Should I buy crypto right now?

JIM ARMSTRONG: Should I buy crypto right now in today’s environment, with everything going on? That is a fantastic question. The answer, as you would probably imagine, has a lot of nuance and many different factors. And we’ll try to cover as many of them as we can on today’s livestream.

Hey there. Thank you for joining today’s Covering Crypto Livestream. I’m Jim Armstrong with Fidelity. To get you some answers to that question, and to dive a bit deeper to figure out how those factors apply to you, potentially, as an investor, we have a pair of amazing guests I’m thrilled joined us today.

They are friends of the livestream. Perhaps you’ve seen them in the past. I’d love it if you could both just introduce yourselves real quickly, talk a little bit about what you do at Fidelity and the perspective you bring to today’s broadcast. And, Lubna, we’ll start with you, if that’s OK.

LUBNA LUNDY: Thanks, Jim. Really happy to be here again. I’m Lubna Lundy. I’m a director on the Fidelity Asset Management Investment Product Group. I am on the equities team focused on thematic and sector investments. And I have the pleasure of creating products that help connect investors to the crypto space, like our crypto industry ETFs, which are very different from spot crypto ETPs. But we will talk more about that during the show.

JIM: That is a very important distinction to make that we will revisit. So thank you for that. And, Chris, how about you?

CHRIS KUIPER: Yeah. Thanks, Jim. And thanks, everyone. My name is Chris Kuiper. I’m the vice president of research at Fidelity Digital Assets^®, a subsidiary of Fidelity, where we primarily serve institutional investors. But we answer questions and talk about some of the very same questions that our viewers on this show have. So happy to be here and answer those questions today for you.

JIM: Excellent. We review every single question that comes in when folks register for the livestream. And we saw a lot for this episode—a lot of people asking, what is crypto? How does crypto work? Why do cryptocurrencies have value?

We see those questions coming in from Kenneth, from Eddie, from Andrea, from Fran, and a lot more. Those are, I think, exactly the right questions to be asking. They are the correct questions to start you on your crypto learning journey. They are also questions we have answered relentlessly, so many times, on the livestream.

So I hope you can appreciate that we can’t dedicate every livestream to answering the basics about what crypto is and how it works. However, if you go to Fidelity.com/LearnCrypto—after the livestream, of course—not now, afterwards—Fidelity.com/LearnCrypto, you will find so many excellent resources to answer those basic questions.

You’ll find old livestreams, long articles, short articles, infographics, animations, a glossary, frequently asked questions—I mean, hours and hours worth of content that’s free. Just Fidelity.com/LearnCrypto. Go, learn at your own pace, and get comfortable with the basics. And then you can, perhaps, feel a little bit more comfortable joining conversations like this in the future. But let’s dive into today’s conversation.

Got a couple of viewer questions, by the way, to start us off that came in during registration. Leslie wants us to, “Please explain crypto investments and advantages.” Mary is asking, “Is bitcoin worth investing in?” Chris, we’ll start with you, and maybe with Leslie’s question, recognizing that there’s, I don’t know, tens of thousands of cryptocurrencies out there. We tend to talk about bitcoin first and foremost, just because it’s certainly the largest by market cap. It’s where a lot of people start learning. So take it away. Help us explain the context here.

CHRIS: Yeah. So I think what’s helpful to set the stage is both of these questions used some form of the word “investing” in it. And so when people say is crypto worth it or what’s the value of it, it’s important to separate the technology from the value as an investment. So the technology, of course, has a ton of value, value proposition.

These are technologies that are being used in novel and interesting ways. New businesses are being built on them. But the questions that you put up there were specifically asking about crypto as an investment. So we’re going to talk about, as you said, bitcoin first—it’s the largest, it was the first one, the longest one out there. And we’ll talk about it as a potential investment.

And so I say “potential” because it may not be right for everyone. Everyone has their own objectives, investing objectives and goals.

And one of the nerdy things we like to look at on the investment side is something called the Sharpe ratio. So I think we have a chart here that will show bitcoin’s Sharpe ratio versus some major asset classes. Now, if you’re not familiar with the Sharpe ratio, it’s your excess return—so the return you’re getting above what they call the risk-free rate.

So risk-free rate is usually just a government bond. That’s the base. Everyone can invest there. Now, if you want more than that return of a bond, you have to go out on the risk curve. You need to take on some more risk. And so that’s where that excess return comes into play.

So what are you getting for taking on that risk? And then you divide it by every unit of risk. And in the investing world, that’s standard deviation or how much something moves around—how volatile is it? Does it move 10% or 20% in a year? Or even something like bitcoin, it moves 40%, 50%, 60% up or down in just a single year.

Now, I want to be clear—it’s not saying it’s the best and you should only hold bitcoin. We know these are very volatile instruments, very risky in terms of volatility, how much they move.

But, historically, at least, you’ve been well compensated for that. So to get back to the original question, why would you own these things? Well, they give a pretty good return—again, at least historically—even with the amount of risk that they’ve been taking on. So they can actually add and enhance your portfolio from an investor’s perspective.

JIM: Another question we get a ton, Chris, is whether and to what extent bitcoin is a possible hedge against inflation. That’s certainly something on people’s mind given today’s economic climate. How do you answer that?

CHRIS: Yeah, this is one we get all the time, especially from institutional investors. And we need to take a step back and talk about the word “inflation.” So in finance, unfortunately, we do this thing where we use terms interchangeably. We don’t define them well. They can change depending on the meaning.

So if we talk about inflation first, one of the things that people use it for, especially in the general sense, the everyday use, is this idea of consumer prices increasing. So the stuff that you buy, your services that you use every day going up in price, that’s usually what we’re talking about with inflation. And we actually have a chart on this, because bitcoin has—again, we’re just going to talk about bitcoin for this example—but it has proven to be a very good hedge against inflation over the long term.

So I want to be clear about that. Sometimes inflation goes up and bitcoin actually goes down. And people say, well, what gives? We say you got to take a step back, let these things work through the market. And the fundamental thesis, and we’ll talk about this more, is that bitcoin has a cap supply. There’s only so many bitcoin out there. Only so many are added every year. Nothing’s going to change that—whereas the money supply doesn’t.

And so you see here, bitcoin is actually a pretty good hedge of consumer inflation if you take a step back. The median price of a US home has continued to go up in dollar terms. But in bitcoin terms, it continues to go down. Same with other everyday items like a smartphone. It’s gone up in price. Your flagship smartphone gets more and more expensive every year as these components get more expensive. But, in terms of bitcoin, it’s actually gone down.

And then to put a different angle on this, if we step back even further, I like to go back to an older definition of inflation, which is inflating the money supply itself. So if you grow the amount of money out there, that’s where inflation starts. And then that can trickle down into either consumer prices or other asset classes.

So one of the charts we like to show here to get this point across is the global M2 money supply—so that’s just a broad measure of how much money is being created in the entire global economy, the entire world. And you see that year-over-year change, it rises and falls. The year-over-year change in bitcoin has also risen and fallen with that as well.

It hasn’t quite kept the same relationship recently, which is something interesting we could talk about. But you see when we had those spikes before, when a lot of money was being created, the price of bitcoin went up. Now, correlation is not causation. So take that for what it is. But just on a statistical basis, 85% of bitcoin’s price changes can be explained by changes in the money supply. And, again, the past is not indicative of future performance, but we think there’s a pretty good reason to look at this and see the linkage there.

JIM: I also want to revisit this question, Chris, of whether or not now is a quote unquote “good time” to be investing in crypto. You’ve made the distinction a couple of times there between bitcoin and everything else. So I think it’s important to call out your research and analysis on bitcoin, for example, might lead you to one conclusion about whether or not it’s good for you as an investment.

But that definitely does not translate to meme coins, for example, which have a very different, perhaps no, value proposition. So high level, Chris, how should people start to wrap their heads around doing that research to figure out what is good or appropriate for them? I know one thing is doing some research online, looking for the white paper associated with a coin or a token—that’s typically just an internet search—bitcoin, white paper, and then off you go. You can read that and start with that research. What else would you suggest?

CHRIS: Yeah. I’ll go back to Peter Lynch, who was at Fidelity, the famed money manager, who said, know what you own. And so it’s the same thing with all investments. It doesn’t change when you move over into the world of cryptocurrencies. Know what you own. Do that due diligence.

Know what it is, what you’re actually buying, what rights you have by buying that, if any at all. What’s the value proposition? Why was this thing created? What problem does it seek to solve?

How does that value accrue to you as someone who buys into this token or this cryptocurrency? Those are all very basic questions that everyone should seek to understand and research before they buy any of these things.

JIM: And, Lubna, what would you add in terms of research that a potential investor might consider?

CHRIS: Yeah. You and Chris added some good ones between the white paper, the value prop. I also would add the social media sentiment or the emotional tone around a particular topic on social. That plays a large role around particular cryptocurrencies. And so you want to get a sense of what is the social sentiment. Also, what’s the overall digital presence of the cryptocurrency?

Also, you can look at market metrics like market cap of the different crypto strategies. A large market cap doesn’t necessarily mean that an investment is the right crypto, but, similar to the stock market, larger strategies may be considered less risky due to their value potential. And then trading volume is another good indicator of activity and interest in a token, as well as price history. So those are a couple other things you should consider.

JIM: I’d also love to get Mary’s question from a few minutes ago back in front of you, Lubna, as well. How does somebody figure out if a particular type of cryptocurrency is quote unquote, “worth it” to them as an investor? I think sometimes this is referred to as suitability. How do I figure out what might be suitable for me?

CHRIS: Yeah. So when asking if a crypto like bitcoin is worth it, you want to go through some key considerations before you start investing. Again, like Chris mentioned, what do you know about the cryptocurrency? Do you know what its utility is, what its value proposition is, what its history is? And that answer can be a little different across the different cryptocurrencies.

Also, what is your time horizon? That’s going to be specific and unique to your own particular situation. Are we talking long term, more than five or six months, or short-term investing that you’re interested in? Also, how comfortable are you with volatility in your particular portfolio?

Cryptocurrencies trade 24/7, 365 days out of the year and can have sudden, large price swings. Are you OK with the type of volatility that may come with investing in crypto? So if you spend time answering those questions and feel like crypto may be right for your portfolio, then you’ll want to do some research and choose which particular cryptocurrency may make the most sense.

But, again, always do your research and consider your personal long-term goals. And I think just being on livestreams like this is going to be a great step in your research journey.

JIM: Yeah. I would humbly agree. Find a trusted source, and ask them your questions, and then evaluate their answers. It’s a perfect tee-up to you on these couple of questions that came in during registration to help frame how you answer them. Gloria wants to know, straight up, “How [can] I invest in crypto today?” And Pichu is asking, “How do I start crypto trading? Are ETFs [or ETPs] with crypto less volatile?” That’s an interesting question as well. So a lot to talk about here, Lubna, but kick us off.

LUBNA: Yeah. So there are many ways to invest in crypto. And I’m happy to break down some of those different options. So if we want to start with spot crypto, that means you are buying and directly owning cryptocurrencies like bitcoin, ethereum, solana that are typically held in a digital wallet.

Why might you consider spot crypto? When you invest in a spot crypto, you have full ownership of the asset so you can transfer, spend, or stake your crypto if you want to. But the potential drawbacks are you are responsible for secure storage, whether through a custodial provider or self-custody wallet. And that can add some complexity and security considerations that not every person wants to have to manage.

JIM: Yeah, for sure. That’s also often just called direct ownership. As you cleanly explained there, Lubna, owning spot crypto is owning crypto directly. How about a spot crypto ETP—exchange-traded product?

LUBNA: Yeah. So spot crypto ETPs, or exchange-traded products, they provide exposure to the crypto price movements without requiring you to own the actual coins. So that’s one of the differences. Now, some of the potential benefits of spot crypto ETPs are they are easy to access through brokerage, trust, or IRA accounts, with no need to manage wallets, or private keys, or 26-word seed phrases. And then tax reporting is often simpler as well.

But potential drawbacks are spot crypto ETPs—with those, you don’t own the underlying asset or crypto, as we mentioned. So you can’t use it on the network. And while crypto trades 24/7, 365 days out of the year, ETPs, or exchange-traded products, can only be bought and sold during market hours. And there’s also management fees that apply.

JIM: Thank you for that. So not to put too fine a point on it, but there’s spot crypto owning directly and then a spot crypto ETP. So maybe a spot ETH ETP, a spot bitcoin ETP. You own an investment product that has, as its only underlying asset, the cryptocurrency that is referenced. Lubna, help us understand the difference between that, and crypto stocks, and ETFs.

LUBNA: Yeah. The winner by a point. So crypto-related stocks and ETFs—these types of investments allow investors to invest in shares of companies that are tied to the digital asset or cryptocurrency industry or ecosystem. And some potential benefits are these types of investments are easy to access through a brokerage account. They can add diversification to your portfolio.

But potential drawbacks are some crypto-related stocks can be highly volatile, and investing in individual companies can introduce some concentration risks. But with crypto ETPs, that can actually help address some of concentration risk concerns by providing exposure to investors to a basket of crypto-related companies rather than a single stock.

JIM: Yes. For that last point, I think you said ETPs. I think you meant ETFs—those are the ones that help reduce concentration risk.

LUBNA: Yes.

JIM: Cool. Yeah. Even we get mixed up a little bit from time to time.

LUBNA: But they are technically ETPs.

JIM: Correct. Exactly. That’s exactly right. That’s the umbrella. So to wrap this all up and do a better job than I just did, just help us break down that difference, again, between an ETP and an ETF in the crypto space.

LUBNA: Yeah. Like Chris mentioned before, these terms, and you also, they are sometimes used interchangeably. But there are some nuances and differences. An ETF is a type of ETP. So think of an ETP as the broader category. Spot crypto ETPs are designed to track the price of the cryptocurrency while a crypto equity ETF invests in baskets of publicly traded companies connected to the crypto ecosystem.

So if we had to recap everything, we’d say spot crypto direct ownership of a cryptocurrency. That’s one of the key differences. With spot crypto ETPs, indirect exposure to crypto prices through a fund structure. Crypto-related stocks—you have ownership in individual companies operating in the crypto industry. And then crypto ETFs are diversified baskets of crypto-related stocks or companies without you directly owning crypto. So hopefully you caught all of that.

JIM: And how about the relative difference to that other viewer question about volatility? Is there any significant difference in how volatile those options are between and among each other?

LUBNA: I would say volatility and risk differs across all of them. We always emphasize whether you are investing in spot crypto, or whether it’s bitcoin or altcoin, or a crypto ETP, or crypto industry ETF—there’s going to be some level of risk that you may incur with these types of investments. But, yes, the short answer is the risk profile, the suggested risk tolerances, they vary significantly, even though they’re all tied to the same crypto market.

And I went through some of those drawbacks. So, again, with spot crypto, there may be that direct asset risk that’s involved with that particular investment strategy. When you buy spot, you get the pure price exposure. And, at the same time, you inherit that custody and regulatory risk.

So if you lose your private keys or if you’re in an unregulated exchange and it goes under, your funds are gone.

So these type of folks that are willing to assume this type of risk, they may be more comfortable with navigating blockchain technology. They may want that true 24/7 asset ownership. If you are a person that is looking at spot ETPs or ETFs, there may be that wrapper or timing risk associated with these type of investments.

And then with crypto stocks, you can incur operational and leveraged risks. Remember, you take on corporate risk—you’re taking on management team, corporate debt, quarterly earnings type of risks. And so a little different across the different strategies. I would say the key takeaways are if you want that pure ownership, consider spot. If you want regulated convenience, you can look at crypto ETFs or spot crypto ETPs.

If you want corporate leverage, you can look at crypto stocks or ETFs. But try to match the investment vehicle with your technical comfort level so you can have peace of mind.

JIM: No shortage of options, for sure. So thank you for walking us through those. Chris, a couple questions coming your way now that came in during registration. Kevin wants to know, “In today’s economy, do we need to carry some crypto in our portfolio?”

Jerry asks, “Would this”—and by “this” he means crypto—”Would [crypto] be considered part of a diversified portfolio now?” Let me hop in front real quick and say, Kevin, no one needs to hold crypto. And our thinking would be you should run fast and run far from anybody who tells you you need crypto or need anything, for that matter. It has everything to do with suitability and what you feel comfortable with.

But, Chris, going back to your research that you and the team at Fidelity Digital Assets® does, what does having crypto in a portfolio, potentially, do to that portfolio?

CHRIS: Yeah. And I’ll echo what you said again. Nobody needs it. It is for everyone out there, but that doesn’t mean you have to have it. It all depends on your situation. But one thing I really like about Kevin’s question here is the part about in today’s economy, because it leads to one of the top reasons that we researched, and think about, and also hear from clients of why they are adding a core position to their portfolio. And, again, I’ll take bitcoin as the example since that’s the largest one, the one that has the most history.

So, looking at bitcoin, one of the key reasons for it in a portfolio in today’s economy is what I alluded to and showed before with the inflation chart, with the amount of money. Now, that showed year-over-year change. If we were to show that chart of the amount of money being created or in the world today, it would just look like this chart that just goes from the bottom all the way up and to the right. It’s constantly growing.

So we’re constantly adding new money into today’s economy. And over the last few decades, even, that’s averaged a growth rate of 8% per year. So the amount of money in the world is growing at an average of at least 8% a year. It’s actually accelerated in the last few years.

So that means there’s more money out there chasing the same or slightly more amount of goods and services. It’s growing faster than the amounts of growth in goods and services—GDP, for example. And that’s why, in my opinion, we’ve had inflation for the past 50 years. Inflation has actually always been positive now for the last 50 years. It’s never gone negative.

You can make of that what you will, but it does mean that everything is just always getting more expensive. And I think some of our viewers probably are feeling some of this. We hear a lot of these stories about grocery prices, and housing, and all these things. So, in today’s economy, to get back to the question, it may be prudent to hold something that can’t be debased, that can’t be printed, something that’s more scarce.

We know, for example, bitcoin has a hard cap—a limit of 21 million coins. And the amount of bitcoin that’s created is only around 1.5% or so a year. And that keeps going down every four years. And so that’s what I would say of why this may fit for a lot of people. And, again, depending on their circumstances or timeline.

JIM: And can you talk a little bit about as a portfolio diversifier too?

CHRIS: Yeah. We get that question a lot too. So people wonder if I put this in a portfolio, is it going to help or hurt my portfolio? And that really gets to the diversification question. Is it going to move along with the other assets?

And we’ve got a great chart up here showing the correlation of bitcoin to the major asset classes that many of the viewers may have in their portfolio. So it shows that there’s a moderately positive—it’s a pretty low correlation to these things, which surprises people. A lot of people think bitcoin trades like stocks, or trades like gold, or trades like something. At times, it does in the short term.

But, again, zooming out over the long term, it actually doesn’t trade like any of this. And this is what you want in finance. Something with low correlation, because then it has the potential to diversify your portfolio, increase those risk-adjusted returns. So when things are zigging in your portfolio, you want it to be zagging the other way. And that gives you a more holistic portfolio construction.

JIM: Lubna, I want to have a couple of follow-up questions headed your way. Let’s assume people watching right now have done their research and they feel like, yes, OK, some allocation to cryptocurrency is appropriate for my portfolio. I bet you can guess the exact next question we get, which is, how much?

And you can see that in both of the questions that we selected here from registration. Joel wants to know, “How much crypto do you need in your portfolio?” Again, you don’t need any but you might want some. But “how much?” is his question. But Norma has the same thing—”How much to invest?” So, Lubna, how might you help somebody wrap their brains around the right percentage allocation to have, if, in fact, they feel like it’s appropriate for them?

LUBNA: Yeah. These are pretty common questions. So thanks, Joel and Norma. Like you said, Jim, nobody needs crypto in their portfolio. It’s not a financial requirement. It’s a strategic choice based on your personal goals, your broader portfolio allocations, and your risk tolerance.

Crypto, it does tend to be more volatile than other asset classes. But, at the same time, we will still encourage folks to explore a non-zero allocation to crypto. So think about whether you may be looking for a smaller allocation.

But you want to only invest an amount that you are 100% prepared to see drop overnight. If that dollar amount keeps you up at night, you may want to dial it back. Also, you may want to look at your portfolio as a whole and determine if you have a lot of exposure to risky assets outside of just crypto. That should be considered when evaluating your risk tolerance and how much crypto you should be considering investing in.

JIM: Chris, I want to bring you back. I know you and the research team at Fidelity Digital Assets are not as afraid of math, particularly, as I am, but you’ve got some interesting research about bitcoin specifically to this question.

CHRIS: Yes. We’ve done a lot of work on this. And there’s two different ways to do this broadly. One is just to take a historical look back, whether it’s five years ago, 10, 20 years ago. So, for example, we like to look back about 10 years. We don’t want to capture the fantastic gains of the early things like bitcoin.

But we also want a lot of data. And what it shows is a little goes a long way, at least historically. Having just a little bitcoin in your portfolio, for example—again, just using bitcoin as the largest one with the most data—a little goes a long way.

The other thing we’ve done more recently is we’ve tried to add more of a forward-looking view of this and saying, OK, maybe bitcoin or these other things won’t provide as high of a return as they did in the past because they’re a lot bigger now. It takes a lot more money to move them. And we put in some more conservative assumptions.

And I’m not going to get into all the math here, but we used something called the Kelly criterion as a unique lens. And if anyone is into math, they’ve maybe heard of this before—you can go look it up—but, really, it talks about what is the mathematical optimal size of a position, especially if it has this asymmetric profile. And what we mean by that is, again—this is at least historically, it may not continue in the future—but, historically, bitcoin has had this asymmetric profile.

It goes up more years than it goes down. And when it goes up, it goes up way more than it goes down. Now, again, it still has really bad years where it goes down 50%, 60%, 70%.

JIM: “Why would crypto go down during a geopolitical crisis? Shouldn’t crypto be a safe haven?” I definitely love that question, Chris. Would love your perspective on it—again, recognizing probably easiest to talk about bitcoin with the largest data set for you to look at. But, in general, how would you answer Donald’s question?

CHRIS: Yeah, I’ll take bitcoin as the example because we get this one a lot for bitcoin, particularly because it is positioned as this thing that’s outside of the traditional financial system. It operates on its own. It has its own fundamentals. And nothing will change about the way bitcoin operates or its value proposition that we talked about.

But then we’ll get some news—usually, like you said, geopolitical news—and it will tank. It will go down. It will go down harder than the markets. And everyone says, what gives? I thought this thing was supposed to be outside of this and protect me. And there’s two different things going on here, I think.

Number one is your time frame. A lot of times it goes down sharply, but it does so in the short term. And I think there’s a few reasons for that. Number one, the knee-jerk reaction for anything in times of stress is to sell and go to cash. We say all correlations tend toward one during times of stress. That’s true for bitcoin and crypto assets in general as well.

The other thing is this old adage in times of stress, you sell what you can, not what you want. And we’ve seen this when news hits on, say, a Sunday evening, the markets aren’t open. Bitcoin will start selling off very rapidly.

These may be institutional investors that are getting things like margin calls. They’re tightening up the risk parameters. They need to raise cash now, and they need to sell something. Well, bitcoin’s a 24/7, 365 market. It’s very liquid. They start selling that first, and then they’ll get to the other stuff. But the data shows if you zoom out and you go from different geopolitical events, bitcoin has actually held up better, or recovered, or done better than other assets seven days, two weeks, two months after the event. So after things are fully digested, that’s when it happens. So in the short term, yes, bitcoin and other crypto can go down sharper and harder. But in the long term, it also tends to recover faster and can even recover more after the fact.

JIM: A fascinating context. I really appreciate that. Lubna, real quick, I’d love to throw another question in front of you that came in during registration. This one comes from Derek. He wants to know if crypto should be considered a long hold, or should it be a continuation of buying low and selling high?

LUBNA: Yeah, I won’t say it’s an either/or for all crypto. But between on-chain ledger data from third parties like CoinDesk and investor surveys, the data does reflect that over 80% of all bitcoin in circulation is held by longer-term holders that have held the strategy or the coin for six months or more.

I would also say that trying to actively trade buy low, sell high during different cycles, that it’s statistically a losing game. But to determine your time horizon, I would look at your goals, your risk tolerance, not just market charts. You can ask yourself this question, like, when do I actually need this cash?

If your answer is under three years, crypto may be too volatile. If it’s more like five to 10 years, you may be able to ride out some of the different cycles. So those are some things that you may want to consider for a time horizon.

JIM: Excellent. All right. Thank you for that. Lubna, Chris, thank you all for taking time to be with us today.

If you have immediate questions that were not answered but you’re still looking for some help, I would suggest heading to Reddit. We have a very vibrant and excellent Reddit there at r/FidelityInvestments. You can ask your questions there, engage with the community, engage with our moderators. And, again, another great resource is Fidelity.com/LearnCrypto.

Hope you enjoyed today’s livestream. And we very much look forward to seeing you at the next one. Take care.