gold has been growing at nearly 2% for centuries, and gold remains the accepted store of value; rare elements such as osmium are not stores of value. In fact, a fixed and limited supply could stimulate hoarding, forcing new buyers to outbid existing ones, thereby driving up price volatility and possibly creating a financial bubble. It is more important to reduce the risk of sharp and unpredictable growth in new supply than to maintain value through a limited supply. Whereas there is no cap on the total supply of ETH, there is a cap on the annual growth of supply and therefore meets this criterion.
Rapidly evolving technology will break the first mover advantage
The most common arguments in favor of the idea that Bitcoin will maintain its dominance over other cryptocurrencies are its first-mover advantage and its large user base. But history shows that first-mover advantage is difficult to maintain in an industry where technology is changing rapidly and demand is growing. If incumbents fail to adapt to changing consumer preferences or competitors’ technological advances, they may lose their dominant position. Think Myspace and Facebook, Netscape and Internet Explorer, or Yahoo and Google.
For the crypto network itself, the number of active users has been very volatile; in 2017/18, Ether gained an active user base equivalent to 80% of Bitcoin’s size in one year. Ether’s governance structure (with a central development team driving new proposals) is probably best suited to today’s dynamic environment, where crypto is changing rapidly and systems that cannot be upgraded quickly may become obsolete.
In fact, Ether is undergoing a faster protocol upgrade than Bitcoin. Namely, Ether is currently transitioning from a PoW to a PoS approach to verification. the PoS system has the advantage of greatly improving the energy efficiency of the system, as it rewards miners (verifiers) based on the amount of ETH they pledge (rather than their processing power), which will end the energy-consuming race to obtain miner rewards. Bitcoin’s energy consumption is already on the scale of the Netherlands, and could double if the bitcoin price rises to $100,000. From an ESG perspective, this makes bitcoin investments challenging.

Why do both Goldman Sachs and JPMorgan prefer ETH?

The user base of the blockchain network has been fluctuating greatly, which means the leadership of the network could change quickly.

Bitcoin is also not 100% secure. Four large Chinese mining pools control nearly 60% of the bitcoin supply, and they could theoretically combine to validate a fraudulent transaction. Ether also faces many risks, and its dominance is not guaranteed. For example, if the Ether 2.0 upgrade is delayed, developers may choose to move to competing platforms. Similarly, Bitcoin’s availability may improve with the introduction of the Lightning Network (LN). All cryptocurrencies are still in their early stages, with rapidly changing technology and an unstable user base.
High transaction volumes persist until true usage drives value
The key difference between the current cryptocurrency rally and the 2017/18 cryptocurrency bull market is the presence of institutional investors – a sign that financial markets are beginning to embrace cryptocurrency assets. But Bitcoin’s volatility has been high, with the price dropping 30% in just one day this past week. This volatility is unlikely to abate unless Bitcoin has a potentially real economic use independent of price, thus eliminating periods of selling pressure. Indeed, the recent slowdown in institutional investor participation is reflected in reduced inflows into cryptocurrency ETFs (exchange traded funds), while the stellar performance of other cottage coins (altcoins) suggests that retail activity is once again taking center stage.
This shift from institutional adoption to increased retail speculation is creating a market that is increasingly comparable to 2017/18, increasing the risk of a major correction. Only real demand that addresses the economy will end this volatility and open a new era of maturity for cryptocurrencies based on economics, not speculation.
Goldman Sachs concludes that ethereum is the platform of the moment to solve economic problems, while bitcoin is “looking for solutions to problems”. That’s why, two weeks ago, JPMorgan made a bullish case for ETH while continuing to bash Bitcoin: Nick Panigirtzoglou, a quantitative analyst at JPMorgan, listed six reasons why Ether will continue to rise even as the U.S. and other regions crack down on Bitcoin.

Last week, the European Investment Bank (EIB) issued €100 million of two-year, zero-coupon digital notes using the ethereum blockchain, its first digital bond issuance. The deal involved a series of bond-based pass-throughs on the Ether blockchain, with investors using traditional fiat currency to purchase and pay for these security-based pass-throughs. The EIB’s digital bond is undoubtedly significant as it represents the endorsement of the Ether blockchain by a major official institution.

The first Ether ETF (ETHH) was already launched on April 20 by Canada’s Purpose Investments, and three other Ether ETHs were launched in the same month.

ETH supply will see a structural decline due to the upcoming summer introduction of the EIP-1559 protocol, which aims to make transaction fees on Ether more predictable by automatically calculating a base fee for all transactions based on network activity. This base fee is paid via ETH and will be destroyed immediately, which means that the future supply of ETH will be reduced. The theoretically unlimited supply of Ether has been a concern in the past, with supply growing at 5% per year for the past three years; however, by destroying ETH through the base fee, EIP-1559 could reduce the change in supply of Ether to 1-2% per year.

Increased investor interest in ESG has shifted their attention from the energy-intensive bitcoin blockchain to the ethereum blockchain, with ethereum 2.0 expected to become more energy efficient by the end of 2022. Ether 2.0 involves a shift from the energy-intensive PoW authentication mechanism to the much less energy-consuming PoS authentication mechanism. As a result, less computing power and energy consumption will be required to maintain the Ethernet network.

In recent months, the dramatic growth of NFTs and stablecoins has increased the use of Ether, which already dominates the DeFi ecosystem.

Rising bond yields (in traditional markets) and the eventual normalization of monetary policy are putting downward pressure on Bitcoin as digital gold, just as rising real yields have been putting downward pressure on traditional gold. Since ethereum captures value from its applications, from DeFi to gaming to NFTs and stablecoins, ethereum does not appear to be as vulnerable to higher real yields as bitcoin.

In short, while you don’t have to agree with Goldman Sachs or JPMorgan Chase, they represent the views of institutional investors. In other words, Bitcoin and Ether can co-exist and could become more popular and eventually reach new all-time highs (FundStrat expects Bitcoin to reach $100,000 and Ether to rise to $10,500), but if central banks and local regulators decide to crack down on cryptocurrencies, what they will effectively eliminate is the threat of tax evasion/money laundering represented by Bitcoin, while Ether and its various DeFi products would be unscathed. While this may mean that Ether must find use within the requirements of the so-called “authorities,” if Goldman Sachs is proven correct and Ether will become the “Amazon of trusted information” and trade at $20,000 or more, then those who are long it may not whine. The people who are long on it might not be whining.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-do-both-goldman-sachs-and-jpmorgan-prefer-eth/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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