Fidelity expects Bitcoin to become the next big alternative investment asset class.
Fidelity published a report last week focused on Bitcoin’s role as an alternative investment and how investing in BTC can help institutions diversify and eliminate risks related to traditional asset classes.
The report reveals positive benefits for hypothetical portfolios holding Bitcoin versus only traditional assets. Portfolios containing BTC outperform the competition in every scenario, highlighting the opportunity for institutional investors who take the leap into Bitcoin.
Bitcoin’s $2 Trillion Market Potential
Observations about the value locked in traditional assets and Bitcoin reveal exciting conclusions for crypto. According to the report, if Bitcoin manages to capture just 5% of the current alternative investments market it would gain $670 billion in market cap, in addition to its current $210 billion capitalization. Capturing 10% would result in a gain of $1.3 trillion.
Fidelity estimates that Bitcoin could gain a portion of the bond market given its historically low yields in addition to the alternative assets market. With just 1% of the bond market flowing into BTC, the cryptocurrency could gain an incremental $500 billion in addition to the market capitalization from the alternative investment market.
In the most optimistic scenario predicted by Fidelity, Bitcoin could achieve a market capitalization of $2 trillion, roughly 10-times what it is now.
Considering the growth in the BTC supply from mining in such a scenario, a single Bitcoin would trade at about $100,000.
BTC Hedges Against Traditional Finance
The report also covers common arguments about Bitcoin’s correlation to the S&P 500 index, gold, and other traditional asset classes. Regarding correlation, the report reads:
“In the past, bitcoin has experienced brief periods of elevated correlations with particular assets, including gold and equities, but the relationships break down over longer time horizons.”
Over the five years observed, Bhutoria noted that a long-term correlation between BTC and other asset classes does not exist, saying:
“Bitcoin’s correlation to other assets from January 2015 to September 2020 is an average of 0.11, indicating there is almost no relationship between the returns of Bitcoin and other assets. Correlations fall within the range of -1 to 1. A correlation of 1 indicates a perfect positive correlation…”
It’s easy to bundle correlation and causation to events happening in a short period on a micro-scale. Retail and institutional investors regularly fall victim to psychological fallacies that lead to poor investment decisions. For example, selling the cryptocurrency when the S&P 500 loses value, suggested the report.
Time will tell if institutional investors respond to this report. If they decide to buy some of Bitcoin’s 21-million possible coins, then current cryptocurrency holders would stand to gain.
Institutions could use Bitcoin to diversify and hedge against adverse conditions in traditional finance—assuming crypto-assets are indeed uncorrelated to the rest of the market. However, Fidelity warns that as more institutions enter Bitcoin the potential for it to remain an asset for diversification will diminish.