Fidelity Asset Management: Why do institutions that manage over $8 trillion in digital assets worldwide favor crypto assets?

Author: Maggie | DaLing Think Tank

Founded in 1946 and headquartered in Boston, Fidelity Investments is in the same league as Blackstone, Vanguard Group, Dow Jones, and JPMorgan Chase. It is one of the top 10 asset management institutions in the world. In March 2020, Fidelity Asset Management released its annual report. By the end of 2019, its global assets under management (AUA) reached US$8.32 trillion.

In 2014, Abigail Johnson became the CEO of Fidelity Asset Management. She was obsessed with digital assets and believed that Fidelity's crypto asset custody service would be a big selling point. It is said that as early as around 2015, Johnson was mining in her office and had also conducted BTC usage experiments in the company's internal restaurant. She has currently obtained hundreds of BTC. Under Johnson's leadership, Fidelity has also been moving towards digital asset management step by step.

In 2017, Fidelity Asset Management established Fidelity Digital Assets, which focuses on providing "secure, compatible, institutional-grade integrated storage solutions" for Bitcoin, Ethereum and other digital assets, and provides top-level crypto asset custody services to Fidelity's 13,000 institutional clients, but has not yet been opened to retail investors. In 2018, Fidelity Digital Assets was spun off from Fidelity Asset Management to provide custody and transaction execution services exclusively for institutional investors in the United States.

Since mid-2017, Fidelity Innovation Lab has established a partnership with the well-known cryptocurrency exchange Coinbase, allowing customers to view Bitcoin and traditional assets in their portfolios. In March 2019, Fidelity's cryptocurrency trading and custody platform was launched to some customers, allowing its customers to buy and sell Bitcoin through multiple sources of liquidity and provide competitive trading prices to front-end customers, but the platform is not suitable for individual investors. In December 2019, Fidelity's digital asset trading platform Fireblocks announced that it had successfully completed Ernst & Young's Service Organization Control System Attestation (SOC) 2. The second type of test was based on five aspects: security, confidentiality, privacy, processing integrity and availability, and obtained relevant certification.

Fund products and research and development are synchronized. In September 2019, Fidelity Asset Management launched the market's first cryptocurrency derivatives-based income fund - the Bitcoin options fund, namely the Wave BTC Income & Growth Digital Fund. The Wave Fund plans to obtain monthly income by selling call options. The price of call options is 20% higher than the current price. The goal is to distribute 1.5% of the net value of Bitcoin assets held in the fund as dividends, which is expected to generate an annualized rate of return of 18%. It is currently accepting subscriptions.

In November 2019, Fidelity Digital Assets' application to operate a trust business was approved by the New York State Department of Financial Services (DFS), expanding the company's potential customer base and competing with companies such as Coinbase Custody and Bakkt that have already done business in New York (Coinbase Custody and Bakkt received custody licenses from New York regulators in July 2018 and August 2019, respectively). Then in December, Fidelity Digital Assets established a new branch in the UK to expand its European business, but has not yet obtained relevant regulatory approval. Fidelity Assets data in 2020 showed that the proportion of institutional investors investing in digital assets through futures was 22%, 13 percentage points higher than in 2019; there were 86 US institutions trading crypto assets, compared to only 40 in 2019, a doubling of growth, marking the starting point for a leapfrog development.

Between November 2019 and March 2020, Fidelity Digital Assets surveyed 774 institutional investors in the United States (393) and Europe (381), including financial advisory firms, family investment institutions, pension funds, crypto and traditional hedge funds, high net worth investors, and endowment foundations, in order to understand the institutions’ interest in digital assets, willingness to adopt, and the main obstacles to current investment in digital assets. The main results are as follows:

(1) 36% of respondents (27% in the United States and 45% in Europe) said they have invested in digital assets. Bitcoin remains the preferred digital asset for institutional investors. More than 25% of respondents said they hold Bitcoin, and 11% of respondents have been exposed to Ethereum. 27% of US institutional investors have purchased digital assets, of which more than 60% purchased digital assets directly. Looking ahead to the next five years, 91% of respondents believe that at least 0.5% of the investment exposure in the portfolio should be allocated to digital assets.

(2) Nearly 80% of institutional investors believe that digital assets are attractive. There are three main reasons for their popularity: they are not related to other asset classes (36%); they are technologically innovative (34%); and they have huge upside potential (33%). In Europe, investors are more optimistic about digital assets, with 82% of respondents believing that digital assets are attractive for investment. Interestingly, 25% of European investors said that the reason they are attracted to investing in certain digital assets is that they are not subject to government intervention, while only 10% of investors in the United States feel this way.

(3) Although the number of institutions investing in digital assets is on the rise, there are still some obstacles to large-scale investment in digital assets. The main factors include: price volatility (53%), concerns about market manipulation (47%), and lack of basic principles for measuring appropriate value (45%). American respondents believe that the problems in the crypto industry have been effectively solved. Investors' concerns about price volatility have decreased by 13%, concerns about market manipulation have decreased by 6%, and concerns about lack of fundamentals have decreased by 8%.

The survey results also reflect the current development trend of the digital asset market, namely: as a new type of investable asset, people are becoming more and more interested in digital assets and are becoming more and more accepting of cryptocurrencies.