The big boys are coming to play in cryptocurrencies.
Asset management giant Fidelity Investments yesterday announced its entry into the cryptocurrency ecosystem with Fidelity Digital Assets – a new service aimed at institutional investors. The new business will provide three offerings to customers – custody solutions for coins, cryptocurrency trade execution through matching of counterparties, and customer service for bitcoin and ethereum’s ether. The Boston-based firm said it plans to expand the number of coins it services later and already has 100 employees working in the unit.
Fidelity did not divulge the names of exchanges for its trade execution service. But Tom Jessop, Fidelity’s head of corporate business, said partners would have to comply with the “Fidelity Standard”. That standard includes due diligence on fiat reserves to compensate customers in case of problems and compliance with securities regulation, such as anti-money laundering (AML) and Know Your Customer (KYC). “We are certainly going to connect to only those counterparties we feel good about,” said Jessop. Fidelity already has a partnership with San Francisco-based Coinbase as part of which Fidelity clients can track their cryptocurrency portfolio on the exchange.
A Shift Towards Institutional Customers
Abigail Johnson, Fidelity’s CEO and Chairman, stated that Fidelity Digital Assets plans to “make digitally-native assets, such as bitcoin, more accessible to investors.” The investors, in this case, are institutional and not retail.
Jessop said current infrastructure in the cryptocurrency ecosystem was “heavily skewed” towards retail investors and early adopters, leaving space for “institutional-quality” offerings. Fidelity already manages assets worth $7.2 trillion for customers, who comprise a broad mix of retail as well as institutional clients. According to Jessop, Fidelity has 13,000 financial institutions as customers and it had applied learnings from servicing those customers to the cryptocurrency world. In addition to this, the company put in approximately four years of research before making this week’s announcement. As part of the research, Fidelity’s team conducted extensive research, which included mining and purchasing bitcoin and performing basic research. The new service is expected to launch sometime in 2019.
Institutional Capital Makes Its Way Into Cryptocurrencies
Wall Street’s interest in cryptocurrencies is a net positive for its ecosystem. It will bring liquidity and stability to cryptocurrency markets, which have been rocked by unceasing volatility in the last couple of years. Part of the reason for this is that the markets mostly consist of retail traders who are mostly momentum traders, partial to investing small amounts.
In contrast, Wall Street trades are large and generally tend towards long time horizons. The entry of institutional investors could also clean up a cryptocurrency ecosystem populated with numerous small exchanges that have proliferated in the absence of government regulation.
But it comes at a time of plunging prices for bitcoin and crypto markets. After registering phenomenal gains towards the end of last year, cryptocurrency markets have been in a slump for most of this year. Bitcoin, the original cryptocurrency, is down by approximately 51% from its price at the start of this year, as of this writing. Cryptocurrency markets have performed even worse, crashing by 73% in overall valuations, as of this writing.
Regardless of the market’s performance, however, Fidelity’s announcement is the latest in a slew of positive recent announcements about institutional capital making its way into the cryptocurrency ecosystem. Several university endowments, including those from Harvard and Yale, are reported to have invested their money into crypto-focused hedge funds.
Goldman Sachs, the big daddy of Wall Street, is also considering debuting a custody solution for institutional clients. Earlier, it had teased reports about launching a trading desk for cryptocurrencies but the firm’s CIO termed those reports as “fake news”. That said, the firm is still interested in cryptocurrencies and is waiting for regulatory clarity.
Key takeaways from Goldman’s #Crypto top cop:
-> getting smart about custody
-> inquiries for liquidity + custody + insights (main client demands)
-> regulatory clarity is the big missing piece preventing a head-first dive into the space. $GS
— Sridhar Natarajan (@sridinats) October 15, 2018
Meanwhile, crypto experts and investors have hailed Fidelity’s entry into cryptocurrencies.
Biggest news this year is #Fidelity opening the door. It’s huge.
Many #Crypto intrigued investors have entered via VC route which is more niche. Multi Billion $ funds want to pile in but biggest hurdle has been Custody. That’s just been solved $BTC seems to be entry point
— Phillip Nunn 🚀 (@PhillipNunnUK) October 15, 2018
Gil Luria, director of research at DA Davidson, called Fidelity’s decision to enter cryptocurrencies “a milestone for crypto assets”. But the firm’s entry may not necessarily translate into an influx of big names into cryptocurrencies. Crypto assets are not easily amenable to fundamental analysis the way that regular assets – stocks, bonds, real estate, commodities – are. “As long as that’s the case, investors are going to have a hard time embracing this category,” he said.