By launching Fidelity Digital Funds under Peter Jubber, the Boston giant is taking an arguably wild bet where the pay-off could be near nada or stratospheric — if crypto bugs get it even half right.
Brooke’s Note: Think of Coldplay’s song “Yellow” and subsitute the word “Zero” and you’d have a way to intone the song of big RIA custodians. These low margins reflect a place in time for the oligopoly here competitve advantages are measured in millimeters. That’s what makes the Fidelity crypto Hail Mary (Hail Abby) covered in this article so fascinating. Chances are that the Bitcoin play will yield red ink for a long time, perhaps forever. But, like poker, it’s a test for rivals as the stakes go up. Will they call Fidelity’s bluff now that Abby Johnson played her Jubber.
In a sign that its Bitcoin wager is for real, Fidelity Investments is betting the time and talent of Peter Jubber on the launch of Fidelity Digital Funds.
Experts are now asking whether rivals can ante in competitively — even if they want to.
“Fidelity is building an almost insurmountable lead in this space relative to the other traditional brokerage majors,” says Mike Alfred, co-founder and CEO of Digital Assets Data, via email.
Alfred’s Denver firm is an effort to do for cryptocurrency research and analysis what his better-known startup, Brightscope, did for the 401(k) market. See: Mike Alfred also exits BrightScope to follow brother Ryan into cryptocurrency sphere.
“[Fidelity] has opened up a wide knowledge and momentum gap … [in] one of the biggest new markets to come along in decades,” he says.
Yet super-geek crypto evangelists wonder if even Fidelity’s plunge into blockchain coins isn’t a little tentative.
Moreover, despite Fidelity’s early crypto-currency lead over traditional rivals, it faces significant competition from the raft of specialized firms that sprang up around Bitcoin and other currencies, like Ethereum.
“The only knock on Fidelity is their focus on Bitcoin-only. They talk about adding Ethereum, but have yet to add that … or any [other],” says a source who asked not to be identified.
Betting talent
Seven years after secretly laying the groundwork for its crypto-businesses, the Boston giant announced the launch, Aug. 26, of its asset management unit.
A month earlier, July 10, Fidelity also stepped up its ability to mine Bitcoin by acquiring a 10% stake in Toronto, Canada-based Bitcoin miner Hut 8.
It joins the two-year old Bitcoin custody arm, as well as its first crypto-fund, the Bitcoin-only, Wise Origin Bitcoin Index Fund. See: Five-year stealth project sees Fidelity go big-time into crypto-custody.
Fidelity Digital Assets will custody the new fund, which has a minimum investment of $100,000, according to SEC filings. Just one bitcoin is worth $10,096.20 at today’s exchange rate.
The new offering is considered “private,” meaning Fidelity can’t solicit capital from retail investors or the general public .The designation means less onerous regulatory oversight and less potential liability if digital assets were to suddenly collapse.
What jumps out at a micro level is that Fidelity is betting a real human talent like Jubber on what many RIAs and investors still see as a vaporous vision of the financial future.
The Jubber effect
Jubber is an 18-year Fidelity veteran whose credits include helping his company catch up in the exchange-traded fund business.
He spent five years as Fidelity head for asset management strategy and business development. Prior to his most recent appointment, he also spent three years as Fidelity head of strategy and planning and three years as head of Fidelity Consulting.
Jubber lauded blockchain-based technology in a 2017 podcast. Research into the field was essential in order for any asset manager to stay relevant, he said.
Crypto-currency believers see ‘mining’ the Internet for value mediums competing increasingly with sovereign governments issuing currencies.
But Jubber, a known crypto enthusiast who spent time working at IBM, could clear the air of unreality surrounding Fidelity’s Bitcoin ambitions, according to Steve Gresham, managing principal of Execution Project, via email.
Gresham spent nine years at Fidelity, between 2008 and 2017, most recently as head of its private client group.
“Peter is a natural for this role because he combines respect for the specialists and industry technicians with a consumer’s ‘so what?’ realism and a savvy manager’s pragmatism.”
“He gets what he needs from different people and synthesizes the result,” Gresham adds.
Jubber worked alongside Gresham in 2009 to develop Fidelity’s initially slow-off-the-mark ETF business, beginning with filings for active ETFs and a distribution deal with iShares.
Today, Fidelity manages $20.38 billion in ETF assets, according to the firm. BlackRock-owned iShares ($1.8 trillion), Vanguard ($1.3 trillion), and State Street ($788 million) dominate the ETF market, according to ETFdb.com data.
Don’t doubt the strategic significance of this Jubber appointment and roll-out of the asset allocation unit, says Ric Edelman, founder of Edelman Financial Engines, via email.
“This is potentially huge,” because Fidelity may be big enough to create a self-fulfilling prophecy, he adds.
“Many will regard Fidelity’s involvement as a ‘stamp of approval’ by the mainstream financial services industry.”
Still the common wisdom is that any economic or investor shift to crypto dominance is way, way downstream.
In it to win it
Fidelity, however, is all-in on crypto-currency, says Edelman whose firm manages about $180 billion.
“Fidelity is applying all of its knowledge and capabilities to the digital asset space … [and CEO Abby] Johnson wouldn’t be engaging so heavily in bitcoin if she wasn’t convinced that its price isn’t wildly undervalued.”
Indeed, in a July report by Fidelity Digital Assets, the firm’s crypto-custodian, the company backed an analysis penned by economics professor Saifedean Ammous that suggests Bitcoin could surge over 100-fold in value to $1 million.
As of Sept. 3, Bitcoin trades at $10,847, and its total market capitalization stands at $209.6 billion — up from $8.92 billion in 2013. In the last month Bitcoin’s value climbed more than 12%.
The overall crypto-currency market is worth $358 billion, as of Sept. 3 — a 17% jump in the last month.
Fidelity declined, however, to answer specific questions related to its new fund, citing regulatory reasons, but the firm intends to grow its lead, according to spokeswoman Nicole Abbot.
“Fidelity has made a long-term commitment to the future of blockchain technology and making digitally-native assets, such as Bitcoin, more accessible,” she says, via email.
“We were among the first institutions to commit [to] R&D … [and this] has led to several key innovations that underlie [what] we’re now delivering to the market.”
Landing a sub-deal
Initially, Wise Origin will be only available to accredited investors through a private placement offering that will include some large RIAs.
Sources state passive and actively managed funds holding multiple crypto-currencies will follow, likely once the SEC allows Wise Origin to adopt a more liquid, registered-fund structure.
Fidelity declined to reveal precisely when it began work on developing its crypto fund, or when it decided to launch a new crypto-subsidiary, but a source states the moves have been “in the works for some time”.
On Jul. 14, Fidelity’s crypto-custodian, Fidelity Digital Assets landed a significant sub-custody deal with Kingdom Trust. See: Fidelity bags $13 billion AUM digital assets win to its custody, as federal regulators attempt to move Bitcoin custody from ‘weirdo websites’ to mainstream banks.
Believers
Vanguard, BlackRock and BNY Mellon Pershing’s parent bank also have blockchain-centered strategies in the works, although BlackRock remains unperturbed by the idea of crypto-currency as an asset class — a position CEO Larry Fink outlined in 2018. See: Vanguard Group seeks ‘new business model,’ it says, to explain blockchain pilot program.
“We are a huge believer in blockchain … [and] I wouldn’t say never [on crypto-currencies]. When it’s legitimate, yes, … [but] it will ultimately have to be backed by a government,” Fink told his audience at the New York Times Dealbook Conference two years ago.
Schwab and TD Ameritrade have also taken tentative crypto steps.
Clients of both firms can trade select crypto-futures. TD has invested in the crypto-custodian ErisX, and Schwab shares a board member with Coinbase. See: Schwab dismisses crypto currencies as ‘speculative’ and too insignificant for its RIA platform as rivals stake out turf for the coming boom… or is that bust?
“We always look to implement products our clients have demand for. When it comes to cryptocurrencies, we take a deliberate approach with a focus on education,” says TD Spokeswoman Margaret Farrell, via email.
Rapidly growing firms like Robinhood and Square also provide retail investors a means to trade and custody crypto-currencies.
Blue Ocean
The leading players in the crypto-custody market include San Francisco’s Coinbase, Palo Alto, Calif.-based BitGo, New York City’s Gemini Trust Co. and newcomers like San Francisco’s Anchorage and New York City’s Curv.
Gemini recently announced the launch of a crypto-TAMP for RIAs in partnership with San Francisco-based Blockchange.
Gemini also plans to go toe-to-toe with Fidelity Digital Assets in the RIA crypto-custody market by offering a wider breadth of custodied coins.
But when it comes to crypto asset management, the current incumbent is New York-based Grayscale, which manages 10 funds worth a cumulative $6.2 billion, as of Sept. 2, 2020.
Its largest, the Grayscale Bitcoin Trust, holds over $5 billion. Only one Grayscale fund manages more than one currency, the $47.6 million AUM Grayscale Digital Large Cap Fund.
Grayscale, like Coindesk and Genesis, is owned by New York venture capital firm, Digital Currency Group, which has a stake in over 100 crypto start-ups, including Alfred’s Digital Assets Data.
Meanwhile, back in the real world of investment firms, Alfred is watching and wondering if mainstream investing brands with sizzling specialization track records will get into the game.
“I would [for example] have expected both Franklin Templeton and T. Rowe Price to be more active, by now, given how active both firms are in pre-IPO tech investing.”
Of the traditional top domestic asset managers, broker-dealers and custodians, only Fidelity has both a crypto-custodian and a crypto-asset manager.
Franklin Templeton has yet to respond to a request for comment, and Pershing declined to do so.
T.Rowe spokesman Bill Benintende confirmed his firm has “no near- or immediate-term plans to introduce crypto asset management.”