Fidelity: more than $5 million for the Ethereum Index Fund

Fidelity launched its Ethereum Index Fund in late September. 

Fidelity: sold more than $5 million thanks Ethereum

According to a document published yesterday on the SEC’s official website, $5,018,184 has already been collected from sales of this Ethereum-based fund. 

On Fidelity Investment’s official website the fund is called the Fidelity Advantage Ether ETF Fund™ (code 7634), and it turns out that it was launched on 28 September. 

It is a fund that invests directly in ETH, which in turn are securely stored using Fidelity’s in-house storage services. 

It is an eligible fund for registered accounts, including RRSPs and TFSAs, so it allows for exposure to ETH with a fully regulated product. 

ETH is not a regulated financial product per se, so those investors who are forced by law to invest only in regulated products simply cannot buy it directly. Instruments such as ETF funds allow anyone to make investments on regulated financial products, but in doing so also give them the opportunity to take positions on unregulated assets. 

Then again, for this specific fund the minimum investment is $50,000, which is an amount that effectively cuts off the vast majority of retail investors. In fact, it has been made available only to accredited investors. 

The Fidelity Advantage Ether ETF Fund is based on an index designed specifically to reflect the performance of ETH in US dollars. It uses data taken from trading platforms deemed “eligible,” calculating a volume-weighted average trading price based on a five-minute window immediately before the 4 PM (ET) close. 

Every six months, the Fidelity Index Committee will review the Fidelity Ethereum Index for any updates. 

Fidelity Advantage Ether ETF does not aim to speculate on short-term changes in ETH prices, but aims to invest in the long term. The official website states: 

“Given the speculative nature of ether and the volatility of the ether market, there is considerable risk that these funds will not be able to meet their investment objectives. An investment in these funds is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. An investment in these funds is considered high risk.”

To get around the current de facto SEC-imposed ban on issuing spot cryptocurrency ETFs in the US, issuing this fund is Fidelity Investments Canada. In fact, they have long been accepted in Canada by now, so there is no issue whatsoever in the country to create them and launch them on the market. After all, Canadian financial markets are also widely accessible to US investors, especially institutional investors. 

The fund’s official website actually states: 

“This site is for persons in Canada only. Mutual funds and ETFs sponsored by Fidelity Investments Canada ULC are only qualified for sale in the provinces and territories of Canada.”

Despite this, it is not at all forbidden for foreign investors to buy this fund in Canadian markets, even in the case of US investors. It is forbidden to sell them in the US, but it is not forbidden to buy them. 

Fidelity Investments: what is it?

This situation seems truly paradoxical, not least because Fidelity Investments is a US company based in Boston. While it uses its subsidiary Fidelity Investments Canada to issue crypto ETFs in Canada, no one prohibits Fidelity from selling these financial products to US investors as well. 

Fidelity is also by far one of the world’s largest asset managers, with about $4.5 trillion in assets under management at the end of 2021. It has been active in crypto markets since 2018 through its subsidiary Fidelity Digital Assets, which among other things handles custody. It most likely also handles custody of the ETH that act as collateral for the value of the Advantage Ether ETF Fund. 

The main competitive advantage is probably precisely the direct custody of the tokens, which is anything but easy to do with complete security. This allows Fidelity to meet the demands of both those investors who simply want to open positions on cryptocurrency prices without having to make a commitment to safe custody, and those who cannot invest in unregulated financial products. 

In fact, the company itself explicitly states that it has recognized that there is a need in the marketplace for a diverse set of products and solutions that help clients gain exposure to cryptocurrencies in line with their distinct goals and risk tolerance. It also confirms that such demand has also grown for digital assets other than Bitcoin. 

Fidelity has been offering derivative financial products on Bitcoin for years now, but on altcoins it had lagged behind. 

There is something to be said for the fact that many altcoins are financial assets with a level of risk associated with them that makes them not at all attractive for financial products such as those Fidelity offers to the market. 

In particular, Fidelity focuses on the less speculative assets, such as precisely BTC and ETH, i.e., those with high but not very high risk. Just to cite a few examples, this company would never issue a derivative product on Luna, or other highly speculative cryptocurrencies with maximum risk levels. 

In fact, clients of companies like Fidelity tend not to be speculators, but medium- or long-term investors. Right now there are very few cryptocurrencies that may be attractive to this type of investor. Indeed, it is most likely no accident that Fidelity has created similar funds still only for Bitcoin and Ethereum. 

It is worth noting that financial markets are not only decidedly complex, but also involve very different players. In addition to the classic short-term speculators who day-trade, there are also large institutional investors who are not interested in short-term speculation at all, but primarily in safeguarding the value of their assets. 

Often, investments in cryptocurrencies are considered by them to be so-called asymmetric investments, in other words, they do involve a high level of risk, but they can allow high returns to be achieved for even minimal investments. In other words, precisely because of these characteristics, BTC and ETH fit into the investment options of those larger and more conservative portfolios as very small investments but which can provide returns that would otherwise be very difficult to obtain. 

Since this type of investor often prefers to allocate a large part of their portfolio to low- or very low-risk assets, which nonetheless generate minimal or sometimes even negative real returns, allocating a small percentage to high-risk assets can help offset the very low returns generated by low-risk assets. 

Fidelity is extremely familiar with these dynamics, and it also knows that investors of this type completely eschew the risks posed by regulations and technical practices such as token storage. 

In short, these are investors who would never invest directly in BTC or ETH, but who can instead be attracted to derivative products that eliminate virtually all of the non-financial risks associated with cryptocurrencies. 

While the 5 million already raised for the Advantage Ether ETF Fund may seem like a lot, given that the fund has only been launched for a very few days, it is, however, very little when compared to Fidelity’s numbers. This suggests that, should it be successful, the collection still has huge potential room for growth.