10:58 AM, Jan 10, 2018 — Digital currencies like Bitcoin are facing “significant hurdles” to widespread usage including excessive volatility and regulations from governments, although they could have appeal in areas with instability in local money systems, according to Goldman Sachs.
“The fact that cryptocurrencies function without central banks may make them valuable as inflation hedges or stores of value, but also makes them vulnerable to demand-driven fluctuations in price,” Goldman analysts Zach Pandl and Charles Himmelberg wrote in a note Wednesday. “Such volatility makes them poorly suited as a substitute for money generally.”
Still, there’s evidence that demand in digital currencies is growing in countries with instability or capital controls, and places where the US dollar is widely used for local transactions.
Goldman said a Google Trends search showed that the highest intensity for queries about Bitcoin over the last five years have come from Nigeria, South Africa and Ghana, which have volatile local currencies or restrictions on foreign exchange — or both.
The popularity of cryptocurrencies has surged, bringing wide price swings in some of the top units including Bitcoin and Ripple, while companies look to jump on the trend with investments in technologies such as blockchain, a shared database that was developed to support the digital money.
But the anonymity of cryptocurrencies means they could face extra government scrutiny as a potential “useful medium of exchange for criminal activities,” Goldman said.
Digital currencies could succeed as a source of money, Pandl and Himmelberg wrote, but face a high bar as developed-nation currencies already deliver monetary services like facilitating transactions at a low cost “and/or providing better risk-adjusted returns for portfolios.”
“That said, Bitcoin (and cryptocurrencies more generally) may offer viable alternatives in countries and corners of the financial system where the traditional services of money are inadequately supplied,” the analysts said.