In recent years, the landscape of asset management has been experiencing a seismic shift, driven by the emergence of digital assets and blockchain technology.
Among the notable players fueling this transformation are financial giants Fidelity Investments and BlackRock.
Their ventures into Exchange-Traded Funds (ETFs) that focus on digital assets have had a rippling impact on the financial industry; signaling a new era for investment opportunities and strategies.
The First Forays in Digital Asset Management
Fidelity Investments, a titan in the financial services sector, made waves in 2018 with the launch of its digital asset arm, Fidelity Digital Assets. This subsidiary aimed to provide institutional investors with a secure platform for trading and storing cryptocurrencies like Bitcoin and Ethereum.
Fidelity’s entry into the digital asset space signaled a significant vote of confidence in the legitimacy and potential of cryptocurrencies, particularly among traditional investors.
Following Fidelity’s lead, BlackRock, the world’s largest asset manager, entered the fray.
While BlackRock’s initial steps were cautious, the company’s strategic investments and research efforts underscored its recognition of the potentiality of digital assets. With its vast resources and global reach, BlackRock’s involvement in digital asset management held the promise of mainstream adoption and integration of cryptocurrencies into traditional investment portfolios.
One of the most significant developments was the introduction of ETFs focused on digital assets. Fidelity’s Bitcoin ETF proposal, filed with the U.S. Securities and Exchange Commission (SEC) in 2021, garnered significant attention and anticipation from investors eager to gain exposure to cryptocurrencies through familiar investment vehicles.
Similarly, BlackRock had been exploring opportunities in the ETF space, signaling its interest in offering investment products tailored to meet the evolving needs of investors curious to explore digital assets opportunities.
ETFs provided for both a regulated and accessible pathway for their investors to gain exposure to Bitcoin without the need for direct ownership.
As the demand for diversified exposure to digital assets grew, the launch of ETFs by industry giants like Fidelity and BlackRock paved the way for broader adoption and acceptance of blockchain technology into traditional financial systems.
Diving into the crypto space, BlackRock and Fidelity, with $10 trillion and $4.5 trillion in assets under management respectively, promised to bridge the gap between conventional finance and cryptocurrencies, thus opening the floodgates for institutional and retail investors alike and unleashing significant capital into the cryptocurrency market.
A promise fulfilled with the advent of spot Bitcoin ETFs
The Spot Bitcoin ETF’s & The “Efficient Frontier”
Blackrock has 10 trillion in assets under management. Fidelity has 4.5. Just 0.3% of their funds allocated to Bitcoin would buy EVERY SINGLE BITCOIN currently available on exchanges. If these two companies get ETFs approved then buckle up!— Lark Davis
The discussions surrounding the approval of Bitcoin ETFs by the SEC might lead one to believe there were no Bitcoin ETFs before January 2024, which is false. Futures-based Bitcoin ETFs had already been up and running for quite some time by then.
The true revolution that everyone awaited with bated breath was spot Bitcoin ETFs.
Spot Bitcoin ETFs are ETFs invested directly in ‘physical’ Bitcoin. They purchase and hold actual Bitcoins in their portfolios, aiming to reflect the performance of the Bitcoin market. Spot Bitcoin ETFs typically track the price of Bitcoin in real-time and are directly impacted by changes in spot market prices.
Investors in spot Bitcoin ETFs are exposed to the actual price movements of Bitcoin.
Futures-Based Bitcoin ETFs invest in Bitcoin futures contracts rather than “physical” Bitcoin. Bitcoin futures contracts are agreements to buy or sell Bitcoin at a predetermined price at a specified future date. Futures-based Bitcoin ETFs do not hold Bitcoin; instead, they invest in these derivative contracts.
The value of futures-based Bitcoin ETFs is tied to the performance of Bitcoin futures contracts rather than the spot price of Bitcoin.
These ETFs may be subject to additional factors such as futures contract expiration dates and the cost of rolling over contracts, which can reach up to 30 percentage points of the annual performance.
By launching an investment vehicle that can provide all the benefits of Bitcoin to people who do not or cannot hold BTC directly, they have opened brand new avenues for portfolio allocations for their investors.
Per André Dragosch, head of research at ETC Group, “Investments into bitcoin significantly enlarge the so-called “efficient frontier” of possible multi-asset portfolios.”
The efficient frontier is like a map that shows all the different ways you can invest your money. Imagine you have three types of investments: stocks, bonds, and bitcoin. The efficient frontier shows you all the different combinations of these investments you can make, based on how much you put into each one.
Imagine each combination of investments is like a dot on a graph. Each dot represents a different mix of stocks, bonds, and bitcoin. Some dots might have more stocks and less bitcoin, while others might have more bonds and less stocks, and so on.
Portfolio managers want to find the best mix of investments that gives them the most return for the least amount of risk. They want to be at the very edge of the efficient frontier because that’s where they get the highest possible return for the lowest possible risk.Source: ETC Group for CoinDesk
According to André Dragosch, the black cloud on this graph represents all the portfolios you can make using only stocks and bonds, without bitcoin. The other cloud, the green cloud, represents all the portfolios you can make when you add bitcoin to the mix.
Thus, adding bitcoin to one’s investment mix opens up a whole new world of possibilities for how you can invest your money.
So, in theory, when people include bitcoin in their investment portfolios, it will more often than not lead to better returns compared to traditional portfolios with just stocks and bonds. Even though it might increase the risk a little bit, the extra return you get from bitcoin usually makes it worth it, again in theory.
Adding bitcoin to a classic investment portfolio and getting better returns with only a small increase in risk has seduced both asset managers at large who followed religiously Fidelity and Blackrock’s path as well as investors who saw in spot Bitcoin ETFs a cannot-miss opportunity.
Between the enthusiasm and massive investments of asset managers and their investors, and the massive enthusiasm of crypto retail investors and actors due to the enthusiasm of asset managers and their investors, a frenzy gripped the crypto space in the first quarter of 2024 post spot ETF bitcoin approvals by the SEC.
This frenzy ultimately led to the crypto market finally breaking through a years-long bear market, with Bitcoin reaching a new all-time high of $73,800 on March 14th, 2024.
The following months and years will reveal whether spot Bitcoin ETFs and other spot currency ETFs were a fad or a profound shift in the traditional financial ecosystem.
In the meantime, BlackRock and Fidelity are both involved in a new digital asset adventure: tokenization.
Tokenization: A Brand New Era
In March 2024, BlackRock and Fidelity both announced theis first foray in tokenisation.
BLACKROCK
Blackrock unveiled its digital liquidity fund named “BlackRock USD Institutional Digital Liquidity Fund” whose main purpose will be the tokenisation of asset funds.
The tokenization process will occur on the Ethereum blockchain, utilizing an ERC-20 token named BUIDL, and will have a minimum investment of $100,000.
They entrusted Securitize, a U.S. digital securities firm, with managing the offering and sale of the fund’s token.
BlackRock submitted a Form D to the SEC for the BlackRock USD Institutional Digital Liquidity Fund, aiming to secure exemptions under Section 3(c) of the Investment Company Act. These exemptions would grant BlackRock greater flexibility in its operations and reduce the regulatory requirements it needs to follow.
This latest move perfectly aligns with the vision of BlackRock’s CEO, Larry Fink, who envisions a future where financial assets will be tokenized on a unified ledger.
FIDELITY
The ‘Fidelity tokenization venture’ is quite a reach as it doesn’t originate from Fidelity; it’s actually a rather indirect process.
The tokenization process actually originates from the Swiss-based global digital asset banking group, Sygnum, which announced that they would invest $50 million in tokenized funds in the Fidelity Institutional Liquidity Fund on behalf of its client, Matter Labs.
The tokenisation will occur on the Ethereum-based zkSync layer-2 blockchain, managed by Matter Labs, and will convert the $50 million investment into digital tokens representing a stake in the $6.3 billion Fidelity Institutional Liquidity Fund.
A development not surprising coming from Sygnum as they have been active in asset tokenization and blockchain technology since 2020, being the first bank to tokenize its own assets.
Fidelity Investments and BlackRock have pioneered the symbiosis of traditional finance and digital assets over the years. By continuing to do so, they provide investors with new avenues for diversification and growth, while also validating the legitimacy and potential of cryptocurrencies as viable investment assets.
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The Ripple Effect: How Fidelity and BlackRock ETFs Shaped Digital Asset Management was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.