Overview Overview
Bakkt, a new cryptocurrency trading platform launched by Intercontinental Exchange (ICE), is finally open for business. After nearly a year of delays and bounces, Bakkt has now received approval from the Commodity Futures Trading Commission (CFTC) and the New York State Department of Financial Services to launch in late September.
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In fact, before Bakkt, there were many attempts to be a compliant bitcoin futures exchange. For example, the Chicago Mercantile Exchange CME and the Chicago Board Options Exchange CBOE, both of which are leaders in the futures industry. However, CBOE decided to cancel the Bitcoin futures contract product not long ago, because the trading volume is gradually sluggish; CME cannot be recognized by some investment institutions because it is not "physical delivery".
Bakkt enters the game - already designed game
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Bakkt is a game for institutions
The primary purpose and winning goal of the game is to provide a legal and compliant investment channel for institutions to invest in Bitcoin. Only compliance is the only way for institutional investors to enter the currency circle. In order to be fully compliant, Bakkt must prepare at least three licenses, which is very difficult for other exchanges. In order to meet compliance requirements, it is necessary to be independent and hold corresponding licenses in the three processes of "trading", "clearing" and "custodial", so as to ensure the stable transaction speed of institutional investors and the legal delivery process. Funds are absolutely safe.
Specifically, each of these different processes:
For the "trading" and "clearing" parts, DCM and DCO licenses issued by the US Commodity Futures Trading Commission CFTC are required.
Source: Standard Consensus
Source: Standard Consensus
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Pieces of the game - Bakkt
Last August, the Intercontinental Exchange (ICE) announced the establishment of Bakkt, which attracted the attention of the entire cryptocurrency market. Bakkt is a new company led by former ICE investor relations chief Kelly Loeffler, who promises to bring bitcoin to the mainstream.
Therefore, Bakkt's top priority will be to make Bitcoin a reliable and safe product for key customers who are currently avoiding Bitcoin-large global investment institutions.
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And the Intercontinental Exchange (ICE), founded by Loeffler's husband Jeffrey Sprecher and the backer behind Bakkt, has a reputation for accomplishing the impossible.
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Chess player of the game - ICE
ICE was founded in 2000 as an over-the-counter trading platform for energy, metals and other commodities. Backed by Goldman Sachs, Morgan Stanley and Deutsche Bank, the company set out to use internet technology to improve the commodity trading experience — specifically, to make transactions cheaper and more transparent.
Intercontinental Exchange is the largest exchange in the world by operating revenue. In 2017, Intercontinental Exchange's operating income reached US$5.8 billion, ranking first in the world; its net profit exceeded US$2.5 billion, ranking second in the world; its return on equity reached 15.5%. In the composition of operating income, the income from transaction clearing business accounts for the highest proportion.
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The shareholders behind ICE are very powerful, almost including the entire Wall Street giant. Currently, 94% of Intercontinental Exchange's equity is held by large European and American private equity funds and other institutions. Among the top ten shareholders, eight institutions are from the United States, and the other two are from the United Kingdom and France. In addition, ICE's shareholding is relatively dispersed, with the first and second largest shareholders holding slightly more than 7% of the shares, and institutions such as BlackRock holding less than 5% of the shares. ICE’s behavior has largely been endorsed by its shareholders.
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Source: Standard Consensus
Source: Standard Consensus
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What game did Bakkt play?
Its early marketing really overshadowed that, in my opinion. Bakkt It is currently positioned as a qualified institutional custody company. First, custody businesses will store the bitcoin that backs their contracts, and it’s safe to assume they will soon open their doors to hedge funds, asset managers and other clients.
So, Bakkt is not yet an exchange.
Custody is Bakkt's core business. So, in a way, it is competing with ErisX, Seed CX, and other derivatives platforms on the futures front. But its real competitors are BitGo, Coinbase Custody and Fidelity. The value proposition of using Bakkt as a custodian is clear. Backed by the Commodity Futures Trading Commission ( CFTC ) and the State of New York, this is a true institutional grade offering.
Bakkt describes its business on its website this way: "With state-of-the-art physical and cybersecurity, institutional-grade technology and governance, and the support of insurance to freeze digital assets in wallets, Bakkt is leveraging the network that the NYSE relies on. Security tool that introduces a new standard in digital asset custody."
Of course, Coinbase and BitGo also have their own advantages. Namely, their respective large user bases. After Coinbase acquires Xapo, the total amount of bitcoins it controls will reach about 4% of the 860,000 bitcoin supply. Currently, 2.5% of all bitcoins are under its custody. Coinbase manages approximately $3 billion in assets. BitGo has $2 billion in assets. At the same time, Fidelity provides custody services to help customers send orders to exchanges when they trade. Hosting is only part of the business development of these companies. Coinbase operates an exchange business in addition to its custody business.
As for Bakkt, the futures contract may be part of a broader effort in its cryptocurrency business to achieve a regulated bitcoin price.
It has greater autonomy than other companies in the market in terms of launching new lines of business. It will be easier to obtain investment and the size of the trust will be larger. Firms can operate in the wider financial services sector. Maybe it's ETFs, maybe it's asset management, maybe even the long-awaited 401(k) plan (here 401(k) refers to the pension fund that operates the 401(k) account). And this also means that Bitcoin has successfully entered the $4 trillion market, which will increase the price of the currency in the near future, and in the long run, it has won an admission ticket to the adult poker table.
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Changes Bakkt brings to the game
1. Physical delivery
Bakkt’s futures contracts will be physically settled, not cash. Currently, futures contracts are settled in cash. This means that when the purchased contract expires, market participants pay or receive the difference in futures expiration in fiat currency, such as U.S. dollars. Cash-settled futures contracts have had little impact on demand for bitcoin, as market participants are simply buying exposure to the cryptocurrency rather than actual bitcoin. This is what sets Bakkt apart from its competitors. For the first time in the history of cryptocurrencies, there will be a platform offering futures contracts where buyers can expect physical delivery of bitcoin. This means that Bakkt must withdraw a large amount of bitcoins from the circulation of bitcoins to meet the needs of customers. This also means that operations of this magnitude will have a real impact on the price of Bitcoin.
2. Bakkt provides a federally regulated and compliant system for institutions to buy Bitcoin
During the 2017 bull run, Bitcoin climbed to an all-time high of around $20,000. Rising prices have been largely driven by retail money, while institutional investors have been forced to sit on the sidelines. Existing laws discourage large-scale players such as investment banks from investing in assets such as bitcoin that have not yet been approved by regulators, or worse, prohibit them from doing so altogether.
With Bakkt, institutional investors now have a platform to purchase Bitcoin using a portion of assets under management. That's because ICE operates companies that have been approved by the Commodity Futures Trading Commission ( CFTC ) and the New York Department of Financial Services ( NYFDS ). All investments through Bakkt are legal and tax-compliant. This will encourage institutions that want to invest in Bitcoin but do not have suitable investment targets to participate in the Bitcoin market.
3. Help retail bitcoin payments
Institutional money coming into Bitcoin is just the tip of the iceberg. With Bitcoin gaining widespread adoption as a reliable payment solution, retail payments are actually a big fish in a pond. So far, Bakkt has partnered with Starbucks to build a template for a low-cost system for processing small bitcoin payments.
With this system, even those who do not understand Bitcoin can easily buy Bitcoin and use it as an effective payment solution. This could attract more Bakkt users, creating more demand for Bitcoin. Therefore, Bakkt will create an upcycle in demand for Bitcoin.
Conclusion
Conclusion
