Fidelity’s Institutional Platform for Cryptocurrencies is Big News

The news last week that Fidelity Investments is creating trading tools for institutional investors in cryptocurrency is big news (1). Fidelity is the 5th largest asset manager in the world with $7.2 trillion USD under management. They service 13,000 institutional advisory firms and brokerages. 
Fidelity claims that their institutional investors, family offices, and brokerages are becoming more and more interested in cryptocurrency as an asset class. They are on-boarding their first customers now and expect to start trading in Q1 2019. With their large exposure to institutions and the fact that they are taking the issue of digital asset custody seriously, you can expect institutional traders to establish accounts on the Fidelity platform and other brokerages to follow suit. There are other large, institutional-facing organizations planning similar moves (2).

Although at least part of the increase in Bitcoin price last year can be attributed to market manipulation using Tether (3), the run up of the Bitcoin price in Dec 2017 is also correlated to both the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) launching Bitcoin futures markets at that time (4). The main differences between what the CME and CBOE did almost one year ago, and what Fidelity is planning to launch in Q1, are that Fidelity’s markets will be open 24 hours per day, and Fidelity is actually permitting the trading of Bitcoins themselves, not the paper futures contracts offered by the Chicago exchanges. To give traders confidence and to thwart would-be hackers, Fidelity is addressing security concerns of digital asset management by putting in place a robust custodial wallet system.
 
Fidelity’s landmark move last week is a show of confidence for cryptocurrencies as a whole and a will drive further adoption. As Bitcoin sheds its shady past and becomes more mainstream with this undertaking, it is being recognized as a successful store of value. Although pundits claim the fact that Bitcoin is down by nearly 70% from its high in December 2017 is an indication of failure, Bitcoin is still worth about $6400 per BTC and has seen tremendous run-up in value since its inception 2009. Bitcoin now boasts a market cap of well over $100 billion since its inception almost 10 years ago. Whereas the US dollar and other currencies are down by 96% or more since their centralized banks began regulating the money supply (5), the price of Bitcoin has gone up. Inflation, due to the manipulation of the money supply by central banks, is why a loaf of bread is no longer 5 cents and the price of everything increases over time. Since moving from the gold standard, fiat currencies such as the US Dollar have lost purchasing power as central bank monetary policies call for the printing of ever more currency. In contrast there is a fixed supply of Bitcoin, hence inflation is not possible. Although UIs need to improve, as I have noted elsewhere, for those with some technical know-how, cryptocurrency transfers are an easy and convenient (they can be done at anytime, from anywhere) way to transfer money securely, over international borders, at relatively low cost. All this points to the value of Bitcoin increasing relative to the dollar over time.

Fidelity recognizes cryptocurrency as an “asset class”, meaning they recommend you have some in your investment portfolio. By making trading tools for Ethereum and Bitcoin available to institutional investors beginning in Q1 2019, I expect to see institutional money coming in to purchase Bitcoin and Ethereum. Other service providers will follow, and cryptocurrencies will become as common as small caps or bonds in a typical portfolio. As this happens, the price of both these cryptocurrencies (and likely others) will rise considerably. I’m not expecting the bubble we saw last year that was in part due to manipulation, but HODLers should see an increase in their portfolio value by Q2 2019.
 
 
References:
1. https://www.forbes.com/sites/michaeldelcastillo/2018/10/15/fidelity-launches-institutional-platform-for-bitcoin-and-ethereum/#602ecd0893c4

2. https://www.ccn.com/nyse-owners-bitcoin-futures-market-will-open-in-mid-december/

3. Griffin, John M. and Shams, Amin, Is Bitcoin Really Un-Tethered? (June 13, 2018). Available at SSRN: https://ssrn.com/abstract=3195066 or http://dx.doi.org/10.2139/ssrn.3195066

4. https://www.cnbc.com/2017/12/17/worlds-largest-futures-exchange-set-to-launch-bitcoin-futures-sunday-night.html

5. Bureau of Labor Statistics https://www.bls.gov/data/inflation_calculator.htm