The highly anticipated second installment of the Bitcoin Investment Thesis Series from Fidelity Digital Assets just arrived.

The series is a research-driven exploration of Bitcoin, with the latest installment focusing on Bitcoin’s role as an alternative asset. The Wolf Team closely analyzed the 29-page report to share with our readers the highlights.

The report began by outlining the foundation of alternative assets. Based on the report, in its most general definition, “an alternative asset is anything that is not a traditional investment.” Bitcoin falls into this category along with private equity, hedge funds, real assets, etc. More importantly, the growth of alternative assets in 15 years from 2003 to 2018 has nearly tripled, according to the report. This is the result of investors beginning to realize that traditional methods of earning interest and yield are weakening, especially when compared to the dollar losing value. Thus, investors are in search of better returns, leading to a booming exploration of alternative assets. This trend has been accelerated in the recent wake of uncontrollable money printing, low interest rates, and a looming pandemic.

The next major takeaway from the report was that allocating some of your portfolio to Bitcoin was advantageous, mostly for “portfolio diversification and return enhancement.” The Wolf Team has continued to point out that one of Bitcoin’s most defining qualities is its lack of correlation to any other asset class. As of late, more concerns have surfaced that Bitcoin is becoming correlated, but this small increase has only occurred for a very short time. According to the report, “Bitcoin stands at a .11 correlation from January 2015 through September 2020.” A perfect lack of correlation would be zero and a perfect correlation or inverse correlation would be 1.0 or -1.0, .11 is extremely impressive considering Bitcoin has recently undergone correlated swings with U.S equities. The portfolio diversification segment concluded with an ode to MicroStrategy as an example of a major company being the first to publicly buy a significant amount of Bitcoin ($425 million worth) to help diversify its portfolio.

Another topic of discussion from the report that the Wolf Team already explores is the present narratives of Bitcoin. The Wolf Team believes the specific narrative you choose isn’t as important as the overall growth of the asset’s price and user base. The report made an interesting claim that a lack of consensus around the Bitcoin narrative contributes to its almost non-existent correlation with other assets. The report argued that if the Bitcoin community began to converge on a single narrative, it could become more likely that Bitcoin correlates to other assets. In short, a rising Bitcoin price likely reinforces all narratives, thus adding to the lack of consensus, which keeps Bitcoin’s correlation down and its price up. The result is a self-fulfilling prophecy. It isn’t clear where Bitcoin’s correlation will land, but it does seem likely that a community-wide agreeable narrative would drive correlation up.

The final section sent irresponsible readers into a frenzy when they saw Fidelity mention a portfolio with 5% allocation to Bitcoin. Readers took this as investment advice rather than a hypothetical scenario, and within hours of the released report, Tweets and articles surfaced claiming Fidelity recommends a ” target 5% Bitcoin allocation.” Even Nasdaq released a blog misinterpreting the report, making this false claim. Instead, Fidelity recommended that investors with a target of 5% Bitcoin allocation should consider responsibly rebalancing between 1% and 10% depending on the performance of Bitcoin. This misunderstanding resulted in boosted publicity for the report, leading others to miss some of the highlights we have taken the time to share.

To conclude, the Wolf Team’s largest takeaways from the report were as follows: The growing trend of alternative assets has been accelerated by 2020 economics and politics. Bitcoin remains an uncorrelated asset that a responsible and well-researched investor should consider allocating a portion of their portfolio to. The lack of consensus around Bitcoin’s narrative strengthens it, creating a self-fulfilling prophecy. And lastly, a well-rounded investor should look to rebalance their Bitcoin holdings periodically rather than holding a stagnant amount.

Read the full report:

Written by Adam Tarlowski