Bitcoin Has Extremely Low Correlation to Other Assets
Based on analysis of Bitcoin price movements over the past five years Fidelity research found Bitcoin as an investment vehicle had a correlation of just .11 to other assets on a rolling 30-day average between January 2015 and September 2020. The correlation measurements range from -1 to 1, meaning assets with a measurement close to 1 are more closely tied to the movements of other asset classes, and the closer to -1 meaning the opposite. With a rating near zero, Bitcoin’s movements are therefore not really related to any other asset class, even alternatives; it is “unique”.
This lack of correlation has led FDA to postulate that should investors allocate at least 5% of their portfolio to Bitcoin, they will reap greater rewards in the future. It may seem odd to some readers that an investment company is recommending an investment due to its lack of predictability, but in these uncertain economic times it is good to have an asset that is less affected by what affects other asset classes as a sort of hedge.
Fidelity’s report also estimated the potential redistribution of investments from alternative investments and fixed income to Bitcoin. The alternative investment market is valued at $13.4 trillion, so if Bitcoin captures 5% of this market, its market cap would increase by $670 billion. Any increase above that 5% would increase Bitcoin’s market cap exponentially. The bond market is approximately worth $50.3 trillion. If Bitcoin were to capture 1% of that market, this would translate into another $500 billion.
Increased Institutional Investment
It’s not a complete surprise that Fidelity Investments has taken such a bullish stance on Bitcoin and crypto. The company filed the paperwork to launch their Bitcoin Index Fund in the US back in the end of August hoping to corner the crypto investment market in the US. With a $100k buy-in the fund aims to attract big players. But they are not the only institution making noise as of late.
MicroStrategy, a business intelligence company, made a big move in August, converting $425 million of their treasury into Bitcoin, in fact making it their primary reserve currency. They stated that it was a dependable store of value asset with the potential for more appreciation over the long run than with holding cash.
Grayscale Bitcoin Trust, a long-time investment trust for Bitcoin, added another $182 million to their Bitcoin holdings over the past week, bringing their holdings up to a whopping $4.7 billion in Bitcoin.
The popular payment company Square just purchased $50 million in Bitcoin after reporting increased sales in Bitcoin over the past two quarters, and it seems likely other payment providers will follow suit or risk not being able to participate in the growing segment. Stone Ridge Holdings Group rounds out the publicly traded companies investing in Bitcoin with their $114 million investment announcement following Square’s.
Overall there are now 18 publicly traded companies now holding Bitcoin as a reserve asset, with the total amount equaling over 600,000 Bitcoin, or $7 billion.
You can read the entire Fidelity Bitcoin Investment Thesis report here.