Goldman Sachs sees Gold outperforming Bitcoin in the longer term

Bitcoin’s (BTC) value proposition is based on the cryptocurrency’s potential usefulness, and its level of future adoption, therefore, is more sensitive to changes in interest rates – or has a longer duration – than gold, Goldman Sachs (GS) said in a research report Monday looking at the benefits of both assets in a diversified portfolio.

In the last year, the “end of a decade of easy money” as central banks raised interest rates saw a sharp reduction in speculative positions in gold and bitcoin, the report said. However, gold is roughly unchanged year-on-year, whereas bitcoin is down 75%, in line with high-growth tech companies.

Tight financial conditions are expected to be a drag on bitcoin’s user adoption, the report said, and this makes a repeat of the cryptocurrency’s strong returns of the last decade less likely. Volatility will likely remain elevated until it develops more use cases.

“The development of real use cases is also crucial to reducing bitcoin’s volatility, but is by no means guaranteed and may take a long time to play out,” analysts Mikhail Sprogis and Jeffrey Currie wrote.

Goldman says such conditions will be a smaller drag on the price of gold as it is a “shorter duration real asset with developed user cases,” adding that the metal “may benefit from structurally higher macro volatility and a need to diversify equity exposure.”

The cryptocurrency’s adoption has been boosted by easy financial conditions, the bank said, with some investors more willing to “explore low liquidity, high risk/return options like bitcoin.” With tighter financial conditions expected moving forward, speculative interest in bitcoin is likely to decline.

Bitcoin is more levered to financial conditions than gold because the metal has “developed non-investment cases today while bitcoin is still looking for one,” the note said, adding that BTC is a “solution looking for a problem.” The majority of bitcoin supply has not moved for over a year, which suggests that it is being held for investment purposes, the note added.