Bitcoin may be developing characteristics of both a high-growth risk asset and a store of value, challenging traditional approaches to portfolio construction and asset allocation.

A research note from Fidelity International pointed to the cryptocurrency’s shifting correlations with US equities and gold, in turn suggesting investors should assess its portfolio role on its own merits rather than attempt to classify it alongside conventional asset classes.

Giselle Lai, director, digital assets strategist for Fidelity in Asia Pacific, said Bitcoin’s relationship with the S&P 500 has fluctuated considerably over the past five years, reflecting its sensitivity to macro conditions and investor sentiment.

Its relatively high volatility and exposure to factors such as global liquidity, interest rates and risk appetite have encouraged comparisons with technology stocks and other higher-beta investments.

However, Bitcoin-specific developments, including anticipation of US spot Bitcoin ETF approvals in late 2023, have periodically driven performance independently of broader equity markets.

The digital gold debate

An alternative argument is gaining attention as investors increasingly consider Bitcoin’s potential as a non-sovereign store of value.

Like gold, Bitcoin has constrained supply, sits outside the traditional fiat monetary system and generates no underlying cash flows, explained Lai. While its correlation with gold has moved between positive and negative territory over the past five years, the relationship has recently strengthened.

She said one possible explanation is growing interest in the so-called ‘debasement trade’, where investors allocate capital to scarce assets amid concerns about fiscal deficits, monetary expansion and the long-term purchasing power of currencies.

“Whether this stronger relationship proves structural or temporary remains an important question to watch,” according to Fidelity.

The investment manager believes these competing characteristics make Bitcoin difficult to categorise using conventional portfolio frameworks. “Bitcoin still does not fit neatly into a single traditional asset category.”

This can raise practical questions for fund selectors about whether Bitcoin should be treated as a higher-beta growth exposure, a potential portfolio diversifier or an alternative store of value.

Investor appetite strengthens

The debate comes as digital assets continued to attract investor interest despite a challenging macro environment in September.

Fidelity highlighted Bitcoin’s 6% gain during the month to close at $83,621, having briefly exceeded $86,000, and noted Ethereum’s advance of 8.4% to approximately $2,681. Total cryptocurrency market capitalisation increased just over 10% to $3 trillion, added the firm.

This occurred despite a 25 basis point Federal Reserve rate increase and the US 10-year Treasury yield rising above 5% for the first time since 2007.

Regulatory developments also continued, added Lai, including: new US Securities and Exchange Commission measures supporting tokenised equities; European Central Bank preparations to invest in tokenised securities; and proposed changes to Singapore’s stablecoin framework.

For allocators, however, the central issue remains how Bitcoin’s evolving characteristics translate into portfolio decisions.

Fidelity believes its combination of risk-asset sensitivity, technology-driven adoption and gold-like scarcity makes it distinct from conventional investments. “Its role in portfolios may therefore be better understood on its own terms, rather than through the lens of any single existing asset class.”