Fidelity COINS investment report: the value of the currency is an ideal storage

Original title: Fidelity Bitcoin Investment Report: Bitcoin an Ideal Store of Value

Source: Babbitt

Fidelity Digital Assets, a unit of asset management giant Fidelity, today released the first report in a series on bitcoin investments, titled "Bitcoin is an Ideal Value Store System." This is a Chinese translation of the report, translated by Babbitt.

At Fidelity Digital Assets, we have conversations with investors who are at different stages of their Digital asset journey -- those who are actively researching investment theory, those who are seeking theoretical validation, or those who have not yet embarked on Digital asset investment research. To help the investor spectrum at different stages, we are developing a series of reports to examine ideas that are driving today's investor interest and investment in Bitcoin and its potential future development and attractiveness. In doing so, we hope to help investors build a comprehensive evidence-based investment thesis and understanding, especially as Bitcoin increasingly integrates with traditional markets and portfolios.

Bitcoin is a lot of things for a lot of people -- why people choose to own bitcoin depends on their circumstances and their views of today's bitcoin and the future of bitcoin. These views have been the subject of misunderstanding, confusion and debate. Historically, such debates have revolved around whether Bitcoin was a store of value, a medium of exchange, an alternative asset, or both or none of the above. In addition, it is unclear whether bitcoin's underlying blockchain technology is best suited to facilitate wholesale clearing, settlement, consumer payments or the anchoring and timestamping of arbitrary data.

The truth is that as an ecosystem matures, bitcoin can perform many functions simultaneously on a base layer or through an incremental layer. One of the beauties of Bitcoin is that its success is not premised on serving a single purpose.

In this article, we'll focus on Bitcoin as an ideal store of value. We'll explore the inherent characteristics that will enable Bitcoin to play that role in the future, consider whether bitcoin is being used in this way today, and discuss factors that may drive greater demand for this utility.

In conducting research for this report, we interviewed some of the top investors and thinkers in the industry and incorporated their investment perspectives. Special thanks to Brian Kelly, Brian Estes, John Vincent, Benson Durham, Roberto Perli, Dan Morehead, John Pfeffer, and Nic Carter for sharing their thoughts on this topic.

The key points

1. Many investors consider Bitcoin an ideal store of value because it has the properties of a store of value, but this property is still not widely accepted.

2. At least in its early days, bitcoin volatility has been a bright light in the dark, a catalyst for attention, development and innovation.

3. Scarcity is a key characteristic of a good store of value, because in the long run, scarcity is essential to prevent the depreciation of real value. One of bitcoin's most novel innovations is its non-falsifiable digital scarcity.

4. Bitcoin's scarcity is encoded into the protocol at creation time. The independence of monetary policy is supported by a decentralized network of computers that support the network's operation and implementation efforts.
5. The current record low bank interest rates, unprecedented levels of global monetary and fiscal stimulus, and the unknown consequences of deglobalisation have all contributed to the increased awareness and adoption of Bitcoin.
6. Bitcoin's long-term drivers include "slow and steady" inflation and a massive transfer of wealth to millennials, who are comfortable with digital assets.

Bitcoin: an ideal store of value

Bitcoin is an ideal store of value that can be created as it matures. For example, an investment in Bitcoin today is similar to an investment in Facebook, which had 50 million users and could grow to more than 2 billion today. This is driven by the idea that Bitcoin offers asymmetric upside. If bitcoin is widely used as a store of value by retail and institutional investors, it could have a lot of upside relative to its initial up-front investment. Today, compared with global wealth reserves such as gold, bitcoin is relatively new and has a narrow base of demand. Stakeholder awareness of their value and potential is also evolving. But the argument investors are making for bitcoin exposure now is that it will be a much bigger market if it is widely used as a store of value in the future.

One of the main arguments against bitcoin as a store of value today is its volatility. Bitcoin holders reject the idea that the trajectory of new assets from negligible recognition and adoption to global stores of value is unlikely to be linear. A different point of view is that many participants initially knew about bitcoin because of its volatility. As new participants carry out further research, perceptions tend to shift to focus less on short-term performance and more on long-term value propositions.

The upward turmoil has also attracted investment, development and innovation. The industry cycle, which began with the rise in the price of digital assets such as Bitcoin, has drawn new attention through news and social media discussions, leading to an influx of talent into new products, projects and infrastructure, and an industry that is maturing compared to the previous cycle.

Bitcoin volatility is likely to remain high relative to traditional assets because volatility is a side-effect of a completely inelastic supply of bitcoin and a borderless, relatively hands-off market. Volatility should continue to decline relative to current levels over time as applications expand, basic demand increases, activity on institutional platforms expands, and complex investment transactions and products emerge.

Bitcoin's potential as a store of value can be built by comparing it to other investable assets that investors can use to store value, as shown in the table below. To gain significant status, more investors need to understand the inherent nature of Bitcoin and determine that the benefits of storing at least some value in bitcoins outweigh the opportunity cost of storing value in different media. In the following sections, we discuss the main factors that investors are considering when investing in Bitcoin.

Source: Messari (July 2020), Yahoo Finance (July 2020), Visual Capitalist (May 2020)

What makes Bitcoin a potential store of value

The digital scarcity of Bitcoin

A strong store of valuable assets can retain purchasing power over the long term. Emerging stores of value increase purchasing power until they stabilize. The key characteristics cited in reference to good value storage are scarcity, portability, durability and separability. The most important of these attributes can be said to be scarcity, which is essential to prevent the depreciation of real value in the long run. Scarcity means that assets are limited in number, cannot be easily created, and cannot be forged.

One of bitcoin's most novel innovations is its non-falsifiable digital scarcity. Investors believe this attribute is fundamental to understanding and appreciating bitcoin. Before Bitcoin, a number of innovators made important contributions to digital scarcity, but failed to implement it. Computer data has always been stored and Shared only briefly, at least since Larry Tesler's invention of copy, cut and paste in the early 1970s. In more modern times, copying and sharing files has become a ubiquitous and indispensable function of the Internet.

Despite efforts to limit the sharing of certain types of files (for example, the development of digital rights management (DRM) technology to keep track of files and make them difficult to copy), until Bitcoin came online in 2009, creating digital scarcity that could not be forged remained out of reach. In inventing Bitcoin, Nakamoto borrowed concepts from previous efforts, but also used a clever combination of computing, cryptography, game theory and incentives to solve previously unsolved problems, such as the double spending problem, thus creating a decentralized protocol that enforces a fixed release schedule.

The supply of Bitcoin is completely inelastic and is not susceptible to supply shocks. Because higher demand leads to higher prices, supply does not respond to changes in capacity (that is, greater computing power). Even gold, which has been used as a store of value for thousands of years, is not immune to supply shocks. While the ability to increase production in response to rising demand is limited, gold is not entirely without supply elasticity.

Rising prices have encouraged existing bitcoin mining businesses to become more efficient and attracted new ones, but improved computing power will not affect supply. Bitcoin does this by adjusting the difficulty of the Internet. Bitcoin's computing power will rise as miners join the network or existing miners upgrade their mining hardware to more efficient versions. At the same time, the difficulty of mining has increased (or decreased) to ensure that an average of one block is produced every ten minutes. The adjustment mathematically regulates the supply of bitcoin.

Bitcoin is released about every ten minutes through a block reward paid to the miners. The block reward is halved every 210,000 blocks until the number of bitcoins in circulation reaches 21 million. This fixed total supply has been hard-coded into the agreement and cannot be changed. By half in May 2020 for the third time, lead to block reward reduced to 6.25 from 12.5 BTC BTC, fell by 50%, year distribution rate below 2%, down from more than 3.5% - central Banks around the globe over the same period of unprecedented unlimited currency issuance cases, the currency is really an interesting special case, we will extend to discuss below.

Source: Avon Ventures, May 2020

The stock-to-flow model is a measure commonly used to quantify the scarcity or hardness of goods. A stock is the current supply of a commodity minus the supply that has been consumed or destroyed. Flow is the annual incremental production of new equipment. In general, the inventory-flow ratio measures the number of years of production required to reach existing inventory levels.

Historically, an inventory of goods that is difficult to double because production is low relative to existing supply has been a high value reserve. These commodities are used mainly for investment purposes and occasionally for industrial purposes. On the other hand, consumer goods that are vulnerable to large increases in supply are less efficient at storing value.

In the Bitcoin Standard, Saifedean Ammous adapted the stock-to-flow to compare Bitcoin to goods for investment and consumption, and since then the metric has been expanded and even rate-based models have emerged. Gold has historically been the most resilient store of value, with the highest ratio of shares outstanding, followed by Bitcoin (today) and silver. After the most recent block halving (May 2020), the gap between gold and bitcoin ratios has narrowed. After the next halving (2024), bitcoin's stock-to-flow will surpass gold's.

Source: PlanB (March 2019), Coin Metrics (April 2020)

Note: A 2015 Goldman Sachs report estimated that the last of the known reserves would be mined for gold by 2035 and the last of the known reserves for platinum by 2055. The last bitcoin will be mined at around 2140.

Analyst PlanB also developed a bitcoin valuation model based on stock-to-flow. Proponents of this valuation model argue that there is a statistically significant relationship between the market value of bitcoin and its scarcity as measured by this model. Critics of the model argue that it fails to capture demand, which is a more important driver of market value. Although the importance of this model is beyond the scope of this article, we explore why the demand for scarce digital assets is increasing.

Decentralized checks and balances

Bitcoin's monetary policy was established at the time of its creation. Its credibility has been enhanced in part by decentralisation and workload proof mining. Bitcoin has a leaderless network of scattered, complete nodes (computers running bitcoin software), where each node stores a transaction ledger and independently performs transaction validation to check that transactions comply with the rules. Because of this redundancy, there is no central point of failure. Verifying the full node of a transaction is different from the miners who expend energy processing transactions and minting bitcoins. Unlike mining, transaction validation does not require significant hardware or power resources. As a result, any computer can join a distributed network to store and verify bitcoin transactions. Today, tens of thousands of nodes perform this function.

The two main types of transactions include Coinbase transactions, where new Bitcoins are issued programmatically according to a supply schedule, and peer-to-peer payments or settlement transactions between network users.

Decentralised computer networks will reject transactions that do not follow the rules of consensus (such as trying to create new COINS or trying to spend bitcoins repeatedly (double spending)).

In addition to preventing transactions that do not follow consensus rules, the degree of decentralization that exists in the bitcoin network also protects core attributes by protecting virtual property (such as 21 million fixed supplies) with little change. No central authority has sole discretion over bitcoin's monetary policy. Rather, such a change would require significant social coordination among stakeholders (such as users, miners, and people who run full nodes). Most stakeholders believe that bitcoin has value because of its digital scarcity, so support for such changes is negligible.

Proof of Workload (PoW)

Workload proved to be an important design element that could augment the fixed supply of Bitcoin by making transactions irreversible. Workload testimonies provide evidence that a considerable amount of computational work has been done, although the validation work has proceeded easily and quickly in relation to the time and effort expended in carrying it out. To create trading blocks, miners hash over and over again in a guessing and checking process called workload proof to find a solution to a computationally intensive cipher problem. The process is computationally intensive because it requires dedicated hardware (with high upfront fixed costs) and power (ongoing operating costs). These true sunk costs, and the block rewards miners receive for processing trades, encourage miners to process trades and trade honestly.

In addition, the workload proved to make it extremely difficult and expensive for a malicious actor to rewrite or undo a transaction, effectively making it immutable. As the number of confirmations increases, in other words, as the number of subsequent transactions increases, the immutability of the trading block also increases. A block buried under a hundred subsequent blocks is more immutable than a block buried under ten blocks, because to undo it would require reversing the volume of a hundred trading blocks, whereas the latter requires only ten. Miners group trades together to create blocks. A transaction is similar to an entry in the database, and a block is similar to an entry page in the database. Each block is linked to the previous block so that the blocks are linked together to form a chain. Therefore, it is impossible to rewrite blocks buried under a hundred subsequent blocks without rewriting each block.

Bitcoin's monetary policy was established from the start. Because the network is decentralized, stakeholders have confidence in the policy. No centralizer can change core attributes and impose these changes on stakeholders. Transactions are immutable, so attempts to cancel transactions and re-write the ledger are both computationally and economically impractical.

Demand driven

Investors believe that the next wave of cognitive and popularize wave may be driven by external factors, such as the central bank and government intervention level has reached an unprecedented level, record low interest rates, fiat money supply increases, the globalization and the factors that may lead to inflation all of these factors was accelerated by a pandemic and economy ground to a halt.

Long-term drivers of adoption are likely to include the use of Bitcoin to protect wealth amid "slow and steady" inflation, as well as the coming transfer of generational wealth to millennials, who see bitcoin as more favorable than other demographics.

Short and medium term catalysts

Monetary and fiscal stimulus

To offset the damage to demand caused by the global shutdown in response to the coVID-19 pandemic, central Banks and governments have responded to the downturn with unprecedented monetary and fiscal stimulus, stimulating economies and calming markets. In eight months, as many as 285 stimulus measures have been announced, including zero or near zero interest rates, increasing the money supply through unprecedented quantitative easing and a range of lending facilities.

Even before the world entered its current health and economic crisis, investors had predicted that central Banks and governments would use more direct forms of liquidity growth to stimulate inflation, which for various reasons was stubbornly low.

Central Banks and governments have implemented expansionary policies in response to deflationary pressures caused by the global blockade. Time will tell whether and how quickly the gradual reopening of the global economy will stimulate consumer spending, how central Banks and governments will react, and the impact on consumer price inflation.

If inflation or expected inflation falls, the impact on demand for fixed supply assets is less pronounced. But an increase in the money supply could translate into higher prices for risky or scarce assets.

If the mix of policy decisions succeeds in counteracting deflationary pressures and creating inflation, or if inflation remains subdued but nominal yields remain low or low, investors may turn to "assets that maintain their real value -- assets that cannot be printed" -- and realign their diversified portfolios. Traditionally, in this situation, investors have turned to fixed-supply assets, such as real estate, dividend-paying stocks and precious metals. This time, investors may turn to a new type of fixed-supply asset to protect against potential inflation or low interest rates, but with huge growth potential -- bitcoin.

deglobalisation

Globalization is one of the structural forces that historically have kept prices of goods and services low in the face of inflationary pressures. While globalisation has been slowing in the wake of the financial crisis (it peaked in 2008, based on trade flows), the restrictions and blockades caused by the pandemic exposed the risks of relying on global supply chains and provided the impetus for at least part of deglobalisation. "The problem with this crisis is that we may have gone too far in globalisation," said Thierry Breton, the EU's internal market commissioner. The World Trade Organization forecasts that world trade will decline by 13-32 per cent by 2020 as a result of the pandemic. Deliberate actions by governments and policymakers to limit trade and reduce reliance on global supply chains may further accelerate deglobalization, thereby putting upward pressure on the costs and prices of goods and services and alleviating some of the downward pressure on inflation from globalization.

Current interest in bitcoin's value store properties

The decision by Tudor Investment Corporation, a global Investment giant, to allocate investments in Bitcoin among Tudor BVI funds is evidence that unprecedented levels of money growth are driving institutional interest in the currency's value-storing properties. Founder and CHIEF investment officer Paul Tudor Jones, a prominent Wall Street trader, and Lorenzo Giorgianni, head of global research, made the case for investing in Bitcoin in a May 2020 investor letter titled "Big Money Inflation." The Tudor Investments team rates financial assets, fiat cash, gold and Bitcoin based on four characteristics that define a store of value -- purchasing power, trustworthiness, liquidity and portability. Bitcoin scores 60% of financial assets, 1/1200 of financial assets, 66% of gold, 1/60 of gold value, and concludes, "There seems to be some error here, my guess is the price of Bitcoin." Although many expressed the same reasoning, it was seen as a watershed, as both the arguments and investments came from the traditional hedge fund manager/legendary macro investor (Paul Tudor Jones) and the former deputy director of strategy, Policy and Review at the IMF (Lorenzo Georgiani).

Long term catalyst

Long-term preservation

Only in a high-inflation environment does the storage of valuable assets matter less. For long enough, even "low and stable" inflation erodes the purchasing power of the most stable fiat money. This drives people to invest in financial assets to preserve or grow their wealth over a longer period of time. Supporters of bitcoin as a potential store of value argue that the basic demand for the currency will grow as more people realize bitcoin as a long-term wealthpreservation tool.

Source: St. Louis Fed, April 2020

A huge transfer of wealth

A Coldwell Banker report released in October 2019 Shared data on the transfer of $68 trillion to millennials, estimated to be one of the most significant wealth transfers in history. The study also found that there are nearly 620,000 millennial millionaires in the United States, or about 2 percent of the nation's millionaires. The millennial population (those born between 1981 and 1996) prefers novelty, digital local alternatives to traditional goods and services, and easier access to new types of investment.

This openness is partly a result of the 2008 financial crisis. Entering the Labour market at such an inopportune time raises a degree of scepticism about the traditional banking system. According to the WEF's 2017 Global Shapers Survey, 45% of the 30,000 millennials surveyed disagreed with the statement that they believe Banks are fair and honest. Edelman in October 2018 to affluent millennials (24-38, to invest $50000, or an individual or a common income of $100000) found that 77% thought the millennium generation rich "designed to support the rich and the rich of the entire financial system", and "financial bad behavior let us into another global financial crisis is only a matter of time."

There is also evidence that millennials are more willing to hold bitcoin than traditional stores of value such as gold. Nate Geraci, President of investment advisory at the ETF Store, notes intriguingly that about 90 percent of millennial customers say they prefer bitcoin to gold -- "it's a slippery slope." According to Edelman's Millennials and The Future of Money report, released in November 2019, 63 percent of "crypto users" in a turbulent economy say cryptocurrencies are a better investment than gold.

conclusion

The inherent nature of Bitcoin leads to the belief that it has the potential to be a store of value, with complementary and interdependent components -- the decentralized settlement network (Bitcoin) and its digital scarce local assets (BCT). It is also important to consider the need for bitcoin's unique features -- if there is no ongoing demand for these attributes, there will be no long-term value creation or storage.

Outside forces that have accelerated interest in and investment in Bitcoin include unprecedented levels of monetary and fiscal stimulus around the world, as well as exotic forms with unknown consequences. This has exacerbated many of the problems that Bitcoin aims to solve, and is leading more investors and users to turn to Bitcoin, an "insurance strategy" that protects against unknown consequences. At the same time, the massive transfer of wealth from the elderly to the young is a gradual but important long-term boon as the young embrace Bitcoin. This is an important catalyst for bitcoin adoption as they inherit and grow their wealth.

While there is no guarantee that Bitcoin will succeed as a store of value, if the sustainable long-term demand for use cases is not realized, these disadvantages will drive the incremental demand for new assets with unique properties. Furthermore, as we will explore in a subsequent installment of the Bitcoin Investment argument series, the strength of Bitcoin lies in features that enable it to perform multiple functions, further cementing the possibility of measuring its success through value growth.

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