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Goldman Sachs believes that Ethereum, with the rapid development of NFT and DeFi, as well as technological iterations, is expected to break Bitcoin’s first-mover advantage.
Original title: “Goldman Sachs heavyweight: Bitcoin will eventually lose its “crown”! Replaced by-Ethereum
Written by: Xu Chao Source: Wall Street
Goldman Sachs believes that Ethereum is likely to replace Bitcoin as the mainstream cryptocurrency, taking into account many factors such as real use, user base, and technological iteration speed.
In terms of market trends, Goldman Sachs emphasized that the key difference between the current cryptocurrency market and the 2017-2018 bull market is the participation of institutional investors. However, with the recent slowdown in the participation of institutional investors (decreased inflows of cryptocurrency ETFs) and the emergence of alternative currencies, the market is once again dominated by retail investors.
Goldman Sachs said that this shift from institutions to retail investors is increasing the likelihood of a market crash. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of prices.
Ethereum has huge potential
Goldman Sachs stated that the Ethereum system supports smart contracts and provides developers with a way to create new applications. At present, most decentralized finance (DeFi) applications are built on the Ethereum network, and most non-fungible tokens (NFT) are also purchased using Ethereum.
Compared with Bitcoin, Ethereum has a larger transaction volume. With the increasing use of Ethereum in DeFi and NFT, Ethereum will establish its own first-mover advantage in the application of encryption technology.
Goldman Sachs emphasized that Ethereum can also store almost any information securely and privately on a decentralized ledger. This information can be tokenized and traded. This means that the Ethereum platform has the potential to become a large-scale trading market for trusted information.
At present, investors can already sell digital art and collectibles online through NFT, but this is only a small part of its practical use.
Goldman Sachs believes that in the future, individuals can store and sell their medical data to pharmaceutical research companies through Ethereum. Digital archives on Ethereum may contain personal data, including asset ownership, medical history, and even intellectual property.
Ethereum also has the benefits of being a decentralized global base server. Unlike centralized servers like Amazon or Microsoft, this may provide a solution for sharing personal data.
Bitcoin’s scarcity is not enough to support its value store function
The main reason for the market to support Bitcoin’s value storage function is its limited supply. But Goldman Sachs believes that the success of the store of value lies in demand, not scarcity.
At present, the main price storage assets on the market have a stable supply: the supply of gold has been growing at a rate of close to 2% for centuries, but gold is still a recognized means of maintaining value. Rare elements like osmium are not a store of value.
Goldman Sachs emphasized that a fixed and limited supply may stimulate hoarding, forcing new buyers to bid higher than existing buyers, thereby pushing up price volatility and creating a financial bubble. Compared with limited supply to maintain value, it is more important to reduce the sharp and unpredictable growth of new supply. At present, there is no upper limit on the total supply of Ethereum, but there is a limit to the growth of the annual supply, which meets this standard.
Fast-developing technology breaks first-mover advantage
Supporting the view that Bitcoin will dominate the cryptocurrency market believes that it has a first-mover advantage and a huge user base.
However, Goldman Sachs pointed out that history has proven that in an industry with ever-changing technology and growing demand, the first mover advantage is difficult to maintain. If established companies fail to adapt to changing consumer preferences or competitors’ technological advancements, they may lose their dominant position (Yahoo VS Google).
At present, the overall number of active users in the cryptocurrency market is very unstable. In this environment, encryption technology is changing rapidly at the same time, and systems that cannot be upgraded quickly may become obsolete.
In terms of technology, Ethereum is currently rapidly upgrading its protocol (faster than Bitcoin), transitioning from Proof of Work (PoW) to Proof of Stake (PoS).
Goldman Sachs said that the advantage of PoS is that it can greatly improve the energy efficiency of the system. It rewards miners based on the amount of Ether they choose to hold (rather than their processing power), which will end the power-burning competition for miners.
At present, the energy consumption of Bitcoin has reached the energy consumption of the whole Netherlands. If the price of Bitcoin rises to 100,000 US dollars, its energy consumption may double. From an ESG perspective, this makes Bitcoin investment challenging.
In terms of security and stability, Goldman Sachs stated that all cryptocurrencies are still at an early stage, with rapid technological changes and an unstable user base.
Although there are security issues in the verification process of the Ethereum PoS protocol, Bitcoin is not 100% secure. At present, the top four Bitcoin mining pools control nearly 60% of the Bitcoin supply, and the excessive concentration leads to the possibility of false transactions.
Ethereum also faces many risks, and its dominance cannot be 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 the real use value appears
Goldman Sachs pointed out that the key difference between the current cryptocurrency market and the 2017-2018 bull market is the presence of institutional investors: this is a sign that the financial market is beginning to embrace cryptocurrency assets.
Bitcoin’s volatility has been high, and the single-day price in the past week has fallen by 30%.
At the same time, the recent participation of institutional investors has slowed down (the inflow of cryptocurrency ETFs has decreased), and alternative currencies have emerged one after another, suggesting that the market is once again dominated by retail investors.
Goldman Sachs believes that this shift from institutions to retail investors is increasing the possibility of a market crash. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of prices. This will usher in a new era of cryptocurrency.
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