The launch of the Bakkt Bitcoin futures exchange has generated a significant amount of hype in the cryptocurrency community over the last year and holds the potential to draw a massive amount of capital into the cryptocurrency market.
Bakkt is a Bitcoin futures exchange that allows investors to invest in Bitcoin futures — which are particularly interesting to institutional investors.
Retail investors, contrasted with institutional investors, typically invest in securities such as stocks in traditional markets. In the cryptocurrency market, retail investors are typically “HODLers,” or cryptocurrency investors that purchase and hold crypto in order to capitalize on long-term price increases.
Institutional investors, however, operate on a far larger scale than retail investors. These investors operate as organizations that pool money to invest in and speculate on various markets and are backed by significant resources.
The rapid maturation of the cryptocurrency market has led to some securities that are typically available in traditional financial markets becoming available for digital assets. Notably, the launch of Bitcoin futures in the last year has attracted a significant amount of interest from institutional investors.
Futures allow investors to speculate on the price of Bitcoin. Investors are able to enter into futures contracts that specify the buying or selling of a Bitcoin at a specific date in the future, at a specific price.
Making Bitcoin futures available to institutional investors has resulted in a significant amount of money entering the cryptocurrency market — but Bakkt could potentially draw in even larger amounts of institutional capital.
Bitcoin futures have been available since late 2017 across a range of different exchanges, but Bakkt is different — unlike other Bitcoin futures products, Bakkt offers “physically backed” Bitcoin futures.
In order to understand the difference between Bakkt and other Bitcoin futures, it’s necessary to break down the difference between “paper” futures and physically-backed futures. Most Bitcoin futures are settled in fiat currency. This means that no Bitcoin is being bought or sold — paper futures don’t require ownership of any Bitcoin.
Physically backed Bitcoin futures, however, are settled in real Bitcoin. This means Bakkt Bitcoin futures require real ownership of real Bitcoin — Bakkt’s futures cause fiat currency to flow into the Bitcoin market.
Bakkt’s physically-backed Bitcoin futures are a relatively big deal because they allow institutional investors to invest in futures in the Bitcoin market. Physically-backed futures also limit the negative impact of paper futures on the Bitcoin market, which commonly occurs in the form of “naked shorts.”
Paper futures allow investors to place a sell order for an asset like Bitcoin without actually owning any of the asset itself. Naked short contracts make it possible for large institutional investors to flood markets with multiple sell orders without owning Bitcoin.
This process could potentially be used to artificially suppress Bitcoin prices. Bakkt’s physically-backed futures would minimize the impact of naked shorts on the Bitcoin market.
The availability of physically-backed Bitcoin futures is a major advancement for the crypto market. Increasing the availability of complex financial products backed by “physical” Bitcoin attracts more institutional capital to the crypto market without the negative impact of paper futures on price movements.
Large-scale institutional investors settling Bakkt Bitcoin futures contracts will need to purchase large amounts of Bitcoin. This will inject fiat currency into the cryptocurrency market, increasing the Bitcoin market cap and potentially resulting in higher demand and positive price action.
Bakkt is a joint venture created by Intercontinental Exchange (ICE), an Atlanta-based operator of 23 large-scale international exchanges. In addition to ICE, Bakkt is supported by both Microsoft and Starbucks. The capital backing Bakkt makes it a very serious platform indeed — ICE operates the New York Stock Exchange, which trades over 1.5 billion shares daily.
Bakkt is backed by ICE, which generates over 6.28 billion USD in annual revenue. ICE announced the launch of Bakkt in an August 2018 press release, which outlined a long list of investing partners that include Fortress Investment Group, Eagle Seven, Galaxy Digital, Horizons Ventures, Alan Howard, and Pantera Capital.
The Bakkt platform captured approval from the US Commodity Futures Trading Commission and the New York State Department of Financial Services in August 2019, making it a completely regulatory-compliant platform.
The highly regulated nature of Bakkt, combined with the large institutional capital players backing the platform, places it in a position to challenge the Chicago Mercantile Exchange’s current market dominance over Bitcoin futures.
Bitcoin futures were first made available in mid-December 2017. The CBOE Futures Exchange offered paper Bitcoin futures from late 2017 until May 2019, at which point CBOE placed their Bitcoin futures product on hold.
The launch of CBOE’s bitcoin futures resulted in strong positive price action for Bitcoin, catapulting the value of a single Bitcoin over $15,000.
A lengthy period of negative price action from Q4 2018 to Q1 2019 saw CBOE retract their Bitcoin futures offering. Chicago Mercantile Exchange Bitcoin futures overtook CBOE futures as the primary investment vehicle for traders seeking Bitcoin futures.
Bakkt’s physically-backed Bitcoin futures have yet to have a significant impact on Bitcoin prices, however. Bakkt launched its Bitcoin futures on September 23, 2019, and has averaged 224 monthly contracts since launch.
The total amount of Bitcoin futures contracts traded on the platform has increased dramatically, however, with Bakkt reporting an increase of 800% in daily trades in the first half of October.
The current Bitcoin market paradigm is extremely volatile — the availability of Bitcoin futures holds the potential to make or break Bitcoin prices.
Bakkt’s physically-backed futures could potentially establish a positive feedback loop for Bitcoin prices as institutional investors enter the Bitcoin futures market and expand liquidity, thereby attracting more institutional interest.
Bakkt’s strong relationship with major traditional finance organizations places the platform in a position to both increase the total amount of capital directed toward the cryptocurrency market as well as legitimize it in the eyes of traditionally hesitant institutional market players.