On January 22nd, Fidelity Investments published a bombshell report entitled Bitcoin First that gave everyone – from diehard crypto evangelists to non-investors – a ton to chew on and debate.
The report revealed the giant investment firm’s latest attitude towards crypto and made some surprisingly bold claims, including:
- “Bitcoin is fundamentally different from any other digital asset”.
- “Investors should consider Bitcoin first in order to understand digital assets”.
- “Bitcoin should be considered an entry point for traditional allocators looking to gain exposure to digital assets”.
Since there’s more to unpack here than at Dudley Dursley’s birthday party, I’m going to start by summarizing the key points made in the report – and then share my own $0.02.
What is Bitcoin First and why is it such a big deal?
Bitcoin First is a free, 26-page report published by Fidelity Investments Inc. on January 22nd, 2022.
The report, written by Chris Kuiper, CFA, Director of Research for Fidelity Digital Assets, and Research Analyst Jack Neureuter, highlights all the reasons why any investors interested in digital assets should not only study Bitcoin first, but invest in it first as well.
Here’s why that’s a big deal.
Traditionally speaking, Wall Street has had two general reactions to the explosive rise of cryptocurrency.
- They’ve either completely ignored it, or
- They’ve actively banned their traders from adding it to client portfolios, and strongly encouraged their investors to stay away from it.
But why? Why would an investing firm want to avoid an asset generating an average 200% APY since 2012?
The main reason is risk.
Despite meteoric returns so far, Bitcoin’s future value is just too hard to predict. There simply isn’t enough data for the big investing firms to plug into their predictive algorithms and create a “no lose” scenario with their clients’ money.
So for a big firm like Fidelity to come forth and say:
- Yes, Bitcoin’s future value is both bright and predictable, and
- Yes, investors should invest in Bitcoin first before other digital assets.
Is a big, big deal.
So what led Fidelity’s analysts to that conclusion?
Key takeaway #1 – Bitcoin is a bonafide “monetary good”
“A monetary good is a good that is valued for its tradability for other goods, not its consumption or use”.
It’s a natural evolution of money “combining the scarcity and durability of gold with the ease of use, storage, and transportability of fiat,” the author writes.
(Fiat currency is any currency that has value because a government says it has value – like the USD or the Euro).
Key takeaway #2 – In fact, it has the potential to become the primary monetary good
The authors predict that “one monetary good will come to dominate the digital asset ecosystem,” and when it finally happens, Bitcoin is a shoo-in for the throne.
“If investors are looking for a digital asset as a monetary good,” they write, “then they will naturally choose the one with the largest, most secure, most decentralized, and most liquid network.”
Key takeaway #3 – Bitcoin is likely here to stay thanks to the “Lindy Effect”
What about the longevity of Bitcoin? Will it survive far into the future?
The authors think so, and use the Lindy Effect to support their claim.
The Lindy Effect aka Lindy’s Law “is a theory that the longer some non-perishable thing survives, the more likely it is to survive in the future.” They give the example of Broadway plays – if a play survives on Broadway for 10 years, it’ll likely survive another 10 years (see: Cats).
The authors also highlight some of the major threats that Bitcoin has survived through, such as the FBI raid on the dark web and getting banned in multiple countries.
Key takeaway #4 – The “Blockchain Trilemma” illustrates why Bitcoin can’t be improved upon
The Blockchain Trilemma, a term ironically coined by Ethereum creator Vitalik Buterin, states that a decentralized network can only deliver two of the following three features: decentralization, security, or scalability.
“Bitcoin is currently the most secure and decentralized monetary network” and “will continue to be.”
In essence, the authors argue that Bitcoin can’t be beaten as a store of value because it already has a huge head start on those two traits. Even if a competing crypto focuses entirely on decentralization and security, it simply has too much ground to make up.
Key takeaway #5 –Bitcoin would dominate a winner-take-all blockchain war
It’s important to remember that there isn’t one singular blockchain – there are countless blockchain networks all founded on the same basic technology. Some private, some public, many powered by their own, proprietary cryptos.
That being said, the authors describe a possible scenario where future developers will want to build on one “base layer” blockchain network. If they do, they’ll most likely pick Bitcoin’s as a foundation since it’s “arguably the most decentralized and immutable blockchain in existence.”
Key takeaway #6 – The risks to Bitcoin’s future are shrinking – and the upside is still sky-high
“Many of the risks that could’ve been used to create a case for the demise of Bitcoin are now gone.”
The authors go on to write, “and each day the network grows stronger with more users, miners, and infrastructure being built.”
Bugs and crashing are a threat to every piece of software, but Bitcoin’s age and “intentionally simplistic code” are signs of its longevity.
What about regulation? The authors argue that “proper regulation appear(s) far more likely than outlawing these assets.”
Plus, while the risks are diminishing, the upside is “still very sizable” because…
Key takeaway #7 – Bitcoin has two tailwinds that will drive values upwards
“Bitcoin’s return profile is driven by two strong tailwinds: the growth of the digital asset ecosystem and the potential instability of traditional macroeconomic conditions.”
The authors make the interesting case that while “other tokens” indirectly benefit from money flowing into the space, Bitcoin benefits the most.
As for the instability of macroeconomic conditions, the authors say Bitcoin “makes a compelling case as the greatest available hedge for some of the potential headwinds facing the legacy financial system.”
Key takeaway #8 – For all the above reasons, investors should consider Bitcoin first before all other digital assets
In a complete departure from traditional Wall Street sentiments, Fidelity is officially on paper saying they’re not only optimistic about Bitcoin – they’re even more optimistic than the average investor.
“It is not that we think an allocation to Bitcoin does not come without risks… but we think some investors are overestimating the downside risks of Bitcoin when compared to other digital assets.”
Here’s why I humbly and respectfully disagree with every key point made in Bitcoin First
To start, I really loved reading Bitcoin First. C&J are obviously extremely smart guys with well-educated opinions. And to their credit, they do frequently use the qualifier “in our opinion.”
So, out of 100% respect and admiration for their work, I wanted to share my counter-opinion on their key points!
Bitcoin is not a monetary good and never will be
A monetary good can be defined using a single word: tradability.
As of January 2022, just 36% of American businesses “accept” Bitcoin as payment. And they don’t even really accept it – they use apps like Bakkt that convert BTC to USD on the spot.
The number of businesses that accept raw Bitcoin remains extremely low.
Even in El Salvador, where companies are required to accept Bitcoin, less than 5% of the country transact in Bitcoin due to its volatility and high fees. The rest prefer to keep using USD.
Bitcoin could never become the primary monetary good because governments and Big Tech wouldn’t allow it
Let’s say Bitcoin was making headway as a bonafide monetary good. In another universe, the people of El Salvador actually loved using it and other world leaders started to take notice.
Here’s why its reign as the primary monetary good in the digital arena would be short-lived.
To start, in a rare moment of unity, both communist and capitalist governments hate Bitcoin for the same reasons: it’s hard to monitor, even harder to control, and it’s abysmal for the environment.
China’s banned it and India plans to, meaning roughly 40% of the world’s population won’t be able to use it anyhow.
Big Tech aren’t big fans either – Tesla no longer accepts it (citing environment concerns) and Google, Meta, and Microsoft have filed patents for their own proprietary cryptos.
In short, there are simply too many big players in the space ready to quash Bitcoin’s hypothetical rise to prominence (if they haven’t already). If a single crypto does emerge as a universal currency, it won’t be BTC.
Bitcoin’s age isn’t a sign of future longevity
C&J argue that the Lindy Effect applies to Bitcoin, and that its age has made it stronger like a piece of oak.
Historically speaking, age has never protected a form of currency.
On January 1st, 2002, the Euro replaced 12 national currencies all at once – including the German Mark, which was widely considered the most stable currency on earth and had been around since 1948.
Age doesn’t protect technology, either. If it did, we’d still be using cassette tapes.
Bitcoin’s superb foundation doesn’t immunize it from competition
Bitcoin may have gotten a head start on decentralization and security, but I don’t think that wholly protects it from competition.
I just think the competition hasn’t arrived yet.
As mentioned, the Big Tech firms are already designing their own rival stablecoins based on the foundation laid by Bitcoin, and China has already rolled out its direct copy – the digital yuan. We’re sure to see other nations follow China’s lead in developing their own crypto, especially with El Salvador showing how simply adopting Bitcoin as legal tender leads to disaster.
I agree with the authors that Bitcoin currently reigns in a few ways, but I doubt that reign will last.
The Bitcoin blockchain may win a hypothetical competition – but it depends on the criteria
I agree with C&J that the Bitcoin blockchain is pretty dang stable and well-made. Like a New York Brownstone, it’s got solid bones and won’t crack under pressure.
But does that mean it would win Blockchain of the Year?
Well, the Bitcoin blockchain’s greatest drawback is its limited functionality. Among other things, it can’t facilitate smart contracts or hold NFTs. It’s robust, but simple.
Read more: Are NFTs Only For The Ultra-Rich?
So if future developers of a “base layer” blockchain are looking purely for a sturdy place to store fungibles, yeah, it’s a winner. If it’s a multi-faceted competition, my bet’s on another horse.
Threats to Bitcoin’s future aren’t gone
C&J made the bold claim that “many of the risks that could’ve been used to create a case for the demise of Bitcoin are now gone.”
Coincidentally, about a year ago I published Is Bitcoin Safe? Where I highlighted six of the greatest threats to a Bitcoin investment:
- Bitcoin isn’t FDIC-insured
- Exchanges getting hacked
- Loss or theft of your private key
- Bitcoin’s high power consumption
- More countries banning Bitcoin over time
- An impending “crypto winter” with prolonged, suppressed prices
Well, a year later, all of these risks have either gotten worse or stayed the same. Crypto-related crime rose 79% last year with a record $14 billion stolen, India has proposed a new crypto ban, and Bitcoin prices are down 40% from their late 2021 record high – prompting some to say that the crypto winter is here.
Granted, “demise” is a subjective term. Will any of these risks totally annihilate Bitcoin? Probably not. But if “demise” means never returning to BTC’s 2021 peak, I think the risks are still very real.
Bitcoin’s “tailwinds” are actually headwinds
According to the authors, Bitcoin’s prices are about to soar thanks to two major tailwinds:
- The growth of the digital asset ecosystem, and
- The instability of the macroeconomic conditions
I’d submit that these two “tailwinds” are actually headwinds keeping prices stagnant – or pushing them down.
To start, there’s little evidence to suggest that Bitcoin prices benefit from a general investment in digital assets. “While it’s commonly believed that the price of ETH follows Bitcoin,” writes Cointelegraph, “research shows that ETH is an independent asset.”
The same goes for exploding NFT sales, which are speculated to be “increasingly de-correlated with the crypto market,” according to Reuters.
Market instability seems to be directly harmful to crypto prices. In a down market, investors tend to dump their high-risk and speculative assets first before investing that capital in low-risk index funds and bonds. Case in point, the S&P 500 was down just a few points in January while crypto prices plummeted 40%.
Investors should study Bitcoin first – but it shouldn’t be an entry point for portfolio exposure
It bears repeating that in essence, Bitcoin First centers around three main points:
- Bitcoin should be viewed and vetted differently from other digital assets.
- It should be considered an entry point for investors to learn about digital assets.
- It should also be considered an entry point for portfolio exposure to digital assets.
I actually 100% agree with points one and two. Bitcoin is the granddaddy of crypto – it’s inherently unique and deserves reverence and understanding before any investment in digital assets is made – or even considered.
But using points one and two to support point three just doesn’t work. It’s like saying:
- The Ford Model T is a unique vehicle.
- It should be studied by anyone with an interest in cars.
- It should also be your first car.
Rather, Bitcoin should be a jumping-off point for studying other digital assets – Ethereum, NFTs, Verdano, etc. – and making an educated investment from there.
I think the overall irony to Bitcoin First is that the more you learn about Bitcoin, the less you should want to invest in it. Its existential threats are rising, prices are stuttering, and all signs point to the Bitcoin rocket finally running out of fuel.
The key takeaways from the report, then, should be the first two.
Bitcoin absolutely should be studied and understood before an investment in digital assets is considered. I’d even expand upon that to say that all investors should understand Bitcoin and its vast impact on economics, politics, and even psychology.
Bitcoin first? Yep. Just not in your portfolio.
Featured image: AlyoshinE/Shutterstock.com