For nearly a year, cryptocurrency investors were waiting for Bakkt's Bitcoin futures. The futures, which are some of the first in this market to offer physical delivery (each futures contract is backed by a coin), held the promise of helping to propel Bitcoin to fresh heights.
When Bakkt launched its market on September 23 after nearly a year of regulatory setbacks, however, many were quick to air their disappointment. During its first trading session, the platform — backed by the Intercontinental Exchange (ICE), Starbucks, and Microsoft — saw less than $2 million in volume. Although volumes recently jumped 800%, they have remained under $2 million per day as of the time of publishing. For reference, LongHash identified in September that the top 10 largest spot Bitcoin markets facilitate an average of $1 billion in trades each day.
Despite the slow start, some crypto insiders believe that Bakkt's flagship financial vehicle has the potential to dramatically alter the nature of the Bitcoin market, especially with regards to market players, liquidity, and supply-demand trends.
Attracting Institutional Players
If you've perused the headlines of the cryptocurrency industry over the past two years, you might have noticed the use of the word "institutional" in tandem with "investment." Analysis platform The TIE discovered that the relative frequency index of "institution" in Bitcoin-related headlines from mainstream outlets (Financial Times, CNBC, etc.) and trade publications trended around 60% for the first six months of 2019.
But the reality on the ground is different. For a majority of Bitcoin's nearly 11-year lifespan, market growth and adoption has been driven by consumer investors. There remains untapped interest in the institutional side of the investment field, which is where a large portion of the money resides.
Institutions have been slow to foray into Bitcoin. Industry upstart BlockFi reported earlier this month that the metaphorical "crypto virus" has only "infected 1.3% of the total private fund population" as of 2019.
Enter Bakkt. Industry analysts, when asked by LongHash, said they believe Bakkt gives the cryptocurrency market immense clout in institutional circles.
Scott Melker, a cryptocurrency trader at TexasWest Capital and popular analyst on Twitter, told us that "Bakkt allows institutional investors to safely gain exposure to BTC" and is thus "potentially extremely bullish." Melker's comment was reminiscent of one made by Tom Lee, a former JP Morgan executive. Three days out from Bakkt's inaugural trading session, Lee wrote on Twitter that the exchange has the "ability to improve trust with institutions to crypto."
Backed by tens of millions in funding from the Intercontinental Exchange — the company that operates The New York Stock Exchange — and partnered with global banking behemoth BNY Mellon, Bakkt could bring legitimacy and institutional-grade security to the crypto industry. Because when ICE, one of the most important financial institutions in the world, embraces Bitcoin, people are sure to take notice.
A main component of new institutional trust in cryptocurrency will stem and has stemmed from Bakkt's custody offering. As Sasha Fleyshman, a trader at crypto investment management firm Arca, told LongHash:
"Bakkt hasn't necessarily reinvented the wheel — CME Bitcoin futures already offer exposure to Bitcoin — but launching an institutional-grade custody solution for physical Bitcoin is a huge value add. This could make a huge difference for them in the long run."
Due to the physically-settled nature of its futures, Bakkt was mandated by the Commodity Futures Trading Commission (CFTC) and the government of New York state to create proper custodial systems for Bitcoin.
While cryptocurrency custody is nothing new to this market, Bakkt has brought Bitcoin security to another level. Measures mentioned on Bakkt's custody page include partnering with BNY Mellon, creating an "air-gapped system stored in bank-grade vaults with sophisticated physical security controls", establishing a $125 million insurance policy, distributing shards of private keys, and utilizing "enterprise security capabilities, including those that protect ICE's dozen exchanges" to protect client funds.
Providing Liquidity to Bitcoin
The pseudonymous quantitative analyst PlanB, who has quickly become a leading crypto commentator, told LongHash that Bakkt provides liquidity to this market in that "it gives investors an additional way to sell their investment, another exit."
He added that this extra exit “could be a reason to buy in the first place. I never buy if I am not sure that I can sell at a reasonable market price."
In this sense, Bakkt could create an ever-growing positive feedback loop for market liquidity. institutions delve into Bitcoin futures due to a robust custody offering and increased market liquidity, liquidity grows as new players enter the fray, and then more institutions are drawn in by the expansions in liquidity.
It is important to note, however, that this positive feedback loop will materialize only if institutions actually make use of Bakkt's futures.
Scott Melker told us that at the end of the day, Bakkt is just a tool. "The institutions need to be interested enough to use it," the analyst said, adding that "[it] remains to be seen" if there will be long-term demand for this financial vehicle.
Cynics may say that there won't be long-term demand for the futures, seeing that daily volumes on the exchange have generally remained stagnant in the low-single-digit millions since its September launch. And they might be right.
But Arca's Sasha Fleyshman made sure to assert that "Institutions are not known for moving fast and breaking things, and due diligence and on-boarding of these firms takes quite a bit of time." In other words, it may make more sense to access Bakkt's success in a few years, not mere weeks after launch.
Bringing Scarcity Back
The cardinal rule of Bitcoin is that there will never be more than 21 million coins. But is Bitcoin's strict scarcity really being upheld?
In December of 2017, the CME became the first U.S.-regulated exchange to offer Bitcoin futures. But one issue with this is that Bitcoin's perceived scarcity can be decimated — the "Bitcoin" traded on the CME's market don't actually exist on a chain. When investors purchase Bitcoin on, say, Coinbase, they’re entitled to claim their cryptocurrency through a withdrawal, taking supply off the market. The CME’s cash-settled futures don’t allow for contract holders to claim the Bitcoin they’re bidding on, as the coins aren’t represented on the blockchain.
As PlanB said in a September installment of "The Investor's Podcast" with Preston Pysh: "you could theoretically sell more than 21 million Bitcoin [through the CME’s futures], even if there isn't 21 million Bitcoin [on chain]. ... You would need a lot of cash, but you could do it, especially with the backdrop of government having access to printing presses."
Fleyshman echoed these concerns, telling LongHash that "cash settled Bitcoin futures serve to disrupt one of the main tenets of Bitcoin – a hard-capped supply. The ability to gain exposure to Bitcoin synthetically has left the door open for manipulation and outsized volatility."
By contrast, Bakkt actually delivers the Bitcoin that is backed by its contracts. When dealing with a strictly scarce asset, "there stands to be a significant injection into the supply-demand model" when physical delivery gets involved, Fleyshman concluded.
What's Next for Bakkt?
While much of the Bakkt hype has centered around its Bitcoin derivatives, Bakkt is also involved other areas of cryptocurrency infrastructure. As this Fortune feature said in August of last year, "With the creation of Bakkt, ICE aims to transform Bitcoin into a trusted global currency with broad usage."
Indeed, the firm's website has the phrase "Building the future of digital asset infrastructure" front and center on its landing page. Alongside offering futures, the company intends to offer cryptocurrency payment systems for both merchants and consumers.
The Block reported in June that the company had brought on former Google consultant Chris Petersen, who is working on a digital asset wallet dubbed "Bakkt Pay." The Block’s source added that Bakkt may eventually unveil a mobile application. Scant details were given about this product.
An excerpt from Bakkt's website, though, gives some insight into the potential applications of Bakkt Pay:
“Whether between consumers and merchants or peers, the ability to conduct transactions in digital assets holds promise as these new global currencies evolve beyond a store of value or speculative assets, and as distributed ledger technology scales. Bakkt is working with leading merchants who recognize the potential of digital assets.”
Starbucks may be among one of the first companies to adopt a cryptocurrency payment solutions pioneered by Bakkt. The Block reported that Starbucks, a founding partner of Bakkt, will be involved in "developing the card and app that will allow it to serve as Bakkt’s first merchant-on-platform." The report added that the work-in-progress payment processor will give Starbucks the ability to accept Bitcoin potentially in 2019.
If true, Bakkt would solve two of Bitcoin's largest adoption hurdles: the inability for merchants to accept cryptocurrency and receive fiat, and the difficulty that consumers have in acquiring, storing and spending cryptocurrencies on their mobile devices.
Bakkt CEO Kelly Loeffler has said Bakkt’s mission is to become a “scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility.” Despite a slow start, there are signs that Bakkt may still achieve this goal.