Fidelity Digital Assets brought new light to the subject of cryptocurrency investments in its September 2023 study, focusing particularly on Bitcoin.
Authored by Chris Kuiper, Director of Research, and Jack Neureuter, Research Analyst, the report meticulously dissects why Bitcoin should be considered as a standalone asset class, separate from other digital assets.
Bitcoin’s Unique Role in Asset Diversification
“Bitcoin is better than gold,” the report states, when it comes to fulfilling specific portfolio requirements.
In the Fidelity report, the unique aspects of Bitcoin are highlighted in comparison to traditional investment options like gold and stocks. One of the salient features is its limited supply, capped at 21 million coins.
This scarcity mimics the finite nature of precious metals, making Bitcoin a potential hedge against inflation. Unlike other digital assets that have indefinite supply mechanisms, Bitcoin’s fixed limit sets it apart, offering an alternative for portfolio diversification.
The report also speaks of Bitcoin’s resistance to “innovative destruction,” a term often associated with emerging technologies that lose relevance due to newer, more efficient competitors. Bitcoin has managed to remain a dominant force in the industry, despite the introduction of various other digital currencies and blockchain projects.
Its decentralized nature, not governed by any single entity, gives it resilience against systemic risks that could otherwise plague centralized financial systems.
Fidelity’s Perspective on Bitcoin as a Store of Value
Fidelity’s report delves deeper into Bitcoin’s role as a store of value as well, asserting that its mathematical underpinning and cryptographic security features give it a distinct advantage.
While gold has been the traditional go-to asset for storing value, Bitcoin offers certain technological advantages that cannot be ignored. For instance, it can be easily transferred across borders without the need for intermediaries, and its ownership can be proven unequivocally thanks to blockchain technology.
“It appears at this point that Bitcoin has found a role in the digital asset ecosystem as a scarce, store of value asset at the very least,” the report states.
Fidelity also highlights the importance of Bitcoin’s underlying technology, such as the use of the SHA-256 cryptographic algorithm, which provides a robust layer of security.
Additionally, Bitcoin transactions are irreversible, ensuring that once a transfer has taken place, it cannot be undone. This feature provides a level of transactional integrity unparalleled by traditional financial systems.
Regulatory Landscape: A Double-Edged Sword
Regulatory considerations are an important aspect of any financial market, and the crypto industry is no exception. The Fidelity report emphasizes that while regulatory scrutiny can be a hurdle, it can also serve as a catalyst for attracting mainstream investors. In countries where regulations have been clarified, the inflow of institutional money into Bitcoin and other cryptocurrencies has been substantial.
“Regulatory measures can drive away the bad actors,” the Fidelity report notes, “while providing a framework that attracts mainstream investors.”
The report suggests that a well-defined regulatory framework could drive away bad actors, enhancing the market’s reputation. Regulatory measures, such as Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures, can help in making the crypto space more secure and trustworthy, potentially attracting more risk-averse investors.
Long-Term Viability: Risks and Rewards
While the Fidelity report is generally optimistic about Bitcoin’s prospects, it doesn’t shy away from discussing potential risks. Volatility is still one of the biggest concerns, with Bitcoin’s price subject to rapid fluctuations.
Additionally, the report discusses the potential for technological obsolescence. Bitcoin operates on relatively older blockchain technology, and there’s always the risk that a more efficient or secure technology could displace it.
However, the report also touches upon Bitcoin’s first-mover advantage and the strong community of developers and miners that back it. This combination of early market entry and robust support gives it a unique standing in the market, contributing to its long-term viability.
The report suggests that as long as this community continues to innovate and improve the Bitcoin network, its position as a valuable digital asset is likely to be sustained.
The Fidelity Digital Assets report makes a strong case for considering Bitcoin as a separate asset class. This differentiation from other digital assets is critical, as each asset class carries its unique risks and rewards. While the report is an important contribution to the ongoing discourse, it also opens up avenues for future research.