How To Invest In Crypto With Fidelity

Cryptocurrency has become increasingly popular since its inception in 2009, with investors looking to cash in on the potential of Bitcoin and other cryptocurrencies as asset classes. One of the earliest mainstream financial firms to support cryptocurrencies was Fidelity, which announced its own Bitcoin fund with a minimum investment of $100,000 in 2020. While this fund is only accessible to qualified investors, Fidelity also offers other ways for regular investors to get involved with cryptocurrencies, including buying crypto directly, investing in crypto-related ETFs, and purchasing stocks of companies in the crypto industry.

Investing in Bitcoin through Fidelity

Fidelity Investments, one of the largest ETF and mutual fund providers in America, has been involved with Bitcoin since as far back as 2014. In 2018, Fidelity launched Fidelity Digital Assets, a limited liability corporation designed to serve institutional customers and allow them access to the growing cryptocurrency investing environment.

Fidelity Digital Assets offers offline cold storage custody solutions, trade execution, and other services. The company has also sought approval for cryptocurrency-related ETFs and trusts, and it has developed custody and trading services for accredited investors.

In August 2020, Fidelity announced it planned to launch its own Bitcoin fund called the Wise Origin Bitcoin Index Fund. However, this fund requires a minimum investment of $100,000, which puts it out of reach for most retail investors.

Fidelity also offers the option to buy and sell Bitcoin through its Fidelity Crypto accounts, where you can trade with no commission (although fees are charged using a spread system). This is a more accessible option for those looking to invest smaller amounts in Bitcoin through Fidelity.

It's worth noting that investing in Bitcoin and other cryptocurrencies carries significant risks due to the high volatility of the market. Before investing, it's important to understand the fundamentals, the potential risks involved, and your own risk tolerance.

The Wise Origin Bitcoin Index Fund

The fund was incorporated in 2020 and is managed by Peter Jubber, Fidelity's president and director of digital funds. It is only open to institutional and accredited investors, with a minimum investment of $100,000. As of May 2022, the fund had raised a total of $126.5 million, with 689 investors.

Crypto investment vehicles

There are several ways to invest in crypto, each with its own unique aspects, advantages, and disadvantages. Here are some of the most common crypto investment vehicles:

• Buying Crypto Directly: This is the most straightforward method of investing in cryptocurrencies. It involves purchasing the coins you're interested in through a traditional investment platform or crypto exchange. Buying crypto outright gives you quick exposure to the industry and complete custody over your coins, allowing you to transfer them between wallets. However, it's important to understand the basics of crypto cybersecurity and be aware of the risks associated with online theft and volatile market prices.
• Crypto Exchange-Traded Products (ETPs): Crypto ETPs provide direct exposure to the value of a cryptocurrency without the need to buy the coin itself. They are typically bought through traditional routes like brokerage accounts, IRAs, and trusts, which can simplify tax and estate planning considerations. However, ETPs have unique trading limitations and investment risks, and they don't provide direct ownership of the underlying cryptocurrency.
• Crypto Exchange-Traded Funds (ETFs): Crypto ETFs offer exposure to a diversified basket of cryptocurrency stocks or the futures of specific cryptocurrencies or a basket of cryptos. They are less volatile than investing in individual cryptos and are more convenient for investors looking to invest in the industry as a whole. However, ETFs don't provide ownership of actual cryptos, and the upside associated with individual cryptos or related companies may be diluted.
• Buying Crypto Stocks: This involves investing in individual stocks of companies in the crypto industry, such as crypto exchanges, bitcoin mining companies, or banks providing solutions for crypto companies. Crypto stocks allow investors to bet on specific companies within the industry. While buying crypto on an exchange incurs trading fees, most major brokerages allow you to trade stocks without fees. However, inexperienced investors should be cautious as the inherent volatility and other factors can cause a stock's value to plummet.
• Crypto Funds: These are investment funds that focus specifically on cryptocurrencies, such as the Grayscale Bitcoin Trust (GBTC). These funds provide a way for investors to gain exposure to crypto without directly purchasing the coins. However, they typically have high minimum investment requirements, making them more accessible to institutional and accredited investors.
• Decentralized Exchanges: Platforms like Exodus and Bisq allow investors to connect with third-party buyers or sellers directly, giving them more control over their crypto and trading. However, decentralized exchanges may have higher fees, limited cryptocurrency selections, and increased risks of mistakes or sending funds to the wrong wallet address.
• Automated Trading: This strategy involves using applications or trading bots that employ algorithms to make trades based on market conditions. Automated trading can help take advantage of small price fluctuations but carries a high level of risk, especially for beginner investors.

It's important to note that the crypto industry is susceptible to market manipulation, and the regulatory environment is uncertain. Direct holders of crypto may not have the same protections as registered securities, and crypto investments are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. Therefore, it's crucial to thoroughly understand the risks and only invest an amount you are willing to lose.

Crypto-enhanced 401(k)s

Fidelity Investments, a leading provider of 401(k) plans, has taken a pioneering step by allowing cryptocurrencies, specifically Bitcoin, in the 401(k) accounts it services. This move, which began rolling out in mid-2022, represents a significant milestone in the mainstreaming of crypto. With $11.3 trillion in assets under administration, Fidelity is now the largest retirement plan provider in the US to offer this option.

Here's what you should know about this development:

Accessibility

The inclusion of Bitcoin in 401(k) plans is currently limited to the 23,000 employers that use Fidelity to administer their retirement accounts. Among these employers, the first to offer Bitcoin as an investment option in employee retirement plans is MicroStrategy Incorporated (MSTR), a well-known supporter of cryptocurrency.

Allocation Limits

How much plan participants can allocate to Bitcoin investments will be determined by their employers, but a maximum cap of 20% is likely. This limit helps balance the desire for crypto investments while maintaining a diversified retirement portfolio.

Fees

Fees for Bitcoin-eligible 401(k) accounts are expected to range between 0.75% and 0.90% of assets, depending on the amount invested and the employer. Additionally, per-trade fees and other charges may apply.

Regulatory Concerns

The US Department of Labor (DOL) has expressed "serious concerns" about the inclusion of cryptocurrencies in retirement plans due to their speculative and volatile nature. The DOL emphasizes the need for plan fiduciaries to exercise caution and provide adequate information about the risks involved, including price volatility and the evolving regulatory environment.

Investor Interest

There is growing interest from both employers and employees in adding cryptocurrencies to 401(k) plans. A 2022 Charles Schwab survey found that 32% of 401(k) participants wished to invest in cryptocurrencies through their plans, with younger generations showing even stronger interest.

Potential Benefits

Cryptocurrency enthusiasts argue that crypto investments in 401(k)s offer the potential for large returns not achievable through traditional investment options. Additionally, cryptocurrencies have outperformed stocks and bonds over the past decade, providing an attractive growth opportunity as they gain wider acceptance.

Risks and Considerations

Investing in cryptocurrencies carries significant risks, including fraud, theft, and loss. The highly volatile nature of crypto assets can lead to substantial price fluctuations. Additionally, there is regulatory uncertainty surrounding cryptocurrencies, and more restrictive rules could be implemented in the future. Therefore, it is crucial for investors to thoroughly understand the risks and treat crypto investments as a small portion of their retirement portfolio.

Buying crypto ETPs or ETFs

There are two ways to gain exposure to the crypto industry through funds: buying crypto exchange-traded products (ETPs) or buying crypto-related exchange-traded funds (ETFs). Both options allow investors to gain exposure to cryptocurrencies without buying and storing digital assets themselves.

Crypto ETPs give you direct exposure to a cryptocurrency's value without needing to buy the coin yourself. They can be bought through traditional routes like brokerage accounts, IRAs, and trusts, making tax and estate planning considerations simpler compared to buying crypto directly. However, ETPs don't give you direct ownership of the cryptocurrency and have unique trading limitations and investment risks. For example, ETPs can only be traded during traditional market hours, and there may be liquidity issues.

Crypto-related ETFs, on the other hand, offer exposure to a diversified basket of cryptocurrency stocks or the futures of a specific cryptocurrency or a basket of cryptocurrencies. ETFs that track the broader crypto industry may offer less volatility compared to buying individual cryptocurrencies. Like ETPs, ETFs don't give you ownership of actual cryptocurrencies, and because ETFs are portfolios made up of multiple investments, the upside associated with individual cryptocurrencies can be diluted.

It's important to note that the crypto industry may be more susceptible to market manipulation than securities, and direct holders of crypto do not benefit from the regulatory protections applicable to registered securities. The future regulatory environment for crypto is also uncertain.

Frequently asked questions