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Fidelty Global Macro Director: Allocate to Bitcoin
BuffBuffPass
Member Posts: 322
Full paper here: https://institutional.fidelity.com/app/literature/item/9901337.html
Conclusions
After dipping heavily into some of the data, what are the takeaways?
In my view, bitcoin has gone mainstream, already considered a legitimate asset class by more
and more investors. I think bitcoin has both a compelling supply dynamic (S2F) and demand
dynamic (Metcalfe’s Law). At close to $900 billion, bitcoin is still just a fraction of gold’s total
global value of roughly $11 trillion, not to mention total global financial assets of $160 trillion.
With interest rates close to zero—or negative—and central banks printing money like there’s
no tomorrow, is it any wonder that bitcoin seems to be having its day? The global monetary
debasement story has a new protagonist, as well as fresh catalyst, in the form of COVID stimulus.
As far as I can see, the current economic situation need not end in tears. The Japan riddle
is an important counterargument to consider when using monetary debasement to argue the
case for owning either gold or digital assets (or both).
Either way, bitcoin is gaining credibility, and as a digital analog of gold but with greater
convexity, my guess is that bitcoin will, over time, take more market share from gold.
Before the days of fiat money—when the price of gold was mostly fixed—gold was money and
little more (exclusive of jewelry, medicine, electronics, and other commercial uses). Without the
ability to compound, gold did not stand a chance against equities except during periods of high
inflation or, more so, hyperinflation. But that changed during the 1970s when the gold price was
allowed to float freely and reflect monetary conditions around the world. Whereas in the old days
bonds beat gold 2-to-1, since 1970, gold and bonds have been neck-and-neck in terms of returns.
Which brings me to the 60/40 paradigm. If gold is now competitive with bonds, and bond yields
are near zero (or negative), could it make sense to replace some of a portfolio’s nominal bond
exposure with gold and assets that behave like gold? Many have already done so, whether via
inflation-protected Treasuries, low-duration bank loans, or commodities—and opportunity cost
of such a shift has become less and less. In my view, the only question may be, how much?
If bitcoin is a legitimate store of value, is scarcer than gold, and comes complete with a
potentially exponential demand dynamic, then is it now worth considering for inclusion in
a portfolio (at some prudent level and at least alongside other alternatives, such as real estate,
commodities, and certain index-linked securities)? Despite the many risks discussed—including
such factors as volatility, competitors, and policy intervention—for some the answer may well
be “yes,” at least insofar as that “yes” applies only to components on the 40 side of 60/40.
For those investors, the question of bitcoin may no longer be “whether” but “how much?”
After dipping heavily into some of the data, what are the takeaways?
In my view, bitcoin has gone mainstream, already considered a legitimate asset class by more
and more investors. I think bitcoin has both a compelling supply dynamic (S2F) and demand
dynamic (Metcalfe’s Law). At close to $900 billion, bitcoin is still just a fraction of gold’s total
global value of roughly $11 trillion, not to mention total global financial assets of $160 trillion.
With interest rates close to zero—or negative—and central banks printing money like there’s
no tomorrow, is it any wonder that bitcoin seems to be having its day? The global monetary
debasement story has a new protagonist, as well as fresh catalyst, in the form of COVID stimulus.
As far as I can see, the current economic situation need not end in tears. The Japan riddle
is an important counterargument to consider when using monetary debasement to argue the
case for owning either gold or digital assets (or both).
Either way, bitcoin is gaining credibility, and as a digital analog of gold but with greater
convexity, my guess is that bitcoin will, over time, take more market share from gold.
Before the days of fiat money—when the price of gold was mostly fixed—gold was money and
little more (exclusive of jewelry, medicine, electronics, and other commercial uses). Without the
ability to compound, gold did not stand a chance against equities except during periods of high
inflation or, more so, hyperinflation. But that changed during the 1970s when the gold price was
allowed to float freely and reflect monetary conditions around the world. Whereas in the old days
bonds beat gold 2-to-1, since 1970, gold and bonds have been neck-and-neck in terms of returns.
Which brings me to the 60/40 paradigm. If gold is now competitive with bonds, and bond yields
are near zero (or negative), could it make sense to replace some of a portfolio’s nominal bond
exposure with gold and assets that behave like gold? Many have already done so, whether via
inflation-protected Treasuries, low-duration bank loans, or commodities—and opportunity cost
of such a shift has become less and less. In my view, the only question may be, how much?
If bitcoin is a legitimate store of value, is scarcer than gold, and comes complete with a
potentially exponential demand dynamic, then is it now worth considering for inclusion in
a portfolio (at some prudent level and at least alongside other alternatives, such as real estate,
commodities, and certain index-linked securities)? Despite the many risks discussed—including
such factors as volatility, competitors, and policy intervention—for some the answer may well
be “yes,” at least insofar as that “yes” applies only to components on the 40 side of 60/40.
For those investors, the question of bitcoin may no longer be “whether” but “how much?”
Comments
Is it say, a $10,000 buy-in? Do you hold for long-term or sell if there is a pop?
You can buy in for as little or much as you want. Bitcoins are divisible up to 8 decimal places so you can buy fractions of a Bitcoin. You can buy a lot of places these days but Coinbase or CashApp are probably the easiest for noobs. You can hold your BTC on there and then as you learn and accumulate more, I'd suggest moving to a self-custodied wallet and eventually a cold storage solution (Nano Ledger S or Coldcard). I'd stay away from Robinhood for a multitude of reasons, but for BTC they don't even let you withdraw your BTC to your own self-custodied wallet.
As far as long term vs selling, I plan to hold some amount indefinitely (subject to change of course) but won't be selling any for probably 6+ months.