Produced | Odaily (ID: o-daily)
Produced | Odaily (ID: o-daily)
After putting pigeons in the entire currency circle for more than half a year, people finally ushered in good news-the US bitcoin futures exchange Bakkt bitcoin futures contract is being tested and is expected to be officially launched at the end of September.
More than a year ago, Bakkt announced in a high-profile manner that it had received US$183 million in financing from 12 top institutions. Even in the bear market, its valuation exceeded US$740 million.
People see Bakkt as the light of the bear market. The market believes that traditional institutions are waiting for a formal channel to enter the market; as long as the market supports traditional institutions with compliance tools, the cryptocurrency market will expand tenfold or even a hundredfold in the future, and the currency price will also increase with the entry funds. grow and rise.
But this is not easy. Since August last year, Bakkt, which has been delayed several times, is facing multiple regulatory difficulties. The launch of Bakkt's test this time seems to mean that the launch of compliant bitcoin futures products is just around the corner. Industry Interpretation: "The regulator has given the green light to Bakkt."
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NYSE parent company enters cryptocurrency circle
In August 2018, ICE Intercontinental Exchange announced plans to establish a subsidiary, Bakkt. In ICE's expectation, Bakkt aims to create an open and regulated global ecosystem for the digital asset market.
The entry of ICE Intercontinental Exchange is obviously the first nerve that Bakkt provoked people. As the world's second largest regulated exchange and clearing house operating network, ICE's business covers 14 securities and futures including the New York Stock Exchange, the Canadian Futures Exchange, the Paris Stock Exchange, and the London International Financial Futures Exchange. exchanges, and five clearing houses.
Launching Bitcoin futures is the first step for Bakkt. Unlike CME and CBOE, which have already launched bitcoin futures products, Bakkt's bitcoin futures are delivered in real bitcoin instead of US dollars.
Soon, the ambitious Bakkt announced that it had received US$183 million in financing from 12 investors, including Li Ka-shing's Victoria Harbor Investment, Naspers, the largest shareholder behind Tencent, Microsoft Ventures M12, Goldman Sachs Galaxy Digital, Boston Consulting Group, Intercontinental Exchange (ICE), and more.
This list of investors full of gold is obviously enough to become the second fuse to detonate the financial world. What the market likes is that as a regular army in the traditional financial industry, it can not only lead Bakkt in the process of compliance, but also has unlimited potential to open the valve of Wall Street capital.
This scene is so familiar. Two years ago, also during the bear market, the Chicago Mercantile Exchange Group (CME, "CME Group") officially launched bitcoin futures products, causing a sensation in the encryption circle.
The world's largest and oldest futures exchange is open to bitcoin. Since then, Bitcoin has ushered in a year-long bull market in the entire cryptocurrency circle.
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Bakkt paves the way for traditional institutions to enter the market?
Over the past year, Bitcoin’s yield has continued to outperform almost all assets. However, considerations including compliance and fund security have made traditional financial institutions hesitate to invest in cryptocurrencies.
Bakkt, born with a golden spoon in its mouth, has the mission of becoming a model of compliance and paving the way for large institutions to enter the market.
Cryptocurrency exchanges are jealous of compliance licenses
"The reason why traditional funds do not allocate Bitcoin is first of all compliance and cannot be allocated." Liu Yang, a traditional securities practitioner, revealed to Odaily, "Large institutions and countries are following closely. First, they are stuck in the tax payment process. It can be said that you are not a financial product.”
The importance of compliance cannot be overstated. Previously, at the beginning of the launch of the Gemini exchange with a Wall Street financial background, industry insiders revealed to Odaily that the reason why its valuation is higher than Binance, the largest cryptocurrency exchange, is precisely because of its compliance and licenses.
However, compared with the Bitcoin ETF, the Bitcoin futures product that Bakkt is preparing to launch obviously has more optimistic regulatory expectations. Hong Shuning, dean of Jinqiu Blockchain Research Institute and former head of Suning Financial Blockchain, told Odaily that the CFTC, which is in charge of supervising futures products, has always been more open-minded towards Bitcoin. The premise is that the exchange has properly resolved the custody, confirmation of rights, anti-money laundering and other links involved in the physical delivery process.
According to market expectations, whether it is the CFTC's more enlightened attitude or the strong capital background of Bakkt, the parent company of the New York Stock Exchange, the industry is quite optimistic about its compliance process.
Different physical delivery model from CME and CBOE
It is not that there are no compliant bitcoin futures before. Both the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) have launched bitcoin futures one after another. It is a pity that CBOE, which was caught up by the latecomer CME, has become increasingly bleak in trading volume. And ended the transaction of the last bitcoin futures contract on June 20, Beijing time.
In contrast to the cash-settled bitcoin futures products of CME and CBOE, Bakkt bitcoin futures use bitcoin for settlement. The highlight of the latter is that when the contract is delivered and closed, the real BTC must be used, and a large amount of Bitcoin needs to be stored, which is undoubtedly a great benefit for the spot market.
Improve the basic solution of asset custody
Physical delivery has higher requirements on exchanges, and futures exchanges settled in Bitcoin need solutions for custody, warehousing, and delivery.
In addition, the lack of custody of crypto assets has been a barrier to institutional funds entering the crypto market. Encrypted assets are currently facing risks such as loss of private keys and hackers stealing coins. There is an urgent need for professional third-party custody institutions to conduct asset custody, so that institutional users can dispel doubts and enter the game calmly.
The compliant custody solution is not only the field that global asset management giant Fidelity, technology giant IBM, and the world's largest digital currency exchange Cinbase are deploying, but also the direction that Bakkt is working on.
However, the trust license responsible for custody is currently the biggest uncertain factor for the official launch of Bakkt.
The launch of Bakkt has been delayed repeatedly. J. Christopher Giancarlo, chairman of the US Commodity Futures Trading Commission (CFTC), talked about the reasons why the Bakkt proposal was blocked in an interview. He said that one of the challenges facing institutions is to evaluate how futures exchanges store cryptocurrencies.
In order to comply with regulatory requirements, Bakkt launched a delivery warehouse ("Bakkt Warehouse") in January this year, and applied for a BitLicense to the New York State Department of Financial Services (NYSDFS) in April this year, as its own delivery warehouse to obtain qualified Primary compliance scenario for custodian identity. However, it has not yet obtained the status of a qualified custodian recognized by the CFTC.
Regarding the delay in passing the issue, Binance Research Institute told Odaily that due to the relatively late emergence of the requirements for compliant custody and warehousing of encrypted digital assets, there is no precedent for U.S. regulators to refer to, so they are extremely cautious in the approval of qualifications. And because the anonymity of encrypted digital assets conceals its custody and ownership.
For exchanges, physical delivery may have additional risks compared to cash delivery:
1. Warehouse default. That is, the delivery warehouse cannot deliver the digital assets that meet the requirements of the futures contract to the holder of the standard warehouse receipt within the time limit, which may include the loss of bitcoins in the warehouse, the wrong address sent by the warehouse, etc.
2. Lack of hedging means. At present, there are very few companies in the market that provide digital asset insurance, and it is difficult for exchanges to pass on this part of the risk.
3. Or lack of sufficient registered Bitcoins. Many holders of physical bitcoins may not be willing to pay taxes for trading digital currencies. Once they enter the market, the physical bitcoins registered in the warehouse will be fully included in the vision of the financial system, which may lead to insufficient exchange warehouses. Registered bitcoins available for trading, which may cause abnormal price fluctuations. This is different from CFDs, which can be created out of thin air.
On April 29, Bakkt announced the acquisition of Digital Asset Custody Company (DACC). CEO Adam White said that DACC's native support for 13 blockchains and more than 100 assets will be an important accelerator for Bakkt. Obviously, DACC is an important supplementary solution until the new escrow service is approved by regulation.
In addition, Bakkt said it will also cooperate with the Bank of New York Mellon (BNY Mellon), which will establish a "geographically distributed" private key storage system for Bakkt. To hedge risks, Bakkt will also provide insurance for funds stored offline. White said Bakkt has purchased a $100 million policy from the world's leading insurance company for the assets held in the cold wallet. Digital currency analyst Joseph Young once commented on this: Bakkt is expected to change the landscape of the Bitcoin market through compliant custody and insurance.
The latest news is that Bakkt, a bitcoin futures settlement platform, will start testing on July 22. On July 18, the board of directors of the New York Stock Exchange (NYSE) held a launch ceremony for bitcoin-settled futures. Foreign media believe that the holding of this event shows that Bakkt has obtained the approval of the US Commodity Futures Trading Commission (CFTC) through self-certification. After a long period of negotiations, the old rules and regulations have also been adjusted in policy.
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Are institutional investors really willing to enter the market?
If Bakkt's compliance plan is really realized, then for institutional investors, compliance entry is no longer a problem.
But as a wild faction in the financial circle, Bitcoin is more of a new thing for traditional investment institutions. Can we really hope that Bakkt's Bitcoin futures will bring more old money to the entire digital currency industry?
Binance Research concluded that traditional investment institutions cautiously invest in Bitcoin mainly for three reasons:
1. The most important reason for traditional investment institutions is the lack of compliant standard products and custodian institutions, which makes Bitcoin more like alternative assets such as red wine and paintings, and it is difficult for fund organizations to be included in asset targets.
2. According to the different attributes of institutional investors, the investment targets of most funds are limited, such as stock, bond, and private equity funds. These funds have signed contracts with investors at the beginning to agree on which assets they can invest in. Therefore, even if the fund manager is personally optimistic about encrypted digital currency, it is not allowed to invest.
3. Encrypted digital currency seems to have no intrinsic value on the surface, or the intrinsic value cannot be calculated by traditional valuation methods, causing many investors to "do not understand", or think that the margin of safety of their investment is extremely low, causing them Not interested.
Bakkt is working hard to solve the first two points, but the third point, "Bakkts" cannot be changed temporarily.
"Usually, an institutional investor will conduct qualitative and quantitative analysis when investing in a new category. Qualitative is to look at the industry, and will consider industry trends and current policies that are beneficial to the industry. Quantitative is to look at other industries in detail. Valuation model." An industry insider explained to Odaily the mentality of institutional investors when they participate in investment.
Value investing is the investment philosophy of most traditional financial institutions. Through the calculation and analysis of investment targets through valuation models, investment institutions need to seek more rational data support when making investment decisions.
In fact, the valuation models of stocks in the current stock market are quite complete. DCF (discounted cash flow method), P/E (price-earnings ratio) and EV/EBITDA (enterprise value multiple) are three commonly used valuation methods. road number. Gold also has a set of applicable cost-benefit valuation methods in its valuation.
But in the world of Bitcoin, there is currently no institution that has made a valuation model suitable for Bitcoin, which is also a major barrier for Bitcoin to enter traditional financial institutions.
"Personally, I think Bitcoin is still quite difficult to value. The key is to value it by what (type), by currency or by asset. If the currency depends on the value of its corresponding economy, the asset depends on scarcity or future cash flow, etc. Wang Fang, an analyst in the securities industry, believes that there is currently no suitable valuation method for Bitcoin, so institutions cannot invest in it.
"We need to know the whole environment to invest in something, that is, we can judge and perceive the risks of the whole bitcoin operation, and we cannot rely on the advice or guidance given by external agencies." Zhang Jian, another traditional securities practitioner, said frankly that most of the traditional Institutions haven't figured out how to value Bitcoin.
"No one can even specifically say the reasons behind every rise and fall in the price of Bitcoin." An investor commented, "In this 24-hour trading market, there are thousands of investment targets, and a bull market cannot be defined."
However, there are also people who hold different views. Song Shuangjie, CEO of Tongtongtong Project, holds a completely different view: "Bitcoin still has an estimation model, digital gold, and in the worst case, the valuation can be on par with gold." In his opinion, incorporating a low-correlation asset into to the portfolio, will significantly improve the performance of the portfolio. And institutions include Bitcoin in their investment portfolios, and decisions can be made based on simple historical data backtesting.
In fact, the concept of using Bitcoin as digital gold has not been recognized by the entire financial industry, and the valuation problem of Bitcoin is still a major unresolved pain point.
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Institutional investors have entered the market, or false?
For a long time, the entry of institutions has always been regarded as the beginning of an industry's crazy growth.
When people are looking for the rising logic behind the skyrocketing Bitcoin, the speculation about "entry of institutional investors" is always the first to be brought up.
But there's little trace of that claim, aside from information from Grayscale Investments. Although the founder of Grayscale came from the traditional secondary market, it is itself a native emerging cryptocurrency fund. Now it seems that traditional financial institutions in the true sense have failed to enter the market.
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(As of May 31, 2019, the types of investment funds released by Grayscale and the products invested by each fund)
After the latest Bitcoin rally, Arthur Hayes, co-founder and CEO of BitMEX, also overturned the view of institutional boost, saying, “This rise is still the result of retail boost. I compared CME with other transactions. Exchange volume. If institutional investors really believed in the promise of cryptocurrencies, they would buy futures directly on the CME, and open interest would explode there.”
Binance CEO Changpeng Zhao held a similar view. He has said that retail investors still play a key role in driving the price of Bitcoin to rise sharply, and have not seen institutions growing at a faster rate. Although Binance's institutional and retail transactions Both are growing, but retail accounts for about 60% of trading volume, about the same as last year.
Arthur Hayes analyzed the mentality of institutional investors and said: "They definitely expect to trade in a multi-billion-dollar market rather than a million-dollar market. Institutional investors can buy Bitcoin futures on CME to gain The fact that they didn’t do it means it’s not worth much to them or to traditional investors.”
Arthur Hayes pointed out a basic fact: the cryptocurrency market is too small for traditional institutions.
The market value of Bitcoin is only more than 170 billion U.S. dollars; in contrast, the market value of Apple alone is close to one trillion U.S. dollars, which is larger than the entire cryptocurrency market. Obviously, the scale of the cryptocurrency market cannot carry huge amounts of money.
A former Wall Street practitioner believes that for traditional institutional investors, the reason for not investing in bitcoins is that traditional businesses are profitable enough and do not need to open up new markets: "But many funds can make money without allocating BTC."
"It is too optimistic to blindly think that the launch of Bakkt will solve all problems, because the entry of traditional institutional investors is a systematic project." Song Shuangjie said. Zhang Jian, a traditional fund practitioner mentioned above, also agrees with this point of view. He believes that the new investors are actually some "big individual investors, or a part of large institutional funds." The former can make quick decisions, but the financial Institutions are "very slow".
Under the current skyrocketing and plummeting market trend of Bitcoin, for institutional investors who want to carry out heavy asset allocation, there will only be more uncertain risk factors. And for traditional institutions, the existing valuation model of Bitcoin is more suitable for analyzing short-term returns.
Obviously, traditional big funds are invested in Bitcoin mining. Financial and technology giants such as the three major exchanges, Fidelity, JPMorgan Chase and Facebook are all deploying cryptocurrencies, but in terms of regulation and decision-making, they are far less rapid than imagined.
Perhaps, when the Nugget Ship really sets sail and moves forward at high speed, people will find that the capacity that the ship can carry is far less than people's skyrocketing desires.
(Note: Liu Yang, Wang Fang, and Zhang Jian are all pseudonyms in this article)
