Digital Assets: “Bitcoin Is An Uncorrelated Asset,” Says Fidelity Report
“It can serve as an alternative investment in improving a portfolio’s risk-adjusted returns.”
A new report from Fidelity Digital Assets titled “Bitcoin Investment Thesis – Bitcoin’s Role As an Alternative Investment,” finds that the cryptocurrency has a very low correlation with mainstream assets such as stocks or gold. (Decrypt)
The report from Fidelity incorporates the investment perspectives from prominent crypto personalities and investors such as Cathie Wood and Yassine Elmandjra (ARK Invest), Meltem Demirors (CoinShares), Michael Robertson (Fidelity Investments), Elisabeth Prefontaine (Octonomics), and Jeff Dorman (Arca).
Bitcoin as an alternative investment: Low correlation
The report found that bitcoin’s correlation to other assets between January 2015 to September 2020 is an average of just 0.11.
This shows that there is almost no relationship between the returns from bitcoin and other assets, the report said.
“Low correlation is an encouraging first sign in evaluating alternative investments with portfolio diversification utility,” said the Fidelity report.
The report quoted Chamath Palihapitiya of Social Capital as follows:
“Bitcoin to me is the only thing that I’ve seen so far that is fundamentally uncorrelated to that decision-making process and to that decision-making body, because, at the end of the day, any other asset class, equities, debt, real estate, commodities, they’re all tightly, tightly coupled to a legislative framework and an interconnectedness in the financial markets that brings together many of the governments that are sort of behaving this way.”
Bitcoin (BTC) as an alternative investment: Disruptive power, says Fidelity
BTC is a drop in the bucket compared with markets bitcoin could disrupt (e.g. stores of value, alternative investments, settlement networks) says the report.
“If bitcoin were to capture 5% of the alternatives market as measured by CAIA, that would equate to an incremental $670 billion growth in its market size. If it were to capture 10%, that would expand its market size by $1.3 trillion,” estimates Fidelity. (As of October 7, bitcoin had a market cap of $197 billion)
Alternatives are associated with limitations such as reduced liquidity, limited accessibility, and high fees. However, bitcoin suffers from none of these, yet offers the benefits of alternatives.
With the current difficulties faced by [60:40] portfolios, bitcoin could capture a huge outflow from fixed incomes as investors scamper from low yields (or negative, even).
“Now, bonds return zero. So does 40 go to zero with it? What do we replace bonds with?” observes Palihapitiya on the [60:40] model. “One idea could be to increase exposure to alternative assets.”
Think of the implications. A flow of 1% of bonds (as measured by CAIA) to bitcoin equates to an incremental $500 billion in bitcoin’s market cap.
Fidelity: Bitcoin as a unique alternative investment
“If investors view bitcoin as a component of their alternatives bucket, it could be beneficial given the growing interest in alternatives amidst overvalued public equities and low yields and the potential for funds to flow out of fixed income into other asset buckets,” observes the Fidelity report.
“Bitcoin is a unique investable asset with compelling differences relative to traditional asset classes as well as conventional alternative investments that could make it a beneficial addition to a portfolio,” concludes the report.
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