the Pros and Cons of 6 Altcoins and How to Reduce Risk
- Goldman Sachs concluded that cryptocurrencies are not a viable investment for clients’ portfolios.
- It said the industry is unregulated and energy inefficient, and current projects could be obsolete.
- It recommended exposure to the sector through private-equity, venture-capitalist firms and stocks.
The crypto space has been widely popular among retail investors and blockchain enthusiasts. More recently, institutional investors have turned their sights toward the crypto rush.
Wall Street’s legacy investment banks — including Bank of America, JPMorgan, Morgan Stanley, and Deutsche Bank — have recruited crypto talent among their ranks.
Some investment firms have even moved ahead by approving investments in bitcoin-related products. Morgan Stanley recently bought up 28,000 shares in the Grayscale Bitcoin Trust. BlackRock, the world’s largest asset manager, is already raking in gains from bitcoin futures.
But the jury remains hung as to whether cryptocurrencies are assets that can be widely integrated into an institutional ecosystem. A Goldman Sachs report on digital assets, published in June by a team led by Sharmin Mossavar-Rahmani — the head of Goldman’s Investment Strategy Group — slammed the brakes on aspects of the crypto rush.
The firm said blockchain technology will bring efficiencies to enterprise operations and curb the ability of large technology companies to access and abuse personal data. But the report’s cons led Goldman to conclude that the cryptocurrencies associated with the technology “are not a viable investment for inclusion” in clients’ diversified portfolios.
Below is a breakdown of six blockchains, accompanied by their respective altcoins, that were included in the report, along with the pros and cons of each one.
Ripple is a rapid payment platform that integrates with the global banking system. The blockchain connects hundreds of financial institutions around the world with a simple application programming interface that’s designed for fast, reliable, and cheap transactions.
Mossavar-Rahmani acknowledged its cheap and fast network as a plus, but she said it’s not as centralized as blockchain technology is known for.
Its ongoing dispute with the Securities and Exchange Commission over allegations that its cryptocurrency, XRP, is a security that is subject to regulation is also considered a negative by the firm.
Goldman Sachs said ethereum is a pioneer for decentralized blockchain technology. It’s also the most commonly used platform with a strong developer community.
But the report added that upgrades on the blockchain are overdue, and that the endeavor can be tricky and risky.
As more applications continue to build on ethereum’s network, its ability to handle more transactions with speed remains a widespread concern.
Ethereum’s blockchain is due for an upgrade in July, known as the London hard fork, which is expected to update its fee system. While blockchain developers may have a better understanding of what that would mean for the underlying technology, investors often have a hard time speculating how that may affect the value of ether.
Polkadot is widely known for its ability to connect different blockchains known as parachains, an issue the sector has struggled with as more networks join the ranks.
The report said the pros of polkadot are that it’s scalable, interoperable, and customizable, but it added that its technology is complex and its purpose or use case isn’t quite clear.
Solana calls itself an open infrastructure, which is key to global adoption. It also claims to have a secure and censorship-resistant platform.
The report said solana is ethereum’s competitor, and that the platform has the fastest public blockchain that is also low-cost and developer-friendly. But it added that the blockchain has a smaller ecosystem.
Developers buying into a blockchain’s technology and increasingly using it to build their applications is key to a blockchain’s growth and improvement.
Algorand aims to increase the speed of transactions and solve three main problems: security, scalability, and decentralization.
Goldman Sachs deemed the blockchain strong, fast, and good for developers. But the firm added that it’s still a new and therefore small ecosystem.
Dfinity Internet Computer (ICP)
Dfinity is aiming to extend the internet in the blockchain world through a limitless environment for smart contracts that run at web speed.
Goldman Sachs saw the technology as innovative and believed it could lead the way into the future in its effort to replace the internet with a new model that allows for the organized hosting of data and applications.
But the firm said its complicated platform is still too new and remains unproved.
After the release of its cryptocurrency, ICP, in May, the token plunged by 90% within a month.
The complexities of blockchain technology; the lack of regulation and investor protection; the energy consumption associated with mining; and the ongoing development of the sector, which could render blockchain technology obsolete, led Mossavar-Rahmani to conclude that cryptocurrencies are not a “viable investment” option for clients’ diversified portfolios.
While Goldman Sachs seemingly snubbed the cryptocurrencies tied to these blockchains, it hasn’t dismissed the sector entirely.
The firm recommended exposure to the growing industry through private-equity, venture-capitalist firms that are invested in various projects and innovations within the sector, but that are not limited to blockchains. This includes centralized cryptocurrency exchanges.
It also suggested public equities such as baskets of stocks that have exposure to blockchains.