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Fidelity Investments is one of the major asset management and brokerage firms in the United States. Due to its profitability and longevity, it didn’t feel the need to investigate the digital currency market until investors started taking an interest in cryptocurrencies in the mid-2010s. Midway through October 2018, Fidelity established a limited liability corporation called Fidelity Digital Assets to cater to institutional clients and provide them access to the burgeoning cryptocurrency investing environment.
With this, Fidelity made a significant entry into the digital currency market. Offline cold storage custody, transaction execution, and other services are provided by Fidelity Digital Assets. By leveraging its position as an industry leader, Fidelity Digital Assets plans to aid financial institutions in gaining access to a wide range of digital asset investment options. Why did Fidelity decide to start this new company? This is a question that many investors ask.
Bullish on Bitcoin
Bitcoin started slowly in 2015, with a price range of $230 to $280. By October, the coin’s value had climbed to more than $300. As more individuals were interested in the prospect of a digital asset’s rising worth, the price of the cryptocurrency began to rise. Bitcoin’s price surpassed $1,000 in early 2017. Bitcoin’s popularity skyrocketed, and it quickly became the instrument of choice for many investors.
Individual investors were enjoying 300 percent returns or more on their Bitcoin investments, and institutional investors were salivating because they couldn’t get into the quickly expanding market. Fidelity, recognizing an opportunity to meet the demands of institutions, determined that the Blockchain Incubator portion of its research and development team should examine and develop cryptocurrency investing solutions for institutional investors.
Fast forward to 2022, and Jurrien Timmer, director of global macro at Fidelity Investments, suggests that, despite Bitcoin’s current troubles, it may be much cheaper than it appears.
So far, Bitcoin has not had the greatest of years. After a strong start to the year, the price of the largest cryptocurrency on the market is now a faint shell of its former self.
Bitcoin’s aspirations to recover further were dashed recently when the digital coin’s price fell to as low as $19,000, a level last seen in 2020. Bitcoin’s downward spiral, as it usually does, has brought the crypto market down with it, with the whole crypto market value currently around $1 trillion, down from the $3 trillion peak it reached last November.
Regardless of its price performance, Bitcoin may still be undervalued in the eyes of investors, says Jurrien Timmer. Despite the fact that the cryptocurrency has been trading at its lowest level since December 2020, the analyst disclosed that the price/network ratio has returned to 2017 levels.
“Is BTC cheaper than it looks? If we consider a simple “P/E” metric for BTC to be the price/network ratio, then that ratio is back to 2017 and 2013 levels, even though BTC itself is only back to late 2020 levels. Valuation often is more important than price”.
A tweet by Timmer
Undervalued
Traditional stock market investors use the price-to-earnings (P/E) ratio to determine whether or not a company is over or overvalued. The price-to-network ratio is the cryptocurrency equivalent of this metric.
A high ratio suggests that an asset is overvalued, whereas a low ratio suggests that an asset is undervalued.
Timmer noted that Bitcoin’s demand curve overlaid with non-zero addresses vs. market value, observing that the “price is now sitting below the network curve.”
Timmer then disclosed how technically oversold Bitcoin is, claiming that Glassnode’s dormancy flow indicator, which indicates the ratio of current market cap to annualized dormancy value, has now reached levels not seen since 2011.
Oversold
The macro analyst also provided a graph using Glassnode’s dormant flow indicator that he says demonstrates “how technically oversold Bitcoin is”
Entity-adjusted Dormancy Flow is a popular measure for analyzing Bitcoin’s worth by comparing the price to spending activity.
According to Glassnode, a low dormancy flow number may signal better long-term holding confidence, meaning that long-term Bitcoin HODLers are buying up from frightened short-term sellers:
“Glassnode’s dormancy flow indicator is now to levels not seen since 2011.”
Similar sentiments were voiced by Morgan Creek Digital co-founder, and YouTuber Anthony Pompliano told Fox Business Monday that Bitcoin’s “value and price are diverging” and that “weak hands are selling to strong hands:”
“What we’re seeing right now is a shift from weak, short-term oriented people with weak hands to strong, long-term oriented hands.”
In June 2022, Bitcoin’s Fear and Greed Index plummeted to seven, denoting “Extreme Fear,” its lowest level since Q3 2019. Low index numbers mostly indicate a good time to buy.
Both Fidelity Investments and Timmer are bullish on Bitcoin. The investment company has been working on developing a Bitcoin retirement investing scheme that would allow users of 401(k) retirement savings accounts to invest in Bitcoin directly. Timmer also predicted that Bitcoin would make a comeback shortly.
Betting Big on Crypto
Fidelity is always focusing on developing innovative solutions for institutional and accredited investors. The company stated in April 2022 that it was developing crypto-enhanced 401(k)s for interested businesses and their employees, which provide exposure to Bitcoin. The custodianship, clearing, and settlement services developed for institutional investors will be used for crypto-enhanced retirement funds. These services offer retirement funds with the institutional-level security and liquidity they require.
Fidelity is also in the lead when it comes to educating investors about cryptocurrencies and the metaverse. It was the first brokerage to offer a metaverse experience. Investors may explore the Fidelity Stack, become acquainted with the metaverse, and learn about investing in Dencentraland.
Fidelity is establishing itself as an industry leader in cryptocurrencies and new technologies by continuing to develop novel cryptocurrency channels and user experiences. Furthermore, it is obvious that the brokerage recognizes that in order to acquire a competitive edge in the emerging digital asset field, it must discover methods to provide its primary clients with the tools to invest in it—and so beat its competitors into the digital space.
Beyond Fidelity
Every top institution has jumped on the Bitcoin bandwagon. Even though some of them have sold some of their assets, most of them still have their Bitcoins. JPMorgan, the largest financial services company, recently said that it is bullish on the future of cryptocurrencies, primarily Bitcoin, and also thinks that it is undervalued. Meanwhile, Goldman Sachs recently said that it would offer its first-ever Bitcoin-backed loan, which is a big step forward for the company’s crypto biz.
According to EY, nearly a quarter of fund managers plan to increase their exposure to crypto-related assets over the next two years. In 2021 alone, institutional investors poured a record USD 9.3 billion into crypto markets, which was a 36 percent increase from 2020.
Creating a favorable climate for cryptocurrency growth
Bitcoin and cryptocurrencies, in general, are obviously gaining institutional traction, but this does not mean that they have reached the institutional mainstream. Many organizations aiming to extend their crypto trading products face significant barriers to entry due to concerns about regulation, trust, and infrastructure.
For institutions to genuinely increase their exposure to cryptocurrencies, CFOs must verify that the proper controls are implemented to provide investor comfort. Greater regulatory clarity is a vital step in this direction.
Some in the cryptocurrency community are vehemently opposed to regulation, claiming that it will stifle innovation and contradict the fundamental decentralized underpinnings upon which cryptocurrencies were formed. Rather than being a barrier to innovation, however, the introduction of a clear and well-developed set of regulations will be critical in incorporating cryptocurrencies into institutional trading venues. Institutions will eventually spend hundreds of millions of dollars each year in the crypto ecosystem, and having confidence in the business through regulation is critical.
The current crypto ‘collapse’ is emblematic of the crypto market’s broader volatility. It is therefore understandable that government agencies like the Federal Reserve and the Bank of England have frequently advised consumers that if they invest in cryptocurrencies, they should be prepared to lose money.
These warnings have become a reality in recent weeks and should act as fuel for providing the necessary legislation to make crypto a more orderly and stable industry. Failure to implement the appropriate regulatory framework raises the likelihood that more cryptocurrencies could see a dramatic decline in value in the future, resulting in more losses.
The operational effort required for a fund to get involved in crypto is also considerable. Institutional solutions have gotten more comprehensive, but managers still have a lot of work to do in terms of negotiating issues like valuation rules, compliance, risk management, and incorporating crypto into their investing strategy.
Access to legal, secure exchanges that give clear and real-time market valuations will be critical in addressing these operational problems, giving institutions the toolbox they need to harness and incorporate crypto into their services.
What comes next?
Further institutional acceptance of cryptocurrencies will likely boost the development of crypto assets as institutions strive to offer decentralized products for their own investor base. This transition is already beginning, with a growing number of financial institutions allowing clients to trade, stake, borrow, and lend against their digital assets.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
