The boss of Goldman Sachs became the latest high-profile critic of bitcoin, claiming it was a vehicle to commit fraud as the value of the cryptocurrency plunged 20% in less than 24 hours.
Lloyd Blankfein, chief executive of the US investment bank, said: “Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud.”
Bitcoin is a 'cryptocurrency' – a decentralised tradeable digital asset. Invented in 2008, you store your bitcoins in a digital wallet, and transactions are stored in a public ledger known as the bitcoin blockchain, which prevents the digital currency being double-spent.
Cryptocurrencies can be used to send transactions between two parties via the use of private and public keys. These transfers can be done with minimal processing cost, allowing users to avoid the fees charged by traditional financial institutions - as well as the oversight and regulation that entails. The lack of any central authority oversight is one of the attractions.
This means it has attracted a range of backers, from libertarian monetarists who enjoy the idea of a currency with no inflation and no central bank, to drug dealers who like the fact that it is hard (but not impossible) to trace a bitcoin transaction back to a physical person.
The exchange rate has been volatile, with some deeming it a risky investment. In January 2021 the UK's Financial Conduct Authority warned consumers they should be prepared to lose all their money if they invest in schemes promising high returns from digital currencies such as bitcoin.
In practice it has been far more important for the dark economy than it has for most legitimate uses. In November 2021 it hit a record high of more than $68,000, as a growing number of investors backed it as an alternative to other assets during the Covid crisis.
Bitcoin has been criticised for the vast energy reserves and associated carbon footprint of the system. New bitcoins are created by “mining” coins, which is done by using computers to carry out complex calculations. The more bitcoins that have been "mined", the longer it takes to mine new coin, and the more electricity is used in the process.
His comments came during another wildly volatile trading session for the digital currency, which plunged by over $2,000 in a 24-hour period. Having topped $11,000 to reach a new record high of $11,395 on Wednesday, it fell to a low of $9,000 on Thursday, before picking up slightly later in the day.
Blankfein said Goldman did not need to have a bitcoin strategy, adding the digital currency would need to be a lot less volatile and a lot more liquid to justify closer attention.
“When do I have to have a bitcoin strategy? Not today. Life must be really rosy if that is what we are talking about,” he said. “Bitcoin is not for me. A lot of things that have not been for me in the past 20 years have worked out, but I am not guessing that this will work out.”
Blankfein is the latest boss of a major bank to voice scepticism about bitcoin, after JP Morgan’s chief executive, Jamie Dimon, described it as fraud that would ultimately blow up and said it was only fit for use by drug dealers, murderers and people living in places such as North Korea.
On Wednesday, Sir Jon Cunliffe, a deputy governor of the Bank of England, said the digital currency was too small to pose a systemic threat to the global economy. He also cautioned that bitcoin investors needed “to do their homework”.
Despite the fall in bitcoin’s value on Thursday, it remained far higher than it was at the start of 2017, when it was trading at $998. It is the biggest gainer of all asset classes this year, prompting sceptics to declare it a classic speculative bubble that could burst.
Banks and other financial institutions remain concerned about bitcoin’s early associations with money laundering and online crime. Unlike traditional currencies, bitcoin is not issued or regulated by a central bank or government.
Lee Wild, head of equity strategy at online trading company Interactive Investor, said the volatility in bitcoin trading was “wild west stuff”.
“Cryptocurrency land’s extreme volatility is like catnip to high-risk traders, and even traditional investors are dipping their toe. Given there’s no logical way to value them with any accuracy, this remains wild west stuff.”
Analysts at the spread betting firm, City Index, said: “While traditional assets are experiencing historically low levels of volatility, the whipsaw action of the bitcoin is drawing the attention of traditional traders. Meanwhile existing traders and newcomers are increasingly interested in fear of missing out.”
