Goldman Sachs Thinks Ethereum Could Overtake Bitcoin. Here's Why

Ethereum's programmable blockchain gives it a foot up.

Investment giant Goldman Sachs told clients this week that Ethereum (ETH) could eventually overtake Bitcoin (BTC) in the race to become the top digital store of value.

Bitcoin is the first and biggest cryptocurrency. CoinMarketCap puts its market cap at almost $650 billion at the time of writing. Its little sister Ethereum sits comfortably in second place. But with a market cap of about $275 billion (less than half that of Bitcoin), it still has some catching up to do.

Goldman Sachs highlighted Ethereum's smart contract capability which allows its blockchain to store small pieces of self-executing code. The Ethereum network was the first programmable blockchain and thousands of decentralized applications (dApps) run on the platform. In contrast, Bitcoin's blockchain ledger records transactions but cannot store smart contracts.

This is why the investment bank thinks Ethereum could surpass Bitcoin. It has a better real-use potential and is a popular development platform. However, this may be a case of damning with faint praise. Ethereum may be better, but Goldman Sachs is also unconvinced that any cryptocurrency makes a good store of value.

Can cryptocurrencies be digital gold?

A store of value is an asset that holds its value and doesn't depreciate over time. It could be a currency, an asset, or a commodity. For example, gold is widely viewed as a good store of value because it is durable, easy to trade, and maintains its value. On the other hand, a loaf of bread would not make a great store of value because it's perishable and would likely be difficult to trade.

Some, like billionaire investor, Mark Cuban, argue that Bitcoin is a good store of value -- a kind of digital gold. Goldman Sachs disagrees. Not only does it think Ethereum makes a better store of value, it doesn't think cryptocurrencies can ever compete with gold. Mind you, it doesn't see gold as an optimal store of value either.

Authors of a separate Insight report into digital assets argue that -- unlike U.S. equities -- gold has only just outpaced inflation over the past 30 years. The report says there is no evidence that cryptocurrencies are a reliable store of value, and that the extreme price volatility doesn't give the "peace of mind that a store of value should provide."

Optimistic about blockchain, but not cryptocurrencies

Goldman Sachs draws a clear distinction between blockchain technology and cryptocurrency investments. The report says, "While the digital asset ecosystem may well revolutionize the future of everything, that does not imply that cryptocurrencies are an investable asset class."

Overall, its analysts do not think cryptocurrencies add value to Goldman Sachs clients' portfolios. This is due to several factors, including volatility and an inability to generate steady returns.

It also highlights several risks. These include:

• Regulation. Various countries around the world are taking steps to beef up their crypto regulation, including the U.S. Congress may set up a new crypto regulatory agency to oversee this complex asset. The report says, "We believe that the U.S. regulatory framework will probably have the greatest impact on the digital asset ecosystem."
• Environmental, Social and Governance (ESG). Consumers are steadily more concerned about socially responsible investing. As such, Bitcoin's high energy consumption and potential to hide illicit activities may make it a difficult sell.
• Loss of confidence. Goldman Sachs argues that cryptocurrency exchanges and other organizations that hold crypto assets are likely to be increasingly targeted by cyber attacks. There's also the risk of coding errors and other glitches that could erode trust.

Listen to both sides of the debate

As a cryptocurrency investor, it's easy to tune out the extreme voices on both sides of the debate. Some clamor that Bitcoin's price can still go 10 or even 25 times higher. Others shout that this is a bubble and the price will completely collapse. The truth is that this is such a new technology and asset class that it is difficult to predict what will happen.

That's why it's good to do your own research and make decisions based on your own financial situation. Be aware of the risks and don't invest money you can't afford to lose. That way, whether you buy Bitcoin, Ethereum, or both, you won't face financial ruin if those investments don't go the way you hope.