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Goldman’s sketchy case to buy (and then sell) bitcoin

Attracting attention in parts of the web this week were headlines that captured the strange place on the fringes of modern banking where astrology, finance and computer games intersect. A Goldman Sachs analyst had predicted the price of bitcoin — currently above $4,000 — would surge in a frenzy of speculation, before going on to halve.

Unpicking the story finds layers of greed, nonsense and warped logic, not least the contradictory claims made in favour of so-called cryptocurrencies. But deeper than that, it exposes what happens when attention is focused on the price of an asset to the exclusion of all else.

Start with the basis of the Goldman idea, a piece of so-called technical analysis in a set of charts to watch. An often mocked niche pursuit, such analysis might best be described as traders scrawling on charts.

The underlying idea is that buyers and sellers react to events in predictable ways that show up as patterns in the movement of prices. So as an investment case becomes popular, for instance that Unilever stock or platinum futures, are cheap, the price starts to rise, attracting attention and money which pushes prices higher in a form of market momentum.

There is some sense in looking at a chart, if only because many people do and data providers have automated much of the scrawling. If a lot of investors think it worth noting when the line representing the 30-day moving average for a share price crosses the path of the 100-day equivalent, the event can start to attract importance.

Such analysis is also taken much further, with shapes on a chart matched against a library of past doodles used to track the ebb and flow of momentum. Resistance levels, Bollinger bands, even a pattern resembling what some call a vomiting camel, and Elliot waves are brandished as reason to believe how a price will move, with decimal point accuracy for an extra sheen of rigour.

As per the Goldman trading desk, discussing the possibility of trend exhaustion that could take bitcoin back to about $2,200: “Once a full five-wave sequence is in place, the market should in theory enter a corrective phase. This can last at least one-third of the time it took to complete the preceding advance and retrace at least 38.2 per cent of the entire move.”

Invocation of invisible market forces seen through their effects is only a few steps removed from a horoscope. Sagittarius is rising, sell gold.

Technical analysis may be all that cryptocurrencies such as bitcoin and its many rivals deserve, however, because the arguments in favour of them are largely self-referential: it must have value because the price has gone up a lot.

Prices rise for reasons good and bad, however. Consider the effect of a recent so-called forking event for bitcoin, an attempt by parts of the community that maintain it to push through an eightfold increase in the network’s maximum capacity to deal with transaction data.

Rather than replacing bitcoin, the attempt has created a parallel new currency, bitcoin Cash, handed out to some but not all owners of the original, depending on the policy of different cryptocurrency exchanges. The value of the new digital coins created by the software tweak is in theory about $5bn, were it possible to swap them for hard currency.

Creating new bitcoin from nothing would appear to go against one of the core arguments for its use as a currency, that a cryptographic formula limits the number of coins that can exist, unlike a central bank that simply wills money into existence.

Since the fork, the price of classic bitcoin has instead zoomed upwards, betraying a sort of video game logic. Congratulations, the quest is complete, all players receive bonus currency. It also comes as initial coin offerings proliferate, where cryptocurrencies supposedly worth millions of dollars are exchanged for digital tokens.

Which is why the trading note is so apt. It begins with a familiar regulatory invocation, that the Goldman Sachs trading desk “may have a position in the products mentioned that is inconsistent with the views expressed in this material”, then goes on to suggest the price of bitcoin may both rise and fall.

In this bold new world of finance, everyone gets to have everything both ways.

dan.mccrum@ft.com