Goldman Sachs: Mainstream crypto adoption can be a double-edged sword

In a report published on Thursday, Goldman Sachs noted that the recent decline in the cryptocurrency market shows mainstream adoption can be a double-edged sword. The total market cap has lost 40% since November, the bank notes. CoinDesk reports that the decline is unique in that mostly macroeconomic factors drove it.

Mainstream adoption to raise correlations with other market factors

While adoption can raise valuation, it can also raise correlations with other financial market variables, limiting the diversification benefits of holding digital assets, Goldman Sachs analysts wrote, adding:

The decline in bitcoin was highly correlated to the drawdown in low-profitability tech stocks and recent IPOs, which reacted negatively to the Federal Reserve’s move toward interest-rate increases.

Bitcoin correlates positively with tech equity, negatively with USD value

According to Goldman, the flagship crypto correlates positively with frontier technology equity sectors and proxies for inflation risk and negatively with USD value and real interest rates.

The bank noted that the steep drop in token prices led to a decline in DeFi borrowing and liquidations, much like in the traditional financial system.

Metaverse apps will push digital assets up

Metaverse apps and other blockchain technology developments could increase the value of certain digital assets over time. However, analysts don’t believe they will be “immune to macroeconomic forces,” such as monetary tightening by central banks.

Hope for Coinbase yet

Goldman still sees Coinbase as the “blue-chip way” to gain exposure to ongoing crypto ecosystem development. They believe further progress on new income initiatives could lead the global exchange’s shares to “outperform beta to crypto prices.”

The bank recommends buying Coinbase shares despite the recent volatility in the crypto market. They see several potential sources of revenue. These include derivatives, non-fungible tokens (NFT), and ongoing adoption of staking initiatives.

Bank adjusts one-year price target

Goldman adjusted its one-year price target from $352 to $288 to account for a decline in crypto prices and a run rate for volumes of around $4 billion on average per day in the first quarter of the year.

Risks to Goldman’s target include the threat of crypto regulation, commission pressure, weaker crypto prices, and lower volatility.

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