Bitcoin has potential as a payment technology but is not likely to become an alternative currency, according to a research report from Goldman Sachs.
The 25-page report entitled All About Bitcoin takes a measured, conservative view of bitcoin, with analysts specialising in commodities research and technology weighing up the pros and cons of the virtual currency.
"So where does that leave us? With the conclusion that bitcoin likely can't work as a currency, but some sense that the ledger-based technology that underlies it could hold promise," Goldman Sachs writes in the report.
Analysts Dominic Wilson and Jose Ursua noted that bitcoin's adoption as a medium of exchange would be difficult as it is not a very good store of value. However, the ability to pay for goods and services using the digital currency is growing, according to the report.
"Obstacles to bitcoin being used more broadly in the payments system are arguably not insurmountable," it said.
"If a ledger-based technology is to succeed, the cyber-currency would very likely have to have some type of fixed exchange rate in order to overcome this obstacle."
They added that bitcoin and other digital currencies, "lie somewhere on the boundary between currency, commodity and financial asset."
"Our best definition would be that it is currently a speculative financial asset that can be used as a medium of exchange," said the report.
Bitcoin's inconsistent demand is contributing to its volatility, according to Jeff Currie, head of Goldman's commodities research unit.
"This volatility undermines the reasons to hold bitcoin. With millenniums of history behind it as a hedge against debasement, the key to gold's success is the stability and predictability of its demand," he said.
"On net, we find that bitcoin is easier to store and transport and is potentially more difficult to counterfeit, but it is not nearly as 'stable' as gold and competitors still pose a greater risk."
Roman Leal, an analyst at Goldman Sachs covering information-technology services, said that bitcoin currently enjoys cost advantage over other payment systems, and its biggest hurdle would be maintaining that advantage amid increasing regulation, higher operating costs and competition.
"While it is too early to tell how banks and payment processors will react to the threat of bitcoin, we believe that it is only a matter of time before major incumbents develop a digital currency strategy," said Leal.