5 ways Fidelity and Bakkt could change cryptocurrency in 2019

05 Mar, 2019
by David Robb
Analysis
5 ways Fidelity and Bakkt could change cryptocurrency in 2019

As the longest bear market in the history of Bitcoin shows no signs of stopping anytime soon, the introduction of large-scale institutional investment into crypto has never been more necessary. Fidelity Digital Asset Services (FDAS) and the Intercontinental Exchange’s Bakkt project are both due to launch later this year, so let’s take a look at how the entry of these two big financial players could change the crypto market in 2019.

What is Fidelity Digital Asset Services?

To be launched by leading retirement and mutual funds provider Fidelity, FDAS is an institution-focused custodial service for cryptocurrencies and other digital assets. A number of start-ups are offering this type of solution already, but Fidelity will be the first major company from the finance sector to launch its own crypto custody service.


What is Bakkt?

Created by Intercontinental Exchange (ICE), the organization behind the New York Stock Exchange and other major exchanges, the new Bakkt project will offer a number of different services. These include physically-delivered crypto derivatives, secure warehouse storage, as well as a new trading platform.

1. Better security means more confidence

Security has been one of the most influential factors in the history of the cryptocurrency market. As investment and adoption has helped crypto grow over the years, the apparent lack of security in the marketplace has worked against it, causing prices to fluctuate greatly. Events like Mt.Gox and the DAO and Coincheck hacks have sent prices plummeting, as investors start to lose confidence that they will continue to have access to their own funds.

For the institutional clients who will make use of Bakkt and FDAS, security concerns have likely been the main thing holding them back so far. These investors are not committed to the underlying ideology of crypto, so for them, the risks involved in holding digital tokens greatly outweigh any potential benefits when compared to more conventional types of asset. Slogans like ‘be your own bank’ and ‘not your keys, not your crypto’ don’t mean the same thing to investors that are literally in the banking sector - they just want guarantees that their funds are safu, and are happy to outsource the security if necessary.

Read more: Fidelity planning on March launch date for BTC custody service

Fidelity’s FDAS custodial service will provide these clients with the opportunity to invest in crypto without directly holding it, thus reducing the perceived risks. It also means they can enter the crypto space without needing any knowledge about the technology itself. Fidelity’s brand recognition and established financial expertise will also bring an extra level of trust to those more used to dealing with OTC trades, brokers and real-world contracts.

Bakkt is also providing a security solution that will bridge the gap between crypto and traditional finance. The private keys for clients’ crypto assets will be held in Bakkt’s digital warehouse, and Bakkt will control the public keys.

Read more: 2018: A Bitcoin and cryptocurrency year in review

2. Mainstream adoption?

As well as institutional investment, adoption of Bitcoin (BTC) or other cryptos as a payment method by a major company would be an effective way to kickstart the next phase in the market’s development. Adoption not only improves brand recognition and reputation, it also contributes to the value of a particular token by giving it an actual use case.

When Bakkt was first announced by the ICE back in 2018, the most attention-grabbing detail that emerged was that Starbucks and Microsoft were partners in the project. Starbucks’ involvement was a particularly exciting prospect, perhaps allowing crypto enthusiasts to finally make that fabled crypto-for-cup of coffee trade that many see as an important end goal for the space.

Read more: Bakkt still on track for "phase 2" partnerships with Starbucks, Microsoft

Further announcements revealed that Microsoft’s involvement would just be at a technical level, with Bakkt making use of its Azure cloud storage solution in order to develop its trading platform. As for Starbucks, the leading coffee chain will probably not be dealing directly with crypto, but it is developing software that will allow customers to easily convert BTC into fiat currency in order to make payments in-store.

When Bakkt finally launches, two huge global businesses will have a vested interest in the success of the crypto market, and their support should convince other institutions that this is a space worth getting involved in.

Read more: What could make Bitcoin go mainstream again?

3. New types of crypto investment

When most crypto traders think of investment in cryptocurrencies, it’s usually in terms of long and short positions: either investing directly in a token that will gain value, or borrowing it in order to pay it back after it has lost value. In the financial world, a much more common type of investment is derivatives, or futures. This is essentially a contract whereby a buyer and seller of an asset agree on a fixed price for it, to be paid at sometime in the future.

Futures contracts for Bitcoin and other digital assets could be a significant development for the crypto market. The wild volatility of crypto tokens is a major sticking point for investors who are used to the relative stability of something like the Forex market, where derivatives are a common way to trade. Crypto derivatives would be a way to bring these established investors in, providing an effective way to hedge against price fluctuations.

Read more: What exactly is a Bitcoin future, and what will they mean for crypto?

There are already several BTC futures markets. The one offered by the Chicago Mercantile Exchange (CME) is particularly influential, giving an increasing number of institutional investors some exposure to crypto. Plans to launch ETH and XRP futures are already underway.

Read more: ErisX tells CFTC of "positive impact" of Ethereum futures

What Bakkt will provide to this burgeoning space is the first-ever physically delivered crypto futures. This means that instead of the derivatives being settled in cash, they will be settled directly on the blockchain, with crypto automatically delivered to the buyer as soon as the contract expires. This will bring the crypto market more closely in line with the Forex market, making it more appealing to institutional investors, who can carry over the same technologies and trading strategies.

Another advantage of crypto futures contracts that resemble their more traditional equivalents from other financial sectors is that they will vastly improve liquidity. The difficulty of getting funds in and out of the crypto market, transferring crypto into other forms of capital, will be significantly reduced.

Read more: Will Bitcoin recover in 2019?

4. Positive steps for regulation

If institutional investment is to be the savior of the crypto market, then a Bitcoin ETF will have a crucial role to play. So far, every proposal for an exchange-traded crypto fund has been rejected by the Securities and Exchanges Commission (SEC), with investor protection being the main motivation. Despite the progress that has been made over years, crypto trading still has a reputation for being unsafe and having very little transparency, with rampant market manipulation as well as connections to illicit activities. The launch of Bakkt could go some way towards changing this.

Read more: Why hasn't the SEC approved a Bitcoin ETF yet?

Bakkt is developing a new trading platform for the crypto industry that will be of a comparable standard to the NYSE and other major exchanges. This institutional-grade quality will not only make crypto trading more efficient and straightforward, it will also up the game in terms of transparency and safety - factors that the SEC is interested in above all else.

Meanwhile, FDAS stepping into the space should also encourage regulators to take a less restrictive approach towards crypto. If successfully integrated into the market, Fidelity’s custodial service could see a large amount of investment in crypto protected with a similar level of security as traditional assets. This should also improve the reputation of crypto, assuring authorities that the market can comply with their standards.

Read more: What does JP Morgan's Jamie Dimon really think about Bitcoin?

5. Fairer prices for cryptos?

Although it is seen by crypto evangelists as an ideal store of value, Bitcoin’s extreme volatility means that few investors see it this way. Established financial institutions and retail traders alike are often put off BTC and the rest of the crypto market by the wild price fluctuations.

A major cause for the volatility is that very few cryptos have prices that reflect their actual intrinsic value. Many in the crypto community believed that Bitcoin was hugely overvalued at the end of 2017 when it reached the ATH price of $20,000, and claim that the prolonged price crash that followed was a correction, as the hype bubble rapidly burst. The proliferation of fiat-pegged stablecoins in 2018 reflected this new need for fairer and more reliable valuations of cryptocurrencies.

With few obvious use cases, cryptocurrencies are tough to properly assign value to, lacking the coherent national economy and centralized monetary policy that stabilizes their fiat equivalents. Bakkt CEO Kelly Loeffler and ICE head Jeffrey Sprecher have both discussed the fair evaluation of cryptos as an important goal of their project. They want to bring the crypto market more in line with that of the commodities or equities market, where assets are properly indexed according to more standardized criteria.

Although the stabilizing effects of more regulations and institutional involvement may be anathema to some committed crypto traders who thrive on volatility, the fact that crypto prices are now mostly dictated by the decisions of a few ultra-rich ‘whales’ is definitely problematic for the ideology of decentralization.

Read more: If I'm not a Bitcoin whale, then what am I?

While Bitcoin is more or less established as the market leader for the foreseeable future, the rest of the market may look significantly different by the end of 2019. More realistic pricing for cryptos could see many smaller tokens shoot to prominence, while others could disappear completely. A potential altcoin exodus could in turn be a positive development for the leading cryptos, with investment being redirected away from inferior tokens towards the more worthwhile projects, perhaps launching a new bull run for the tokens occupying the upper reaches.

Read more: Why it's good you're still in cryptocurrency in 2019

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