Bitcoin is "a superior form of money" and "many of its risks are gone"

The way in which traditional investors approach Bitcoin is not the most appropriate, Fidelity's experts belive, as they tend to treat Bitcoin the same way as any other technological investment. They point out, however, that Bitcoin's first breakthrough "was not as a superior payment technology, but as a superior form of money," since as a monetary asset "Bitcoin is unique."

Thus, the experts of this investment firm that is in the race to launch Bitcoin exchange-traded funds in the US, argue in their report 'Bitcoin First', that "Bitcoin must be considered, first, to understand digital assets, and, then, separately from all other digital assets that have come after." "Investors working on their understanding of the digital asset ecosystem and creating a framework for considering investing in the space are likely to benefit from segmenting Bitcoin and all others," they explained, and suggest treating "digital asset investments as separate decisions."

This simplifies the portfolio construction process and allows allocators to make two simultaneous but distinct decisions. On the one hand, "the importance of maintaining exposure to the scarcest monetary asset in this emerging digital asset class (Bitcoin)," while, on the other, "also considering the potential for exposure to ongoing innovation and experimentation within the ecosystem outside of Bitcoin (the other 'altcoins')."

Given the increased competition and potential avenues for failure for many of these projects, "allocation to non-Bitcoin tokens is often done with a VC-like mentality," stated the asset management giant's experts. Instead of picking a particular project, "investors often take small positions in many individual names." "This often results in the search for an actively managed solution to deal with the increased overall complexity," they continued explaining, something that "shows a stark contrast to a simple Bitcoin-only approach in this digital asset space."

OVERESTIMATING BITCOIN RISKS

As for the place of these assets in a traditional investment portfolio, investors must first sort out the key risk and return drivers of their respective investment thesis. As for Bitcoin, "first-mover advantage has led to a lack of real competition in its primary use as a monetary asset and store of value, and creates a drastically different return profile for investors in Satoshi Nakamoto's currency," noted Fidelity.

As for the risks intrinsic to this asset, which were previously put forward as reasons to talk about its demise, "many have faded and every day the network grows stronger with more users, miners and infrastructure," they explaning, arguing that almost all the setbacks that Bitcoin continues to face today can also be seen in any other digital asset, "with nation-state attacks and protocol failures being two of the network's most notable risks."

One of the big dangers to this ecosystem is the possibility of large countries opposing its growth, as has happened in China. "The geopolitical landscape to date has made proper regulation seem far more likely than illegalization," they noted in this regard. In any case, "Bitcoin is better positioned to defend against coordinated attacks due to its prioritization of decentralization."

As for the failures of the network itself, Bitcoin "is the protocol least likely to encounter a major flaw at this stage of its life, given that it has been around longer than any other project, has an intentionally simplistic code, and has a $1 trillion bounty for anyone who is able to exploit it," Fidelity analyzed.

That said, they qualify that "it is not that we think that an allocation to Bitcoin is free of problems, but we believe that some investors are overestimating the downside risks of Bitcoin compared to other digital assets".

In conclusion, "the bumps facing Bitcoin today seem minor compared to all other digital assets, given the lack of code complexity and emphasis on decentralization." "Little or no competition in its primary use case and 13 years of functioning as a store of value help to reinforce the idea that Bitcoin will become a currency of exchange," they insisted through a postscript.