How will the launch of Fidelity in crypto affect the Bitcoin market?

01 Jun, 2019
by David Robb
How will the launch of Fidelity in crypto affect the Bitcoin market?

One of the most eagerly-anticipated developments in crypto this year is the launch of Fidelity’s cryptocurrency services, with the financial giant rolling out dedicated tools that will make it a lot easier for traditional institutions to invest in digital assets. Let’s take a look at just how much impact this launch could have on Bitcoin and the crypto market.

Fidelity's interest in cryptocurrency
Based in Boston, Massachussetts, Fidelity Investments Inc. is one of the world’s largest asset management companies. The firm created its crypto-focused subsidiary, Fidelity Digital Asset Services (FDAS) back in October 2018, but reports suggest that it has been committed to crypto for much longer. An insider recently claimed that one of Fidelity’s U.S. bases has a room full of Bitcoin mining rigs, and CEO Abigail Johnson has apparently been mining the top crypto in her own office since 2015. There are passionate crypto advocates at every level of the company, and BTC is even used as a payment method in the cafeteria.

Beating the ICE’s Bakkt project to the punch (not to mention that elusive Bitcoin ETF), FDAS has now started to roll out its crypto services to selected clients for preliminary trials. An institutional-grade crypto custody service is perhaps its most important offering, giving firms and funds from the traditional finance sector the opportunity to invest in crypto without needing any new technical knowledge, and free of any concerns about potential security risks. As FDAS services move on from initial testing, institutions should gradually start to get involved with the crypto market on a scale that is likely to be unprecedented.

But what is it about a relatively new asset like crypto that appeals to these traditional financial giants? According to a recent study carried out on behalf of the firm, a number of factors are piquing their curiosity about this emerging investment opportunity. 47 percent of the 411 respondents claimed they were drawn to how disruptive the technology is. As large-scale financial innovation goes, Bitcoin will definitely be the most advanced asset available for the foreseeable future, and any investors with a forward-thinking outlook will be ideal clients for FDAS’ new products.

Meanwhile, 46 percent of the institutions polled claimed that crypto’s apparent lack of correlation with any other asset makes it appealing. This argument is often made by crypto enthusiasts who believe that Bitcoin is the best store of value. Fundamentally resistant to inflation due to how it is designed, BTC’s price also appears to fluctuate mostly independently of any other type of asset.

To test this argument, it’s probably worth taking a closer look at the specifics of BTC’s performance compared to other assets. Although 2018 was a bad year for the top crypto, with losses of 75 percent, this could easily be explained by the bubble of 2017, which saw Bitcoin start the year close to its all-time high price. And most other traditional asset classes also had a terrible year. A summary by Visual Capitalist shows that crude oil was down almost 25 percent, and real estate down 8%.

For 2019, the figures are quite different. A study of investment returns published by Binance Research shows that, at the start of May, Bitcoin’s returns had increased by 53 percent for the year so far - outperforming every other asset class. Well behind this in second place was crude oil, which showed a YTD return of 33 percent. Global stocks were up 13 percent, while global real estate was up 11%. The best-performing mutual fund offered by Fidelity is up around 30 percent.

In 2018’s annual letter to shareholders, amidst one of the worst stock market dips of the decade, Fidelity claims that its "diverse group of businesses and broad set of investment solutions helped to offset the negative effects that the stock market’s decline would have otherwise had on the company’s asset levels". Investing in assets that fluctuate in value in similar ways for similar reasons can exacerbate losses, and diversifying can be a way to prevent this.

If crypto is seen by many of Fidelity’s clients as the ultimate non-correlated asset, it will be the best alternative for diversification. As a relative safe haven from political and economic uncertainty, crypto will move into the fill the gap left when world events affect the financial system and more traditional types of asset start to seem less dependable.

'Could drive price of Bitcoin up $1000, $2000'
As for crypto prices, how will they be affected by Fidelity’s launch? In a recent interview with CoinTelegraph, eToro’s senior market analyst made a quick calculation that could give us a rough idea. According to Mati Greenspan, Fidelity has "upwards of a trillion dollars under management. Let’s say even 1% of that, if that goes into crypto, if all of their clients diversify with 1%, I think that that may be a bit aggressive to think about but if we think about it in those terms, that itself could drive the price of Bitcoin up $1,000, $2,000 easily.”

Is this estimate correct? Issues with the upcoming Ethereum (ETH) hardfork mean that Bitcoin will be the only cryptocurrency available through FDAS's services for the foreseeable future, so nearly all the new crypto investment will be going into BTC. It’s difficult to predict price changes with much accuracy but as a general guide, a further $10 billion added to Bitcoin’s market cap tends to correspond to a price increase of around $600. This level of growth would likely be accompanied by additional interest from crypto-focused funds as well as retail traders, pushing this well within the range predicted by Greenspan.

But how realistic is Greenspan’s scenario - will 1 percent of institutional investment really be transferred into Bitcoin? Prominent Bitcoin bull and Wall Street legend Mike Novogratz certainly thinks that it should be, identifying this particular figure as the bare minimum. Undeterred by the $100 million losses his Galaxy Digital firm suffered as a result of 2018’s bear market, he recently claimed that he couldn’t think of a reason why any top investment fund wouldn’t have at least 1% exposure to crypto assets.

There is good reason to believe that FDAS itself expects a significant diversification of institutional assets into crypto. Not only does anecdotal evidence suggest they are aiming for as much as 5 percent crypto investment from clients, its survey found that 40 percent of institutions would be open to investment in digital assets sometime within the next five years. Even if these were all pre-existing Fidelity clients, they wouldn’t need to have any more than 3 percent exposure to collectively push the total new investment in Bitcoin well beyond Greenspan’s conservative estimate. 

If the current BTC rally continues with its exponential momentum, a price increase of around $2000 could soon be doubled or tripled, and send the top crypto back up to the dizzy heights of late 2017, if not further.

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