Victor Ugochukwu · Dec 14, 2020 . 5min read
Fidelity: Bitcoin market will increase by $670 billion if investors pump just 5% of the alternative investment market
Fidelity Investments posits that Bitcoin's market cap could increase by $670 billion by capturing merely 5% of the alternative investment market.
By Victor Ugochukwu · Oct 15, 2020 . 10min read
Fidelity Investments which recently reached $3.3 trillion in asset under management (AUM) in an investment thesis report posits that Bitcoin’s market cap could increase by $670 billion by capturing merely 5% of the alternative investment market.
Alternative investments are anything that is not traditional investments. Examples include hedge funds, private equity, real assets and structured products. The alternative investment market which with a $13.4 trillion value as of 2018 is projected to grow to $26.8 trillion by the year 2025.
Most investors who allocate a part of their assets to alternative investments do that for two reasons. Firstly, to diversify their portfolio and secondly to enhance their rate of returns. Bitcoin, which is now playing an important role in the turf of global finance, fits this role of alternate investment. Most importantly, Central Banks interest rate are not just plunging to zero; they are venturing into the negative arena. Institutions who are seeking to hedge against tough times see bitcoin as crucial to the tool for hedging.
Moreso, the Bitcoin correlation to traditional asset debate was a hot topic during the coronavirus market crash this year in March. But as research proves, Bitcoin’s correlation to other assets from January 2015 to September 2020 is an average of 0.11. Simply, there’s almost no correlation between Bitcoin and traditional assets.
Some reasons why Bitcoin’s correlation to traditional assets is divergent.
As per Fidelity’s investment thesis report, Bitcoin diverges from traditional assets in correlation due to four key factors.
Differing return and risk factors between digital assets, including bitcoin and stocks, currencies, or precious metal commodities. Second is that Bitcoin has evolving narratives which make it less correlative to other assets. As Jeff Dorman, CIO of Arca puts it,
“Correlations are often narratives. They’re built off what people expect to happen. If bitcoin’s narrative starts to be more consistent, bitcoin’s correlations to certain asset classes could rise.”
The narratives of Bitcoin keeps changing from time to time. Whether it is bitcoin as a means of payment, a reserve currency for digital assets, a store of value asset, or a portfolio optimization too, the fact is that there is a lack of consensus on this. This invariably makes it even difficult for bitcoin to correlate with the movement of other traditional assets.
Also, in Bitcoin, there’s a greater overlap between market participants. During Bitcoin’s early days, events and sentiment affecting traditional markets had little to no impact on the digital asset’s market. A shift is already happening today, especially when you look at from the short term perspective. For instance, the bitcoin price responded to the last stimulus package released by the United States government. Even as the Trump administration looks to lock a deal with the Congress on another stimulus package, the indicators are pointing towards a spike in the asset price. Therefore,
As bitcoin matures and the profile of market participants in bitcoin expands to include more participants from traditional markets, bitcoin could become more correlated (positively or negatively) with other assets
Bitcoin is retail-driven, therefore decoupling it with the movement of other assets.
Perhaps the most important on why Bitcoin doesn’t easily correlate with other traditional assets is the fact that Bitcoin is retail-driven. As Meltem Dermirors of Coinshares aptly puts it,
What is unique about bitcoin is that it’s retail-driven. Financial media and the way people consume investment information is changing, and influencers command more attention than institutions. And this is happening against a backdrop of massive generational wealth transfer. As wealth and power move from older to younger generations, bitcoin is the first asset that will capitalize on this shift in how we create and consume investment narratives.”
Summarily, Fidelity’ research may have put forth a hypothetical view, but the conclusion from various researches quoted lends support to the possibility of the hypothetical. As at press time, the Bitcoin network market cap is valued at $210 billion with the bitcoin price at $11,394. It’s also the longest time on recorded history that bitcoin’s price has been above $10k. For more than 76 days and still running, bitcoin price has been over the $10k mark. The next stimulus package is just around the corner and it promises to be the biggest ever doled out by the US government.
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