Last January, Fidelity released a report on why “investors need to consider Bitcoin (BTC -0.35%) separately from other digital assets.” In the report, Fidelity outlined various qualities that Bitcoin possesses that not only make it more desirable as a store of value but also inherently more decentralized and secure than other cryptocurrencies. And after the year that was 2022, never has that seemed more needed.
2022 in a nutshell
The past year was one of turmoil and scandal, highlighted by events such as the implosion of the Terra stablecoin and the more recent bankruptcy of crypto exchange FTX. If 2022 had to be boiled down to one headline, it would probably read something like “Centralized Players Exploit Decentralized Assets” or something close to that.
Due to the rapid rise of cryptocurrencies and increased interest from investors, individuals and companies realized there was money to be made. They created their own cryptocurrency tokens, extended credit to businesses that didn’t deserve to be supported and at times even pocketed investor dollars.
This is the ultimate problem. Cryptocurrencies are supposed to be decentralized and void of any control from one person or one company. Fidelity’s report showed through a series of analyses that Bitcoin is the epitome of decentralization and security, and possesses other inherent characteristics that should make it the preferred digital asset of investors.
It’s a lengthy paper, 26 pages in total, and full of compelling reasons Bitcoin should be considered separate from all other cryptocurrencies. To save you from reading the full paper, here are the top points Fidelity analysts made.
In a class of its own
Some of Bitcoin’s characteristics that distinguish it from every other cryptocurrency are its unmatched level of decentralization and security. Since Bitcoin’s creation, a number of cryptocurrencies have taken off but many of them have sacrificed security and decentralization in favor of fast transaction speeds. Often, decisions such as the rate at which new tokens enter circulation or the consensus mechanism to be used are left to a select few community members such as founders and developers.
But with Bitcoin, there isn’t any one person or entity behind the scenes pulling strings, an attractive quality considering the flaws that plagued some networks in 2022. Furthermore, Bitcoin’s distributed and expansive network of nodes around the world makes it orders of magnitude more secure than its closest competitors.
Possibly the most interesting conclusion made by the Fidelity analysts was their belief that Bitcoin has the potential to become the “primary monetary good” due to characteristics that make it considered sound money — namely its scarcity and desirability. Fidelity suggested that Bitcoin’s limited supply of 21 million coins and its increasing network effect might make it the preferred digital asset for investors.
Due to Bitcoin’s first-mover advantage (it was the first and only cryptocurrency for quite a while), its blockchain became the “most secure, most decentralized, and most liquid network” — qualities that Fidelity says incentivizes users to pick the Bitcoin network instead of others. Fidelity’s analysts believe that this process of more people choosing Bitcoin over other cryptocurrencies will enhance its legitimacy, subsequently making it more valuable as demand increases.
Lessons to be learned
Now that 2022 has come and gone, it’s well past time for investors to come to the realization that not every new cryptocurrency is worthy of a spot in their portfolio. Many of these assets pretend to be cryptocurrencies but in reality they are more like centralized Ponzi schemes.
There will likely never be another Bitcoin, and for that reason it should be prioritized more than any other digital asset. Bitcoin investors can be confident that the blockchain will remain resilient in the face of centralized actors that inevitably come and go, but of most importance is that it is the most likely candidate to become the primary digital asset for years to come.
RJ Fulton has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.