An Analysis of Bakkt Bitcoin Futures Trading Platform

At long last, the highly awaited Bakkt platform, a regulated bitcoin futures market, is finally open for trading. What could this mean for the cryptocurrency industry as a whole and what would it change?

Days after the launch of Bakkt, the crypto market took a massive nosedive. It’s hard to believe that this is a mere coincidence. But the question is, will the platform be able to catch on soon or will it remain quiet for a while?

What is Bakkt

Bakkt is a digital assets platform and futures market founded in 2018 by the Intercontinental Exchange (ICE). ICE happens to be a financial giant, owning 12 regulated exchanges including the well-known New York Stock Exchange (NYSE).

The company aims to create a platform where institutions, merchants, and consumers can safely trade digital currencies in a secure and trusted system.

Bakkt partnered with multiple big-time companies including Boston Consulting Group (BCG), Microsoft and Starbucks

What does Bakkt do?

Their flagship product is physically-settled BTC futures contracts with a custodial service approved by the Commodity Futures Trading Commission (CFTC). 

What sets Bakkt apart from other bitcoin futures contracts, like the ones offered by the Chicago Mercantile Exchange (CME), is that they deliver “physical” bitcoins. The instrument settles in actual bitcoin upon liquidation instead of cash equivalents.

They believe that “physically” delivered bitcoins will entice more investors since it gives them exposure to the actual asset rather than an instrument that is flimsily connected to it.

Bakkt offers traders two types of derivatives: 

Daily contracts which allow buyers to receive their bitcoin at the end of the same day, and 

Monthly contracts which lets buyers receive their bitcoin in a month’s time.

History

It was in August 2018 that ICE announced their plan to utilize Microsoft’s cloud service Azure to “create an open and regulated, global ecosystem for digital assets.”

At that time, the launch of the exchange was postponed on several occasions due, in part, to regulatory hurdles as well as the work required to prepare its services.

It was only in July 2019 when the exchange began their initial testing phase. In the same year, they had acquired Digital Asset Custody Company (DACC) to boost their crypto asset custody and storage.

The Launch

Finally, after more than a year of trials and tribulations, Bakkt was able to launch the first federally regulated platform for Bitcoin (BTC) futures trading on September 23.

On its first day, Bakkt handled merely 72 monthly contracts, followed by 166 the next day. This is a far cry compared to the time when CME started its Bitcoin contract in December 2017, with 221 contracts traded in the first hour, and several thousands now trading on a daily basis.

It’s safe to say that Bakkt’s launch got off to a slow start.

To make matters worse, the price of Bitcoin dropped below $8,000 for the first time in 3 months, leading some analysts to suspect a causal relation between the two events.

Crypto Twitter and media hype had, after all, fueled the public with high expectations, so much so that a measly 72 contracts on the first day likely lead to disappointments, and thus, a selloff.

Give it time

But to put things in perspective, it’s only been a week since Bakkt released their platform and there’s no telling what could happen in the next few months. Furthermore, enticing institutional investors may be an incremental process, even with the backing of ICE and other big players.

After all, institutional investors have always steered clear from bitcoin in the past. It would be presumptuous to assume that they would hastily jump in now because Bakkt did so.

And it’s not accurate to compare CME’s launch to Bakkt’s either. The latter was released at the peak of market exuberance while Bakkt was released when the market was more mature and stable.

Bigger fish and smaller fish will likely follow eventually

The fact remains that Bakkt has brought a unique product in the crypto space: a regulated futures market for “physical” bitcoins. At the very least, this brings a sense of legitimacy to the largely “underground” industry.

Bakkt’s involvement in crypto could be a catalyst for larger firms to come on board at some point, depending on how it manages to navigate through regulations from here on. 

The same thing could be said for smaller firms. In the finance world, little fish is known to trail bigger fish to feed on scraps. In the coming months, we might see these “smaller” institutions open their doors to cryptocurrencies.

Having more institutional involvement will mean more influx of capital, which is likely to attract more retail investors. This could lead to a snowball effect that would result in another 2017-like bull run. But don’t get your hopes too high just yet.

Downsides

Since the platform will do everything in its power to be compliant to regulations, it is guaranteed to become a massive surveillance machine. 

Government agencies will have access to all records of trading and user information. Mechanisms will also be in place to detect “illicit activities”. Furthermore, KYC and other stringent authorization will be imposed on traders.

While this is viewed as a favorable outcome in a way, since it prohibits drug cartels from profiting in the crypto market, it is also extremely exclusive.

When mass adoption?

Part of the greater mission of the industry as a whole is to “bank the unbanked”. Not only is it a noble cause, but is also very profitable. If you think about it, providing the five billion unbanked individuals access to the global economy through crypto is a surefire way to reach mass adoption.

In a way, regulated trading platforms can help attain that goal since it will attract more people to the space. However, they could simply be a blip in the timeline.

Bakkt may be a major milestone, but we can’t say for sure that it is a turning point for mass adoption. It could, however, be the prelude to mass adoption.