Fidelity: Bitcoin trading for retail clients

Financial giant Fidelity may launch Bitcoin trading for retail clients in November.

💥BREAKING: Fidelity is launching #Bitcoin trading for retail customers in November! 😱

Fidelity has $4.3T assets under management.

— Bitcoin Archive 🗄🚀🌔 (@BTC_Archive) September 8, 2022

Fidelity: New trading service for clients?

Although there is no official confirmation yet, a recent press release posted on the company’s website explicitly hints at something similar. 

Yesterday, the launch of the Fidelity Hedged Equity Fund (FEQHX) was announced, which is a fund dedicated to alternative investment products specifically for retail investors. 

These Fidelity alternative mutual funds, as stated in the official press release, can include alternative investments such as “distressed debt, real estate debt, private equity, and Bitcoin.”

Fidelity, whose full name is actually Fidelity Investments, is a US financial services giant, so much so that it is by far one of the largest asset managers in the world, with more than $4.5 trillion in assets under management and $24 billion in revenues. Among other things, it is well known for managing large pension funds.

However, it is not only involved in asset management but also offers various other investment services to institutional and retail clients. 

Funds such as FEQHX in particular are precisely those aimed at retail clients. Among them, the company has a special focus on those who own large assets and invest with the aim of increasing their income once they retire. 

There is even an entire section on their official website dedicated to cryptocurrency investments. 

The company has an entire department dedicated to cryptocurrencies, Fidelity Digital Assets (FDA), although this deals specifically with crypto services. Funds such as FEQHX, on the other hand, are managed and offered directly by the parent company. 

Through funds such as this, Fidelity is able to offer its retail clients the ability to take a position on, for example, the price of Bitcoin, thus in some way to trade on the price of BTC, without having to directly buy and hold them. 

As a matter of fact, even the services offered by Fidelity Digital Assets generally do not involve offering cryptocurrencies directly, but ETFs that have cryptocurrencies or crypto companies as their underlying. 

What is on the horizon, therefore, is not the launch of a classic crypto spot exchange that allows Fidelity’s clients to buy and sell cryptocurrencies directly, while also having the option of depositing or withdrawing to non-custodial wallets, but only the ability to invest in financial products managed by them that allow them to gain indirect exposure to the prices of certain cryptocurrencies. 

However, it is worth noting that there are many clients of companies like Fidelity who have no particular interest or willingness to take on the responsibility of directly owning, and thus having to hold custody of, cryptocurrencies. 

Scepticism around cryptocurrencies for old-fashioned traders

Cryptocurrencies are based on a technology that did not exist until a few decades ago, and which in the eyes of those belonging to the previous financial generation is particularly difficult to understand. For this very reason, the typical Fidelity customer may not be interested at all in having to take on the responsibility of holding tokens in their own custody based on a technology they do not know well or understand thoroughly, with obvious security risks and perhaps substantial invested funds to protect. 

In such cases, it is quite easy to understand why such clients prefer to entrust all the details and technical responsibilities to experienced financial market participants, especially given the fact that Fidelity itself has its own entire in-house department dedicated specifically to these technologies. 

It is therefore not surprising that the company does not seem to be willing to offer its clients direct access to the crypto spot market, i.e., where the various tokens can be bought, sold, deposited, and withdrawn directly, but instead prefers to take charge of all the technical issues, and offer its clients only derivative financial products that allow them to invest in and speculate on cryptocurrency price movements. 

What’s more, Fidelity Digital Assets has been operating in this way in the crypto markets for years now, which gives them a certain reputation, particularly with regard to security. 

All this, however, should not suggest that Fidelity itself does not have a direct presence in the crypto markets. 

On the contrary, in order to collateralize their crypto funds the company must own and hold cryptocurrencies, so while its clients do not operate in the crypto markets, but in the crypto derivatives market, the company does operate in the crypto markets. 

However, it is possible that they use intermediaries to do so, both in terms of buying and selling operations, which are probably done OTC in large volumes, and in terms of physical custody of the tokens.

Fidelity therefore does not compete with the classic crypto exchanges that allow direct trading of Bitcoin and cryptocurrencies to retail customers, nor with the OTC operators that act as intermediaries for large customers who want to trade large volumes of cryptocurrencies on the spot markets. It will likely simply offer its clients financial products created and managed by them to allow those who want to to allocate part of their assets to funds that are exposed to changes in cryptocurrency prices. 

It is not known, however, whether the company itself has decided to invest part of its assets, or part of its managed assets, in Bitcoin on its own. 

High and low-risk investments

Cryptocurrencies are high-volatility financial assets, meaning that they are not particularly suitable for managing funds such as pension funds. In fact, this type of fund prefers, and should prefer, low-risk investments. 

However, low-risk investments generate low real returns, which are further reduced in times of high inflation. For this reason, mutual fund managers often allocate a small portion to higher-risk investments, hoping to offset the reduced returns of low-risk assets in this way. 

This strategy is based on the logic that if risky assets perform poorly the losses will be small, but if they perform well the gains may be so significant that they have a significant impact on the average percentage return. 

Bitcoin and cryptocurrencies could therefore fit into such an investment strategy, although at the regulatory level mutual fund managers may have problems with direct exposure to unregulated financial products such as these. Crypto ETFs serve this purpose as well, namely to allow mutual funds that would like to open a small position in unregulated risky assets not to have direct exposure, with the risk of violating the law, but to still be able to do so indirectly by using regulated derivative products that replicate their price movements. 

In such a scenario, the assumption that Fidelity invested in Bitcoin anyway, or included cryptocurrencies in the management plans of their managed funds, seems at least plausible and not at all far-fetched. This is not sufficient to claim with certainty that they have already done so, but it does allow one to imagine that it is certainly possible, if not probable. 

Finally, it is worth adding that Fidelity is not the only financial giant in the world that is adopting such a crypto strategy. It is, however, one of those that is most talked about because it is well known, especially in the US, and above all because it manages large pension funds involving millions of workers and former workers.