Fintechs push Bitcoin trading onward and upward: Fidelity

Despite a precarious macro environment, advisers should be ready for Bitcoin to increasingly become a part of their conversations with investors as fintechs continue to open access to digital assets and reduce barriers to participation, according to research by Fidelity Digital Assets. 

Given growing retail demand, the maturation of the market and leadership changes at regulatory agencies, the approval of a Bitcoin ETF is the question on the minds of investors and advisers, according to Fidelity’s 2020 Bitcoin Retrospective report published Thursday

In the meantime, experts are keeping a close eye on the firms fueling Bitcoin by enabling more retail access to digital assets driven by regulatory clarity from the Office of the Comptroller of the Currency and competitive pressure from fintechs, according to Fidelity Digital Assets Director of Research Ria Bhutoria. 

Moving forward, retail interest will be an important segment for Bitcoin, especially millennials and Gen Z, according to Bhutoria. Naturally, digitally native generations typically express openness toward digital assets like Bitcoin. For example, a survey by deVere group found about two-thirds of its more than 700 millennial clients said Bitcoin is a better safe-haven asset than gold. 

How Bitcoin Stacks Up as a Safe Haven

These younger generations are important for Bitcoin adoption because the demographic will inherit $68 trillion in wealth, the greatest generational wealth transfer, over the coming years, according to the report. 

With that much wealth set to transfer into the hands of young investors, fintech companies have rolled out support for Bitcoin including Square, Robinhood, Sofi and most recently PayPal.

These fintechs have expanded Bitcoin’s reach to millions of active users — via smartphone apps. For this report, Bhutoria specifically pinpointed Square and PayPal’s impact on Bitcoin’s trading demand. 

For perspective, Square’s Cash App is the number one finance application in the U.S. on the iOS app store, according to rankings as of January 20, and garners more than 30 million monthly active users. In the first three quarters of 2020, Cash App facilitated $2.8 billion in Bitcoin volume, more than five times Square’s Bitcoin volume in all of 2019. Simultaneously, Bitcoin’s share of profitability grew as well, with Bitcoin  gross profit generated by Cash App rising to 8.3% in Q3 2020 compared with 2.5% of gross profit during the prior year period. 

That level of growth is largely due to Square’s initiatives that show its commitment to the Bitcoin ecosystem, according to Bhutoria. Most recently, the company announced a Bitcoin Clean Energy Initiative, pledging $10 million for companies furthering the role of clean energy in Bitcoin mining. 

PayPal, too, has been a huge driver of retail investors accessing Bitcoin as the fintech continuously rolls out new ways for users to access the digital asset.

In October, PayPal launched the ability for users to buy, sell and hold digital assets in app in partnership with Paxos with plans to expand to Venmo users and select international markets in the first half of 2021. PayPal also noted it will allow account holders to use digital asset balances as a funding source for payment at its 26 million merchants.

Users in the U.S. can buy, sell and hold four different cryptocurrencies on PayPal including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.

PayPal also increased the weekly purchase limit from $10,000 to $15,000 “due to initial demand from customers,” according to the fintech’s third quarter earnings call. In November, the company announced another increase to $20,000. 

INSTITUTIONAL INTEREST

While the entrance of fintech’s democratizing access to Bitcoin is a huge driver of its demand and trading volume, institutional investors are also slowly adopting digital assets. 

Bhutoria highlights the Grayscale Bitcoin Trust (GBTC) as it provides institutional investors with a passive, regulated vehicle to express interest in Bitcoin. Grayscale handles the purchase and safekeeping of assets, which may be valuable to investors that are less familiar with digital assets.

In its Q4 2020 report, Grayscale highlighted that 2020 inflows into GBTC was more than four times cumulative inflows over the prior six years. GBTC’s assets grew from $1.8 billion at the beginning of 2020 to almost $21 billion as of January 2021, driven by inflows into the product as well as Bitcoin’s price surge.

Moreover, a number of traditional investment firms launch passive Bitcoin funds in 2020, including NYDIG, a subsidiary of Stone Ridge, a $10 billion alternatives asset manager. Others include SkyBridge Capital, which manages $7.7 billion in assets, and Osprey Bitcoin Trust, which reopened its trust for private placement by accredited investors.

These fund launches are likely a direct response to institutional demand for accessible vehicles to Bitcoin offered by traditional institutions who have an opportunity to establish a new revenue stream, according to Bhutoria.

Bitcoin just rebounded from a steep sell-off, which saw prices plunge more than 12% to below $30,000. Despite the extreme swings in price, analysts from top Wall Street firms like J.P. Morgan still projected Bitcoin to increase to $146,000.

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