Fidelity Research Report: Why investing in Bitcoin is better than other digital assets?

Fidelity Digital Assets, a subsidiary of asset management giant Fidelity, released its Bitcoin investment paper "Bitcoin First" in January 2022.

Once an investor decides to invest in digital assets, the next question becomes: “Which one should I invest in?”.

Of course, Bitcoin is the most recognized and earliest digital asset, but there are hundreds of other digital assets in this ecosystem.

One of the primary concerns investors have about Bitcoin is that as the first digital asset, it could be vulnerable to innovation threats from competitors (think MySpace and Facebook). Another concern surrounding Bitcoin investing is whether it can offer the same potential returns or upside as some of the newer, smaller digital assets that have emerged.

In the report, Fidelity made the following important points:

• Bitcoin should be understood as a monetary commodity that serves as a store of value asset in an increasingly digital world, which is one of the core concepts of investing in Bitcoin.

• Bitcoin is fundamentally different from other digital assets. As a monetary commodity, we have not found any other digital asset to be better than Bitcoin, because Bitcoin is the most secure, decentralized, and sound digital asset, and any "improvement" of any other digital asset will inevitably face trade-offs.

• There is no need for the success of the Bitcoin network to be mutually exclusive with all other digital asset networks. Rather, other parts of the digital asset ecosystem may serve different needs or solve certain problems that Bitcoin simply cannot solve.

• Bitcoin should be evaluated differently from other projects (non-Bitcoin projects).

• Bitcoin should be viewed as an entry point for traditional asset allocators to gain exposure to digital assets.

• When considering investing in the digital asset ecosystem, investors should hold two distinct frameworks. The first framework considers Bitcoin’s inclusiveness as an emerging monetary commodity, and the second framework considers it as a digital asset with similar venture capital attributes.

Why Bitcoin is a monetary commodity

Bitcoin possesses many of the best qualities of money, combining the scarcity and durability of gold with the ease of use, storage, and transferability of fiat currency (and even improving upon it).

It is also worth noting that, like other monetary commodities, Bitcoin is not a company, it does not pay dividends, and it has no cash flows. Therefore, Bitcoin’s value is better able to meet the characteristics of a monetary commodity than traditional alternatives.

• The value of Bitcoin is driven by scarcity

Not only is Bitcoin scarce, Bitcoin's current inflation rate of 1.8% is roughly comparable to gold's current inflation rate. Bitcoin can be proven to be finite, with only 21 million Bitcoins ever created (Bitcoin's decentralization means that no other digital asset has a monetary policy as immutable as Bitcoin's. In other words, Bitcoin's monetary policy may be considered the most credible.

• Yes, the Bitcoin network is censorship-resistant

Since no individual, company, or government owns or controls the Bitcoin network, it is very resistant to censorship. Additionally, the Bitcoin network has no geographic boundaries, making it difficult for a nation-state to exert control or regulation over the network and the Bitcoin Core code itself.

To summarize Fidelity’s logic for believing Bitcoin is a valuable monetary commodity:

1. The monetary good is valued above its utility or consumption value. While Bitcoin’s payment network certainly has utility value, people also assign a monetary premium to the Bitcoin token.

2. One of the main reasons why investors believe Bitcoin is valuable is its scarcity. Its fixed supply is the reason why it has the ability to become a store of value.

3. Bitcoin’s scarcity is supported by its decentralized and censorship-resistant properties.

4. These characteristics are hard-coded into Bitcoin and will almost certainly never change, because those who believe Bitcoin is valuable and own it have no incentive to do so. In fact, network participants are incentivized to defend these characteristics of a scarce asset and an immutable ledger.

Why Bitcoin has the potential to become the primary monetary commodity

• Bitcoin’s network effects are very powerful

Bitcoin had a first-mover advantage as the first truly scarce digital asset ever created, and has maintained that advantage ever since. Note that while Bitcoin’s dominance, or its market cap as a percentage of the entire digital asset ecosystem, has fallen from 100% to about 50%, this is not due to its size shrinking, but rather the rest of the ecosystem growing.

Bitcoin's first-mover advantage has led to a lack of competition for its primary use cases as a monetary asset and store of value, and has created a very different return for Bitcoin investors. Many of the risky arguments about Bitcoin's demise in the past have now disappeared, and the Bitcoin network is getting stronger every day with more and more users, miners, and infrastructure being built.

Money networks also have a reflexive nature. People observe others joining a money network, which incentivizes them to join. This phenomenon can be seen in the rapid growth of payment platforms like PayPal and Venmo.

In the case of Bitcoin, the reflexive property is even more pronounced because it includes not only passive asset holders, but also miners who actively improve the security of the network. As more people believe that Bitcoin has superior monetary properties and choose to store their wealth in Bitcoin, demand will increase. This in turn will cause the price to rise (especially if the supply is inelastic).

• The Lindy Effect and Bitcoin’s Antifragility

The Lindy Effect, also known as Lindy's Law, is the theory that the longer something non-perishable survives, the more likely it is to survive in the future.

For example, a Broadway play that has been running for 10 years may continue to run for another 10 years, compared to a Broadway play that has only been running for 1 year.

We believe the same applies to Bitcoin. Every minute, hour, day, and year that Bitcoin survives increases its chances of continuing to survive in the future, as it gains more trust and survives more shocks. It’s also worth noting that this goes hand in hand with the property of antifragility, where something becomes more robust or stronger every time a system is attacked or subjected to some form of stress.

Bitcoin’s antifragility. Here are some negative events Bitcoin has encountered:

• Risk Analysis of Bitcoin

Nation-state attacks and protocol vulnerabilities are two of the most significant network risks for Bitcoin.

• Protocol flaws

Potential vulnerabilities in any code are always a present threat. This problem can be mitigated by keeping a particular piece of software simple and by thoroughly reviewing the code. In the case of Bitcoin, it is arguably the protocol least likely to experience a major vulnerability, given that it has been around longer than any other project, has a simplified code, and currently has a $1 trillion bounty for anyone who can exploit it.

• State Attack

Another valid risk to the Bitcoin thesis is that major powers could oppose the growth of the digital asset ecosystem. The geopolitical landscape to date makes it seem far more likely that these assets will be properly regulated than that they will be made illegal. In any case, Bitcoin is best positioned to defend against coordinated attacks because it prioritizes decentralization.

Compared to all other digital assets, Bitcoin currently faces lower risk due to its lack of code complexity and emphasis on decentralization. Its primary use case has little real competition and it has a 13-year run as a store of value token.

Analysis of the impact of Bitcoin investment returns

Bitcoin investment returns are driven by two powerful forces: the growth of the digital asset ecosystem and the potential instability of the traditional macroeconomic environment. These returns are likely to be driven in an easier, less risky, and more certain manner than most other digital assets.

• Growth of the digital asset ecosystem

As money flows throughout the asset class, the legitimacy and importance of digital assets grows further. While other tokens benefit from indirect flows of money into the space, Bitcoin is the easiest way to benefit from this growth. As discussed earlier, Bitcoin has no competition in being recognized as the preeminent store of value asset, meaning that there are few threats to its current stronghold as the “money” of the ecosystem. “The growth associated with all digital asset construction is largely in Bitcoin’s favor.

• Potential instability of the traditional macro environment

Policies as a way to provide support for continued economic growth may raise concerns about the overall stability of the financial system and the ability of the economy to survive. The accumulation of these policies has led to unprecedented levels of global sovereign debt. Historically, leverage has pushed the financial system toward fragility.

The current situation is a trend towards financial repression (negative real interest rates). Historically, these types of macro environments tend to favor scarce assets where supply cannot be altered. For example, gold outperformed during the most recent period of high inflation in the late 1970s, which resulted in negative real interest rates. In the digital asset world, Bitcoin’s rule set, historical precedent, and decentralization create the most severe scarcity of any digital asset protocol. It is the most effective hedge against some of the potential headwinds facing the traditional financial system. The ability to hedge against potential outcomes for traditional assets and capture growth across the ecosystem makes Bitcoin a simple and effective way to gain exposure to the digital asset ecosystem.

in conclusion

Traditional investors often apply a technology investment framework to Bitcoin, concluding that Bitcoin, as a pre-existing technology, can easily be replaced by superior technology or offer lower returns.

However, as we have argued here, Bitcoin's first technological breakthrough was not as a superior payment technology, but as a superior form of money. As a monetary commodity, Bitcoin is unique. Therefore, we believe not only that investors should consider Bitcoin first to understand digital assets, but that they should consider Bitcoin first and separate it from all other digital assets.