Feb 8, 2024

Fidelity's Strategic Bitcoin Allocation: If this catches on, look out!

Fidelity's new approach: Bitcoin in the Multi Asset Fund

Fidelity's Strategic Bitcoin Allocation: If this catches on, look out!

Introduction to Fidelity's Bitcoin Strategy

Fidelity just added Bitcoin into its Canadian multi-asset funds. This is huge news because if this became normal for balanced (multi-asset) funds in the United States this would almost certainly trigger a massive re-pricing in Bitcoin.

Fidelity's All-In-One's Allocations Across Portfolios

  • Conservative Portfolio: 1% Bitcoin allocation
  • Balanced Portfolio: 2% Bitcoin allocation
  • Growth Portfolio: 3% Bitcoin allocation
Fidelity All-In-One Strategic Asset Allocation
Fidelity All-In-One Strategic Asset Allocation

Fidelity's All-In-One Balanced Fund Allocation

To be clear, the financial impact of this new strategy will be modest at the outset, with the balanced fund managing $536M CAD. However, it's broader implications for Fidelity's future strategies, particularly in the United States is what stokes excitement.

Potential Impact on U.S. Funds

Putting aside other managers such as Blackrock following suit, Fidelity's Balanced and Growth funds alone in the U.S. hold $89 billion in assets. A parallel adoption of this Bitcoin strategy in the U.S. from them could generate ~ $2.5 billion in demand for Bitcoin.

Why include in Bitcoin in a Multi-Asset Fund?

In January last year, Fidelity released research highlighting Bitcoin's potential as a valuable addition to diversified investment portfolios. Their research shows that Bitcoin has historically had low correlation to price movements in stocks and bonds, which means that when sized correctly it could actually reduce risk!

Bitcoin correlation with stocks and bonds
Bitcoin's Correlation with Traditional Assets

Bitcoin's Correlation and Volatility

Fidelity, like most Bitcoin investors, is acutely aware of Bitcoin's volatility. Their analysis suggests that for a traditional 60/40 portfolio to warrant a 3% Bitcoin allocation, Bitcoin would need to deliver an average real return of 15.5% annually. Fidelity in Canada is investing in Bitcoin, suggesting they believe it will provide a justified return. When we look at Bitcoin's past performance, its four-year CAGR has always been above 25%. So this seems like a reasonable conclusion!

Bitcoin Rolling 4 year returns
Bitcoin Rolling Returns

The Ripple Effect Across Balanced Funds

Should other balanced funds follow Fidelity's lead, the impact on Bitcoin's price and market cap would be substantial.

Consider the Fortune 1000 Pension plans

According to Willis Towers Watson, the Fortune 1000 Pension plans hold approximately $240 billion in 'Alternative Investments.' A shift towards allocating 2-3% of their portfolios to Bitcoin could signify a monumental shift of around $50 billion towards Bitcoin

Looking Ahead: Bitcoin's Role in Mainstream Investment

Fidelity's Canadian initiative may not instantly translate into a significant capital influx into Bitcoin. However, it signifies the growing acceptance of Bitcoin as a mainstream investment option.

Changing the Landscape

Previously, the potential career risks associated with a Bitcoin drawdown deterred many from including it in their portfolios. Now, as Bitcoin becomes normalized within diversified portfolios, we could a see a tipping point where the greater risk lies in not allocating to Bitcoin. It won't happen tomorrow. But It might just happen this decade. In fact, I expect it too.