Fidelity's Crypto Gamble: Fortunes Lost In Digital Currency

Fidelity has been offering crypto services since 2021, when it introduced digital assets to its approximately 40 million individual clients. Crypto is a risky, volatile, and complex asset class that is not for everyone. Fidelity's crypto platform initially offered only two cryptocurrencies: Bitcoin and Ethereum. While the company has simplified the process of investing in crypto, it does not offer the same level of functionality as some other crypto exchanges. For instance, users cannot send or receive cryptocurrency from their accounts, and the platform does not offer staking rewards or 24/7 trading. Additionally, investors could lose their entire investment due to the highly volatile nature of crypto. Despite these limitations, Fidelity's crypto platform may appeal to investors who are curious about cryptocurrency and trust the company with their investments.

Fidelity Crypto®: Fidelity's crypto platform, which allows users to trade and secure crypto like Bitcoin and Ethereum

Fidelity Crypto®: Fidelity's Crypto Platform

Fidelity Crypto® is a service offered by Fidelity Digital Assets℠, allowing users to trade and secure cryptocurrencies like Bitcoin and Ethereum. The platform is built into the Fidelity® mobile app, enabling users to manage both their traditional and crypto investments in one place.

Fidelity Crypto® is designed to provide an intuitive and secure way to trade crypto. With a focus on education, the platform offers a range of resources, including news, articles, podcasts, webinars, and on-demand content to help users make informed decisions. Additionally, Fidelity Crypto® provides 24/7 virtual assistance and community forums for further support.

One of the key advantages of Fidelity Crypto® is the level of security it offers. The platform is built on the expertise and history of Fidelity Investments®, ensuring robust physical, cyber, and security controls. Fidelity Digital Assets℠ has been a leader in the crypto space since 2018, providing institutional-level security and services to its users.

Fidelity Crypto® accounts are available to US citizens over the age of 18 who reside in eligible states. To get started, users need to open a Fidelity Crypto® account and link it to an eligible Fidelity brokerage account for funding. With a minimum investment of $1, users can then buy and sell crypto directly through the platform.

It is important to remember that investing in cryptocurrencies carries a high level of risk. Crypto is a highly volatile asset class, and investors could lose their entire investment. Therefore, it is crucial for individuals to carefully consider their risk tolerance and only invest what they are willing to lose.

High Risk: Crypto is a highly volatile asset class with a high risk of total loss and is not suitable for all investors

Crypto is a highly volatile asset class with a high risk of total loss and is not suitable for all investors.

Volatility in financial markets refers to how much the price of an asset has increased and/or decreased over a period of time. High volatility is indicated by larger and more frequent price movements, while the opposite holds true for low volatility. Generally, the more volatile an asset is, the riskier it is as an investment. Crypto is a highly volatile asset class, with huge price fluctuations occurring at an extreme pace compared to mainstream markets. For example, Bitcoin has witnessed over eight 50% corrections in its 15 years of existence.

The high volatility of crypto is due to various factors. Firstly, crypto is a relatively new asset class, and the market is still in its early and high growth phase. The limited supply of certain crypto assets, such as Bitcoin, can also lead to increased volatility when there is sudden increased demand. Additionally, crypto markets are heavily influenced by investor sentiment, and the immaturity of the market means that positive or negative views can spread quickly, impacting prices.

The lack of clear regulation in the crypto market also contributes to its volatility. Without comprehensive government regulations, crypto markets are more susceptible to market manipulation and investors do not have the same regulatory protections as they would with registered securities.

Furthermore, crypto is not backed by intrinsic value, as it is not linked to any physical commodities or guaranteed by any central authority. This means that its market value is based on speculation, which can lead to price sensitivity and volatility.

Due to its high volatility, crypto investing is considered high risk and may not be suitable for investors with a low-risk tolerance. Investors could lose their entire investment, and it is recommended that individuals only invest an amount they are willing to lose.

Regulatory Environment: The future regulatory environment for crypto is uncertain, and investors do not benefit from the same protections as registered securities

Crypto assets and associated products and services have experienced rapid growth in recent years, and their interlinkages with the regulated financial system are increasing. Policymakers struggle to monitor risks from this evolving sector, where many activities are unregulated. These financial stability risks could soon become systemic in some countries. Crypto is susceptible to market manipulation, and direct holders of crypto do not benefit from the same regulatory protections as registered securities.

The future regulatory environment for crypto is uncertain. However, there is a growing consensus that a comprehensive, consistent, and coordinated global approach is necessary to address the risks to financial stability and market conduct. The cross-sector and cross-border nature of crypto assets limits the effectiveness of uncoordinated national approaches.

• Licensing and registration: Crypto asset service providers delivering critical functions, such as storage, transfer, exchange, settlement, and custody services, should be licensed, registered, and authorized. Rules should be similar to those for providers of these services in the traditional financial sector.
• Prudential requirements: Entities performing multiple functions should be subject to additional prudential requirements. Customer assets should be segregated from other functions to protect customers from significant risks, as seen in the recent FTX failure.
• Stablecoin regulation: Stablecoin issuers should be subject to strict prudential requirements as they resemble "money" and could pose challenges to monetary and financial stability if not properly regulated.
• Regulated financial institutions and crypto: Clear requirements should be provided for regulated financial institutions regarding their exposure to and engagement with crypto. If these entities provide custody services, the requirements should address the risks arising from those functions.
• Global regulatory responses: A robust, globally consistent, and comprehensive regulatory response is needed to achieve effective crypto regulation and supervision. This global approach must be adaptable to changing landscapes and risk outlooks.
• Targeted restrictions: Some countries have implemented targeted restrictions on certain crypto derivatives or promotions, which can deliver better public policy outcomes if accompanied by sufficient regulatory capacity.
• Standard-setting bodies: These bodies have provided varying levels of guidance, from broad principles for some crypto assets to rules for mitigating exposure risks. However, a more coordinated global framework is needed to manage the risks to financial and market integrity, financial stability, and consumer and investor protection.
• Level playing field: The global regulatory framework should provide a level playing field across the activity and risk spectrum. Licensing and authorization criteria should be clear, and coordination mechanisms among designated authorities should be well-defined.
• Tailored requirements: Requirements should be tailored to the main use cases of crypto assets and stablecoins. For example, investment services and products should have requirements similar to securities brokers and dealers, while payment services and products should resemble those of bank deposits.
• Addressing cryptoization: Cryptoization, or the replacement of domestic currency by crypto assets, is a concern in emerging markets and developing economies. Authorities need to address the root causes of cryptoization to improve trust in domestic currencies, banking systems, and economic policies.

Market Manipulation: Crypto may be more susceptible to market manipulation than securities, and direct crypto investments are not insured by the FDIC or SIPC

Crypto assets are not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). The FDIC is like the SIPC for banks and savings institutions, providing insurance and consumer protection. If an FDIC-insured institution fails, you are covered for up to $250,000 per depositor. However, crypto exchanges are not covered by the FDIC, and the corporation has issued letters to crypto sites instructing them to remove misleading statements suggesting FDIC protection.

Similarly, the SIPC protects investors if a brokerage firm fails financially. It covers cash and securities, such as stocks and bonds, held by a customer at a financially troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. However, it is important to note that SIPC does not protect digital asset securities that are not registered with the U.S. Securities and Exchange Commission, even if held by a SIPC-member brokerage firm. As a result, most cryptocurrency exchanges are not included in the list of SIPC-member firms.

The lack of insurance for crypto assets through the FDIC or SIPC means that investors could lose their entire investment. Crypto is also more susceptible to market manipulation than securities. For example, in February 2023, Avraham Eisenberg was charged with commodities fraud, commodities market manipulation, and wire fraud. He allegedly manipulated the Mango Markets cryptocurrency exchange to fraudulently obtain approximately $110 million worth of cryptocurrency. He achieved this by artificially manipulating the price of certain perpetual futures contracts, causing the price of MNGO Perpetuals to rise by 1300% in just 20 minutes.

Given the risks associated with crypto investing, some experts recommend that investors arrange their own insurance coverage. Policies typically cover theft, loss of access, business risk, and decentralized finance (DeFi) coverage. However, it is essential to understand the terms and read the fine print before purchasing any policy.

Overall, while crypto investing provides opportunities for high returns, it is a risky venture. Investors should carefully consider the potential for market manipulation and the lack of insurance coverage before investing in cryptocurrencies.

Investment Options: Fidelity currently offers a limited number of cryptocurrencies compared to other platforms, which may be a factor for experienced crypto traders

When it comes to investment options, Fidelity offers a more limited selection of cryptocurrencies compared to other platforms. Currently, investors can trade bitcoin, ethereum, and litecoin through Fidelity Crypto®. This may be a factor for experienced crypto traders who are looking for a wider range of options.

Fidelity Crypto® is a service provided by Fidelity Digital Assets℠, which was launched in 2018. It allows investors to trade and secure crypto with as little as $1. This service is built into the Fidelity® mobile app, enabling investors to manage both their traditional and crypto investments in one place.

In addition to trading cryptocurrencies directly, Fidelity also offers Exchange-Traded Funds (ETFs) that are focused on digital assets. These include the Fidelity® Wise Origin® Bitcoin Fund (FBTC) and the Fidelity® Ethereum Fund (FETH). These funds invest in a single cryptocurrency and are intended for investors with a high-risk tolerance.

Fidelity also offers ETFs that do not directly invest in cryptocurrencies but instead focus on companies engaged in activities related to digital assets, digital payment processing, and the metaverse. These include the Fidelity® Crypto Industry and Digital Payments ETF (FDIG) and the Fidelity® Metaverse ETF (FMET).

While the number of cryptocurrencies available through Fidelity Crypto® may be limited compared to other platforms, it is important to note that investing in cryptocurrencies carries a high level of risk. Crypto is highly volatile and susceptible to market manipulation, and investors could potentially lose their entire investment. Therefore, it is crucial for investors to carefully consider their risk tolerance and conduct thorough research before investing in cryptocurrencies through any platform.

Frequently asked questions