 One of the main criteria for Bitcoin establishing itself as a store of value will be driven by the convergence on the narrative that it's a store of value. This is Rhea Butoria, head of research at Fidelity Investments Digital Assets subsidiary. Fidelity is among the world's largest providers of financial services. It has over $7 trillion of assets under management, now also including cryptocurrencies. So why has Fidelity dedicated a subsidiary specifically to the research and custody of Bitcoin? The upside is asymmetric, but we're also past the point where there's an equal or higher likelihood that it goes to zero. Join us as Rhea breaks down Fidelity's Bitcoin investment thesis on how Bitcoin can become an established store of value. What's up, YouTube? My name is Jackson. Welcome to another Cointelegraph interview. How are you doing today, Rhea? I'm great, Jackson. Thanks so much for having me. Yeah, I'm great to be able to talk to you today. You've written a number of pieces recently on Bitcoin and why, essentially giving the reasoning why Fidelity is investing in Bitcoin. So I'm really curious to pick your brain on one of those posts in particular, which is called your Bitcoin investment thesis in aspirational store value. So just to start with the title, why do you call it an aspirational store value rather than naming it just a store value? Sure. So, I mean, the main reason is that it's simply the size of the Bitcoin market relative to other store of value assets like gold. So Bitcoin today has a network value of about, I mean, I think it's over 300 million at this point. And that's about, you know, three to four percent of gold's market size, which implies that compared to gold, Bitcoin is relatively more narrowly held as a store of value. But it's unrealistic to think that a new asset will be established and have a network value in the trillions of dollars in just a matter of years. And I think the takeaway to consider from the title is the untapped addressable market of an emerging or aspirational store of value versus something that's an established store of value. The other thing I would note is that the Bitcoin network is a really complex system and it's difficult to define. So as a result, there have been a variety of narratives of what Bitcoin should be. You know, in the past, people have said it's a P2P payments network, programmable money, a reserve asset for the crypto industry, a settlement network, an alternative investment and a digital gold or store of value or some combination of these things. But I think for it to be unequivocally referred to as a store of value, more people need to use it like one. And we've definitely started to see more of that, especially this year and especially coming from outside the crypto native community. But I think the beauty of Bitcoin is that it can serve multiple functions that are complementary, like potentially being a store of value that also offers fast and cheap settlement relative to traditional rails and traditional stores of value. But, you know, time will tell how the mainstream extracts the most utility from the asset and the supporting network. Yeah, so it sounds like one of the main criteria you're setting up for Bitcoin to become a store of value is that it needs to be widely accepted. But as I understand it, aren't there other properties that make some an asset a store of value? Why does it seem like you believe that the main criteria for Bitcoin becoming a store of value is its acceptance or adoption? So, you know, as you mentioned, store of value is one of the three functions of money, the other two are medium of exchange and unit of account. So given that store of value is one of the functions of money, we can leverage the criteria that's used to evaluate hard money to evaluate the viability of an asset as a store of value. So I certainly think those are extremely important. And there are six or seven. But I think the ones that are most applicable to the store of value use case are scarcity, durability, uniformity and portability. It's important for an asset to have those fundamental properties ahead of it being adopted. But, you know, adoption is equally important because people have to recognize that Bitcoin does have have these properties. And, you know, one of the main criteria for Bitcoin establishing itself as a store of value will be driven by the convergence on the narrative that it's a store of value. So people, you know, recognizing that it has these properties and determining that these properties are valuable to them. So, you know, I think of it as a network effect. And for an asset like Bitcoin, network effect is especially important because also because the security of Bitcoin and its properties are directly tied to the network and the number and the diversity of users, minors and validators that are supporting the network. So, you know, these properties come first, but next is recognition of these properties and adoption and network effect. So it's kind of circular, but, you know, that's how I think about it. In your investment thesis, you also say that investing in Bitcoin today is akin to investing in Facebook when it had 50 million users with the potential to grow to the more than two billion users it has today. So why do you believe that this analogy to Facebook's network effect is applicable to Bitcoin? Sure. So, you know, the purpose of this analogy was to kind of set the frame for where I think and many of us think Bitcoin is today. You know, I think people often compare Bitcoin to an early stage startup and that implies that it has a decent probability of failing or going to zero. What I wanted to do with this specific analogy is show that like Facebook at 50 million users, the upside is asymmetric, but we're also past the point where there's an equal or like or higher likelihood that it goes to zero. And then, as you mentioned, you know, Bitcoin is fundamentally a network like Facebook and they both benefit from network effects or the idea that the more users the network has, the more attractive it becomes for other people to join because of the value and usefulness of the network increases. You also write that one of the key arguments against Bitcoin as a store of value is its volatility and even President Trump in one of his tweets pointed out this view against Bitcoin. But you go on to offer a different perspective in that many participants initially learn about Bitcoin because of its volatility as new participants conduct further study. Perceptions often shift to focus less on short term performance and more on the long term value proposition. So which side are you on? Are you do you believe that Bitcoin's volatility will hinder it becoming a store of value? Or do you think that that will not be an issue at some point in the future? Sure. So volatility is definitely a barrier to adoption because or before people understand why Bitcoin is volatile. But, you know, as I wrote in the piece, I think that Bitcoin's upward volatility is also a positive catalyst for adoption at this stage in its life cycle because it does attract newcomers to the industry. You know, the price appreciation is intriguing. It's the hook that leads to many people learning more about Bitcoin and its value proposition. And I am and have met so many people that are Bitcoin believers now that were introduced to the asset in 2016 and then, you know, the especially significant rise in its price in 2017. So in terms of why Bitcoin has been and is volatile, you know, one reason is that it's an emerging store of value. It's a new asset and it's growing off the base of zero. And as I write in the report, you know, the trajectory of a new asset from negligible adoption to a store of value is unlikely to be linear. You know, in the early days, the price appreciation and volatility were much more significant than they are today. But as the market cap has grown and with the increase in products to get exposure as well as derivatives to hedge exposure, you know, I think the ability of any one market participant to move them to move the market has gone down. And, you know, as the number of participants in Bitcoin continue to grow and as market structure continues to evolve, I do expect volatility to continue to decline as it has historically. But another reason why Bitcoin has exhibited higher volatility relative to other assets is that it's perfectly it has a perfectly inelastic supply and not even gold has a perfectly inelastic supply. So with Bitcoin, change in demand doesn't translate to a change in the speed of production or the amount of production. Price is the only release valve. And, you know, what's important is that this supply inelasticity while it does contribute to some volatility of the asset, it is what makes Bitcoin scarce and valuable. So so I like to think about volatility as the cost or premium of getting early access to a perfectly scarce asset that's becoming a global non sovereign store of value. And the last thing that I'd say on this is that people store value in assets that they expect to hold for long longer periods of time. So the day to day volatility doesn't matter as much as the long term trajectory of the asset. I think one of the appeals for many traders and investors to Bitcoin is its volatility because it provides a lot of it provides a lot of space to play around in and how you sell and buy in order to create profit and how you use derivatives because of its volatility. It's very attractive. So how do you think? And like, you know, when this volatility starts to die down, as you're suggesting when adoption becomes much greater in the future, do you think Bitcoin will lose some of its appeal to traders and institutions who are taking advantage of this volatility right now? Yeah, I mean, I think that the potential for them to, you know, benefit from substantial increases and decreases in price will certainly go down as it becomes if and when it becomes more widely held as a store of value. So, you know, that is one consequences that it becomes less appealing to, you know, institutional traders and market participants that are in the market in search of this kind of volatility. So, yeah, I would agree with that. You said that the significance of Plan B's famous stock to flow model, which charts Bitcoin's potential price against its supply is out of the scope of your investment thesis. Would you like to take a chance now to comment on that famous stock to flow model? Sure. So, you know, stock to flow just to set the stage for the audience is a quantitative measure of scarcity that's generally applied to commodities. So the idea is that a higher stock to flow ratio implies that a harder asset, because an increase in supply or a change in supply is relatively low compared to the existing stock of the asset. The challenge with a model based on this ratio is that or specifically for Bitcoin is that the main input is supply and the model is driven largely by Bitcoin's having every four years. But unlike commodities, you know, even gold, Bitcoin's fully diluted supply of 21 million and its supply issuance rate is known at the onset, you know, when it was launched. And the having of supply doesn't necessarily represent new information. You know, changing demand for Bitcoin is unknown. And it is the more likely driver of price, I think. But you know, another way to think about having's, and maybe why we see, you know, an increase in price after the event is that they're a built in marketing event for Bitcoin. So they might occur, you know, they occur as planned without any intervention from any third party. But there's generally more chatter about Bitcoin ahead of each of these events, because it's programmatic issuance that is, you know, fully known as a novel concept. So as a result, I think at this point in Bitcoin's life cycle, when there are many people in the world that still don't know about or don't fully understand Bitcoin, I think that having's do potentially attract new eyes and investment, because they reinforce Bitcoin's independent monetary policy. And it's a stark contrast to, you know, the unknown monetary policy around fiat currencies, and the unknown impact of money printing on assets like stocks and bonds even. So you know, I think if Bitcoin continues to become more understood and widely held, future havings will have a diminishing effect on demand. And I think this is also true because the magnitude of the having on supply issuance rate continues to decline with each event. Gotcha. So you set up a nice little segue there. So let's move into the next topic, which is talking about the the monetary policies of central banks and governments and how they're impacting Bitcoin. In your investment thesis, you say central banks and governments have implemented expansionary policies to counteract the deflationary pressures created by global lockdowns. Time will tell whether and how quickly the gradual reopening of the global economy will spur consumer spending, how central banks and governments will react and what the impact on consumer price inflation will be. The impact on demand for fixed supply assets is less clear if inflation or expectations of inflation fall. So here you are referring to a time post pandemic when deflationary pressures are letting up. Do you believe central banks and governments will actually be able to recover from their extraordinary expansionist policies has quantity of eating easing not past like a point of no return. So, you know, while central bankers and governments say that these measures are temporary, history has shown that this kind of intervention is really difficult to unwind even once the crisis is over. So, you know, for example, I was reading earlier this week that under different Fed chairs, the Fed actually tried to unwind the rounds of quantitative easing that they implemented during the global financial crisis in 0809. But every time they tried to do this or hinted at it, markets went into turmoil and, you know, it caused them to retract the attempt. So, you know, ultimately, we can't say anything with certainty because each crisis is different and each recovery is different. But I think based on what we know now and based on, you know, historical examples, I do think it will be difficult for central banks and governments to unwind the situation that they found themselves in today. How will this manifest in the future if everything's so intertwined? I mean, what kind of problems could arise from this specifically? Central banks at least have exhausted the tools that they have at their disposal. So the efficacy of these tools on markets and on the economy have gone down. And, you know, that is a risk that we have to consider going forward is in a future crisis, if this is a steady state, what levers do central banks and governments have to pull to, you know, boost the economy? Like, where does it go from there? You know, I think that's one of the risks that we think of. What kind of role does Bitcoin play in all that? You know, we're headed towards this unknown monetary abyss that you're kind of describing. Is Bitcoin, you know, the safe haven in all this? Would you go that far? I think time will tell based on the evidence we've seen this year with, you know, people, you know, outside the crypto community for the first time have come out and been so vocal about their attraction to an investment in Bitcoin, starting with Paul Tudor-Jones earlier this year, greater clarity from regulators like the OCC around allowing banks to custody Bitcoin, you know, to something that I hadn't even thought much about, you know, the idea of holding Bitcoin as a treasury reserve asset on balance sheet, as well as, you know, the conversations that we're having having with new institutional investors that are, you know, interested in Bitcoin for the first time because of this, you know, this intervention and unprecedented level of stimulus that we've seen in the economy. So I think if that continues, then it could definitely become the safe haven asset store of value that we've talked about for such a long time. But, you know, as we discussed, it has all the properties to do that. It's just a matter of adoption or not. That would kind of stand in stark contradiction to something that Ray Dalio said the other day, which is that he believes that if Bitcoin's price gets high enough that nations will be forced to outlaw it. I mean, do you think that there's a possibility of that scenario happening? Is it even possible for nations to outlaw Bitcoin? I mean, would and would that even like affect Bitcoin at all? Yeah, you bring up a really great point is, is it possible? So, you know, one of Bitcoin's core properties is that it is seizure resistant. And I think an outright ban would be really hard, if not impossible to implement, especially on people that choose to self custody Bitcoin, which is one of the unique features of Bitcoin. But the risk that I think you're talking about and that maybe Ray Dalio was talking about is that governments make it illegal for service providers to offer on an off ramps or custody or other services, which would make it really challenging for retail investors and especially regulated institutional investors to to build exposure or allocate to or hold Bitcoin. My take at this point is that the likelihood of government spanning Bitcoin is low, you know, relative to other asset classes, Bitcoin is still extremely small and it doesn't seem like a threat. So I don't think it's a priority relative to the plethora of other challenges that governments are facing. But Bitcoin is slowly entrenching itself, you know, through the already established and growing number of legitimate and regulated and incumbent businesses that provide Bitcoin related services. So as Bitcoin becomes more and more entrenched, I think it'll be harder to ban because banning it will hurt so many types of institutions and investors that have exposure to it. And the other factor that I'd consider is, you know, competitive pressure. So, you know, banning Bitcoin can make the country that bans it less competitive compared to other countries that are pro Bitcoin and pro digital assets. So that's kind of how I think about that scenario. I wanted to retrace our steps to one to one last thing, because we were talking earlier about stock to flow and how Bitcoin's price is more demand side. It's more demand driven than it is necessarily supply driven because its supply is very fixed. So it's not vulnerable to like supply shocks and stuff like that. So do you can you envision a scenario where the future demand for Bitcoin just simply doesn't materialize? Yeah, there's a few, you know, things I think worth mentioning on that and how I think about it. So I think one of the biggest risks to Bitcoin succeeding as a store of value is the circulation of misconceptions about the asset. So in other words, a lack of appropriate education and understanding about Bitcoin and its properties. And that's why education and research are such a core focus at Fidelity digital assets, because, you know, that is ultimately what will drive adoption. I also think that, you know, we need to continue to improve infrastructure for both institutional and retail investors to to accept and hold Bitcoin as a store of value. I think we've already come really far in the last three years, but you know, there is more work to do. Specifically for institutions, I think it would be helpful if we improved capital capital efficiency in Bitcoin markets. So what I mean by capital efficiency is lowering the friction and fragmentation in trading Bitcoin, as well as the ability to use Bitcoin as collateral in other transactions. And then another scenario that I actually, you know, took note of, I was listening to a podcast with Lynn Alden and Meltem Demirs, I think it was an episode of Unchained. And what they said, you know, what they brought up is the potential for an unfavorable tax policy on Bitcoin holdings that could maybe deter people from holding it as a store of value. But that being said, in that same conversation, Lynn also pointed out that gold has an unfavorable tax policy, you know, it's taxed as a collectible, but that hasn't prevented Bitcoin people from holding gold. Thank you, Rhea. I really appreciate your time coming on the show today. Thanks, Jackson. Thank you, everyone, for watching. My name is Jackson, and that was Rhea Butoria, who is the head of Recharts of Fidelity Digital Assets. And if you haven't noticed, we are now in the new Cointelegraph video studio. 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