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Banking giant Goldman Sachs sees an increasing interest in digital currencies, particularly from family offices and firms that manage rich people's wealth and personal affairs. Goldman Sachs reported that nearly half of the family offices it is doing business with want to add cryptocurrencies to their stable investments, as per Bloomberg. This shows that while prices in the crypto market might be subdued, their adoption is undoubtedly growing. It’s just that traditional markets tend to move slow, and compared to the fast-paced crypto industry, that’s extremely slow. In a research note this week, Goldman Sachs’ economic research team meanwhile tried to find ways to value cryptocurrencies. Previously, equating it to precious metals like gold was a common framework. Still, the most significant difference is that bullion doesn't have a users' network, wrote authors Zach Pandl and Isabella Rosenberg. This brings them to social media.
“Cryptocurrency prices may also be related to the value of their underlying distributed networks, in the same way, that equity valuations of social media companies like Facebook are related to the value of their proprietary networks.”
When studying this for different cryptos, Bitcoin, Bitcoin Cash, Dash, Ethereum, Ethereum Classic, Litecoin, XRP/Ripple, and Zcash observed: “a clear correlation” between their market cap and network size. As for how significant the correlation is, the value is equal to users to the 1.4 power. According to this, they found Bitcoin’s market cap is far greater than its fundamentals as over the past few years; its value rose 520% from the 2018 average while the network only grew between 60% to 100%. But of course, like stocks, “fundamentals” don’t always tell the whole story, and factors like sentiments complicate things further.
“Rising prices may generate more speculative trading activity and therefore address growth. For this reason, rising network activity may not represent an improvement in cryptocurrency ‘fundamentals: the platforms do not have more economic value through network effects simply because of higher speculative trading,”
For these networks to have sustainable value, activity needs to be driven by non-speculative use cases, which aren’t there, for now, they added.