Goldman Sachs on Bitcoin

On the subject of Bitcoin, I find myself in odd agreement with the folks at Goldman Sachs who, while they think the payment aspects of the crypto-currency are quite novel and could ultimately see widespread adoption, it will never succeed as money.

That’s the gist of this story over at Tech Crunch that begins by suggesting that Bitcoin devotees might be advised to “take a cold shower, drink some coffee, and sober up”. On the subject of commodity money (i.e., what the world had for thousands of years right up until a few decades ago), there’s this:

If Bitcoin is, in fact, a commodity, Goldman’s head of commodities research, Jeff Currie, argues that it still won’t hold a candle to the gold-standard of commodities — gold.

“A commodity is  any item that ‘accomodates’ our physical wants and needs. And one of these physical wants is the need for a store of value,” writes Currie. Currencies, by contrast, are instruments that are secured by either a commodity or a government’s ability to tax and defend.

By Currie’s reasoning, commodities become supplanted when a better commodity comes along, so, for him, the question is whether Bitcoin solves an economic problem that currently exists with gold.

“The short answer is no,” Currie writes. “Gold is not failing as a store of value as wood failed as a sources of energy in steam engines. Steam locomotives could go farther and faster on coal. But Bitcoin does not improve upon gold.”

I’m not sure if the simple wood-steam analogy helps or hurts here. Currencies – particularly fiat currencies – are a bit more complicated than innovations in transportation.

In any event, of the three characteristics of money – widely accepted, easily divisible, store of value – Bitcoin is failing pretty miserably at the latter as its value fluctuates wildly relative to just about everything else and, in some cases (e.g., Mt. Gox), it goes all the way to zero.