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Goldman Sachs: Ethereum could displace Bitcoin as mainstream

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Goldman Sachs believes that as Ethereum becomes more widely used in DEFI and NFT, it will build its first mover advantage in crypto technology and could replace Bitcoin as the mainstream cryptocurrency in the future.

原文标题：《高盛重磅：比特币终将失去它的「王冠」！取而代之的是——以太坊》

Source: Wall Street, Xu Chao

Goldman Sachs believes that Ethereum has a good chance of replacing Bitcoin as the mainstream cryptocurrency, given its real-world use, user base, and speed of technology iteration.

In terms of market movements, Goldman Sachs highlights that the key difference between the current cryptocurrency market and the bull market of 2017-2018 is the participation of institutional investors. But with the recent slowdown in participation by institutional investors (with less money flowing into cryptocurrency ETFs) and the emergence of altcoins, the market is once again dominated by retail investors.

Goldman says this shift from institutions to retail investors is increasing the likelihood of a market rout. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of price.

Ethereum has huge potential

The Ethereum system supports smart contracts and gives developers a way to create new apps, Goldman said. Most of today's Decentralized Finance (DEFI) applications are built on the Ethereum network, and most of the non-fungible tokens (NFTs) are also purchased using Ethereum.

Compared to Bitcoin, Ethereum has a much larger volume of transactions. As Ethereum becomes more widely used in DEFI and NFT, Ethereum will establish its first mover advantage in the application of encryption technology.

Goldman notes that Ethereum can also store almost any information securely and privately on a decentralized ledger. This information can be tokenized and traded. This means the Ethereum platform has the potential to become a large marketplace for trusted information.

Investors can already sell digital art and collectibles online through NFT, but that's only a small part of what it's actually used for.

Goldman Sachs sees a future in which individuals can store and sell their medical data to pharmaceutical research companies via Ethereum. A digital archive on Ethereum could contain personal data, including asset ownership, medical history, and even intellectual property.

Ethereum also has the benefit of being a decentralized global base server. Unlike centralized servers like Amazon or Microsoft, this could provide a solution for sharing personal data.

Bitcoin's scarcity is insufficient to support its value store function

The main argument for Bitcoin's store of value in the market is its limited supply. But Goldman argues that demand, not scarcity, drives store of value success.

There is now a steady supply of the main price store assets in the market: the supply of gold has been growing at a rate of nearly 2% for centuries, yet it remains a recognized store of value. Rarified elements such as osmium are not stores of value.

Goldman stressed that fixed and limited supply could stimulate hoarding and force new buyers to outbid existing ones, driving up price volatility and creating financial bubbles. Compared with limited supply to maintain value, it is more important to reduce the sharp and unpredictable growth of new supply. There is currently no cap on total Ethereum supply, but there is a limit to annual supply growth that meets this criteria.

Rapidly advancing technology has disrupted the first-mover advantage

The arguments for bitcoin's dominance of the cryptocurrency market point to its first-mover advantage and large user base.

But Goldman notes that history has shown that first-mover advantage is difficult to sustain in industries where technology is changing and demand is growing. Established companies may lose their dominance if they fail to adapt to changing consumer preferences or competitors' technological advances (Yahoo vs. Google).

The number of active users in the cryptocurrency market as a whole is very volatile. In this environment, encryption technology is changing rapidly at the same time, and systems that cannot be upgraded quickly can become obsolete.

In terms of user base, Ethereum gained a large active user base in 2017, which is now 80% of Bitcoin's size.

On the technology side, Ethereum is currently in the process of rapidly upgrading its protocol (faster than Bitcoin) from Proof of Work (PoW) to Proof of Interest (POS).

Goldman says the advantage of POS is that it can greatly improve the energy efficiency of the system, rewarding miners based on the amount of ether they choose to hold rather than their processing power, which would end the race to burn electricity to reward miners.

Bitcoin's energy consumption is now equivalent to the energy consumption of the entire Netherlands, and could double if the price rises to $100,000. From an ESG perspective, this makes investing in bitcoin challenging.

In terms of security and stability, Goldman Sachs said that all cryptocurrencies are still in their early stages, with technology changing rapidly and an unstable user base.

Despite the security issues in the verification process of the Ethereum POS protocol, Bitcoin is not 100% secure. The top four mining pools now control nearly 60 per cent of the supply, and excessive concentration has led to the possibility of fraudulent transactions.

Ethereum also faces many risks, and its dominance is not guaranteed. For example, if the Ethereum 2.0 upgrade is delayed, developers may choose to move to a competing platform.

The market will continue to fluctuate until true use value emerges

Goldman notes that the key difference between the current cryptocurrency market and the 2017-2018 bull market is the presence of institutional investors: a sign that financial markets are starting to embrace cryptocurrency assets.

Volatility has been high, with the price of bitcoin falling 30 per cent in a single day over the past week.

At the same time, institutional participation has slowed recently (with less money flowing into cryptocurrency ETFs) and altcoins have been emerging, suggesting that the market is once again dominated by retail investors.

Goldman Sachs believes this shift from institutions to retail investors is increasing the likelihood of a market rout. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of price. This will usher in a new era of cryptocurrencies.