Fidelity Investments joins recent giants NYSE/ICE (with Bakkt) and TD Ameritrade (with ErisX) in the crypto realm by starting a new company that will both trade and hold crypto in safekeeping for their clients. Professional trading and compliance tools are designed to bring in more institutional investors, and custody will be a key service in both the institutional and retail segments. Fidelity Digital Asset Services LLC will buy and trade cryptocurrencies, assets and presumably security tokens (STO) as well as hold crypto keys offline in secure locations known as cold storage.
Even though these new exchanges use the blockchain which tends to be secure, they still need to manage traditional websites and customer databases which have many layers of security concerns. The best way to secure your crypto is to move it from the exchange to a hardware wallet that is then disconnected from the internet until a transfer is made. For example, Coinbase also has a custody solution that works by requiring a day or 2 prior notice before you can access your funds. Upon request and approval, the hardware wallet is taken out of cold storage and the funds moved to what is called a “hot wallet” for trading or spending. These hot wallets are the ones that can be tampered with more easily so in general any holdings should be kept offline.
Fidelity claims to have 27 million customers but the Bitcoin supply far less than that. The total supply for Bitcoin is mathematically locked at 21 million tokens, but it will take decades to reach that number. The current circulating supply for BTC should be around 16 million right now, however many millions of BTC are thought to be lost due to missing private keys that were left on an old hard drive or computer. This brings the current estimated supply of BTC to around 11 million. This simple math problem means that MOST of Fidelity’s customers will never be able to own even 1 BTC. This scarcity is only going to get worse (or better for price) as the demand goes up but the supply stays the same or even goes down due to more lost keys.
Competitors like Bakkt, TD Ameritrade and Fidelity are all planning on buying and holding crypto in order to secure the assets and create the necessary liquidity for their clients to trade and spend. Most likely these holdings will come from the OTC markets and not retail exchanges, however the effects should be felt throughout the industry. Not only will the already limited supply of BTC and other coins start to tighten up, but this type of activity also gives a huge boost to investor confidence and sentiment. The buy and hold mentality is something of a positive feedback cycle, as more and more coins are taken out of circulation more people tend to hang on to the few coins that they have. There are an estimated 35 million millionaires in the world, but there can only ever be 21 million Bitcoins – most likely far fewer than that. Watch for marketing concepts such as “the new Bitcoin”,” a better Bitcoin”, or “a cheaper Bitcoin” to really take hold as the BTC price rises sharply over the next few decades.
Most of these exciting new entities are still many months away from launching and we still have something of a lack of regulation to deal with in the short term. Clarity on ETF decisions, asset classification status (commodity? property?), and questions on if the current ICO model is even viable anymore still need to be answered. The combination of a physical-custody ETF approval, better SEC/CFTC guidance, and these new retail/institutional physical-custody liquidity pools should be enough to flip sentiment all the way bullish and spark the next major market cycle.