Can Fidelity Investments’ Latest Platform Draw Institutional Capital to the Industry?

November 21, 2018

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By David Drake

Fidelity Investments is now offering alternative solutions to clients that are in cryptocurrency trading business. The Wall Street firm has set up a new company dubbed Fidelity Digital Asset Service LLC to serve as both as custodian and trader for family offices, hedge funds, and endowment funds on various exchanges.

The primary purpose of this company is to provide an avenue for secure storage of digital assets. Fidelity becomes the first Wall Street company to take this step, with other smaller companies having gone before. For most players in the cryptocurrency space, this move to target institutional investors will have a positive effect on the cryptocurrency industry.

Jori Falkstedt, CEO of Verifer says, “Absolutely positive effect. The more traditional Wall Street companies become involved in the crypto market, the more trustworthy and legitimate crypto companies will also be in the eyes of ordinary people. Also, more institutional money is certainly expected, which makes the market more stable.”

Institutional Investor Needs

Since January 2018, the cryptocurrency market has been very volatile and unstable at best. At the same time, globally, regulatory bodies are still contemplating on the best course of action for an industry that is constantly evolving and branching out. To a certain extent, these issues have hindered full participation of institutional investors in the cryptocurrency industry.

According to John Lore, a managing partner at New York’s Capital Fund Law Group, institutional investments will get mainstreamed in the cryptocurrency industry once regulations and structures are in place.

Currently, government bodies in countries such as China and India have placed a ban on the use of cryptocurrencies. Their decision to ban digital currencies is justified considering the fact that recent report released in Australia cited that one in four bitcoin user is involved in some kind of illegal activity. This translated to about 46 percent of transactions, which is $76 billion in value.

As of June this year, over $1.6 billion worth of digital currencies had been lost through hacking of cryptocurrency firms. High volatility has seen the cryptocurrency market lose more than 50 percent of its market capitalization since January 2018. The price of bitcoin rises and falls at the whim of large scale investors who can pull funds spontaneously, or based on anticipated future events.

With these kind of losses, institutional investors are overly cautious. They are aware of the high risks involved, and while they are interested in investing in cryptocurrencies, their fears overshadow any forward action. If regulations are not put in place to safeguard their investments, they will remain slow to tango with the cryptocurrency bull.

Institutional Investor Entry Effect

Until Wall Street moguls create crypto platforms, institutional investor interest will remain minimal. The entry of a brand such as Fidelity Investments is a good start and there is a likelihood that other institutional investors will begin to perceive less risks when it comes to investing in cryptocurrencies.

According to Hunter Horsely, CEO for San Francisco-based Bitwise Asset Management Inc, the entry of Fidelity Investments into the cryptocurrency space removes a big obstacle for some institutional investor to invest in digital assets. He believes it is the beginning of a new era where cryptocurrencies will be cemented as a legitimate asset class.

There will be other institutional investors that will sit on their haunches and wait for the market to be recognized by a familiar name. Fidelity Investments offer its services to high-end enterprises, but is deemed to have a greater effect once it dabbles with retail clients, such as 401(k) funds. This decision may not be too far off.

“We expect to continue investing and experimenting, over the long-term, with ways to make this emerging asset class easier for our clients to understand and use,” Abigail Johnson, CEO of Fidelity Investments said.

Other companies such as Gemini, Coinbase, and BitGo are already exploring holding digital assets. Once this becomes mainstream, there is no telling what direction institutional investors will take, but the future for cryptocurrencies gets brighter as months roll.


Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.