Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji)Editor's Note: This article comes from
Blue Fox Notes (ID: lanhubiji)
, Author: Frank Chaporro, Translation: Monchi, published by Odaily with permission.
Foreword: Bakkt will launch Bitcoin futures contracts on September 23. In everyone's eyes, Bakkt is a cryptocurrency exchange, but the author does not think so. He thinks there is a bigger story behind Bakkt. what is it?
Intercontinental Exchange (ICE) announced last August that it was launching Bakkt, a company led by former ICE head of investor relations Kelly Loeffler, promising to bring bitcoin mainstream. This caught the attention of the entire cryptocurrency market.
After that, Bakkt appeared in media reports, especially this enthusiastic image of wealth, and was seen as a panacea to solve the problems of the nascent Bitcoin market. The market has been plagued by hackers and has been struggling to gain the attention of professional money managers and investors.
“The number one priority for Bakkt is to make bitcoin a robust and safe investment product for key institutions, which is currently being shunned by most institutions, including the world’s largest financial institutions.” Shawn Tully, Fortune wrote.
“The next step after that is to replace your credit card with bitcoin,” he added, referring to Bakkt’s large partnerships with Microsoft and Starbucks. Details about the two companies’ involvement with Bakkt have been released since August 2018.
Bakkt also promised in November 2018 to launch a bitcoin futures contract, which, unlike other futures, uses physical delivery. On August 16, 2019, Bakkt stated that the futures contract product will be launched to customers on September 23 this year. In fact, the launch will be the first regulated physically delivered bitcoin futures contract offered by a U.S. company. Many in the market see this as an important step in the maturity of cryptocurrencies. This assumes, of course, that ErisX or LedgerX will not be the first to launch a product.
Still, the two bitcoin-related futures contracts are a far cry from what Loeffler described in 2018 as "an open platform that can help unleash the transformative potential of digital assets."
If there's one thing to consider, it's that, at least based on my conversations with market makers, betting against ICE is a fool's errand. In fact, Bakkt’s slow-and-steady approach, a concept foreign to native players in the crypto world, may in fact turn out to be a winning strategy.
But let's start with the first point. As I've also mentioned on Twitter before, ICE, founded by Loeffler's husband Jeffrey Sprecher, is known for making the impossible possible.
Founded in 2000, ICE (Intercontinental Exchange) is an over-the-counter trading platform for energy, financials and other commodities. Backed by Goldman Sachs, Morgan Stanley, and Deutsche Bank, it was founded to use Internet technology to improve the experience of commodity trading, especially through it to lower prices and increase transparency.
In 2013, Nathaniel Popper told the New York Times the story of ICE from Sprecher, reflecting on his inability to help investors succeed in acquiring the symbol of American capitalism, the NYSE, which cost him money and his life. It sounds ridiculous. A businessman from Atlanta comes to New York and steps up to the soaring colonnaded temple of American capitalism. If all goes according to plan, his $8.2 billion acquisition announced before Christmas will close later this year.
With this, 221 years of Wall Street history will come to an end. New York will no longer be the master of the NYSE. Instead, from its headquarters 750 miles away from Wall Street, Mr. Sprecher's young firm ICE will operate the largest stock exchange in the country, if not the world.
In fact, it still sounds ridiculous. Almost as ridiculous as ICE's plan to launch Bakkt as the backbone of the entire cryptocurrency ecosystem.
Don't sleep on top of ICE. ICE developed rapidly in its early days, expanding with the acquisition of London's International Crude Oil Exchange (IPE) in 2001 and the New York Board of Trade in 2005. In 2008, ICE established a clearinghouse for credit default swaps in the aftermath of the financial crisis. Two years later, Bloomberg News called Sprecher the "Sultan of Swaps" (Blue Fox Note: It means the overlord of the credit default swap industry.), because its business scale grew rapidly to $10 trillion by 2010 .
To be sure, in some ways ICE has been a bit of a disappointment in recent years, more of an acquisition than a creation.
"They did well and made a lot of money during their formative years, but since then they've spent shareholder wealth on a bunch of disappointing yachts," said Thomas G. Thompson, derivatives expert and contributing editor at John Lothian News. "
According to data collected by the Wall Street Journal, the NYSE's share of the U.S. stock market has hovered around 22 percent since it was acquired, and has not benefited from the change in ownership.
Still, shareholders don't have much to complain about when it comes to ICE's overall stock price. Since the company went public in 2005, its share price has risen by as much as 1,200%.
As for Bakkt, one of its main buying points is the backing of ICE, according to the unnamed market maker. But what exactly is Bakkt?
In my opinion, its early marketing glossed over this. Credit card ambitions and the Starbucks partnership aside, what Bakkt has brought, and its strong position now, is its status as a qualified institutional custody business, and it's backed by a $51 billion public company established. First, custodial businesses will store bitcoin, which can underpin their futures contracts, but it’s safe to assume they will soon open their doors to hedge funds, asset managers and other clients.
“Wait, so this isn’t a cryptocurrency exchange?” you might ask. No, not really. At least, not yet.
Don't let futures distract you. Several sources told me that custody is at the heart of Bakkt. So, in a way, it is competing with ErisX, Seed CX, and a host of other derivatives platforms on the futures front. But its real opponents are BitGo, Coinbase Custody and Fidelity (Blue Fox Note: Fidelity has always been very interested in cryptocurrencies.). The value proposition of using Bakkt as custody is clear. This is a true institutional grade product with permission from the CFTC and New York State.
"With state-of-the-art physical and cybersecurity, institutional-grade technology and governance, and support for holding digital assets in cold wallets, Bakkt is delivering a new standard in digital asset custody by leveraging the cybersecurity tools that the NYSE relies on." Bakkt Revamp wrote on the website.
To be sure, Coinbase and BitGo each have their strengths. Namely, they each have a sizable user base.
Coinbase's acquisition of Xapo gives it control over approximately 4% of the total Bitcoin supply (860,000 btc). Currently, 2.5% of the total BTC is under its custody. Grayscale is one of the largest crypto asset managers, with around $3 billion in assets managed by Coinbase.
According to reports, BitGo has $2 billion in assets under custody. Meanwhile, novice Fidelity's custody business offers a complementary brokerage business to help clients send orders to exchanges when they want to trade. Hosting is just one part of what these companies do. Those fees, which hovered around 100 basis points last summer, are fast approaching zero. In addition to custody, Coinbase also has an exchange business. BitGo also plans to launch a premium brokerage business.
As for Bakkt, futures contracts may be part of a broader effort to help it enable regulated price discovery. That's something COO Adam White hinted at during his time at FIA Boca.
“Bakkt fundamentally believes that price discovery will happen in an end-to-end regulated market, and most of the price discovery will happen in the spot market, but it will move to the futures market.” Adam White mentioned.
The shift could help assuage regulators' concerns that they have rejected exchange-traded funds, which they feared would depend on prices in unregulated spot markets.
