Facebook is planning to launch Libra, and the People's Bank of China is preparing to launch the central bank's digital currency. Although the two major events that will affect the digital currency industry in 2019 are huge, they are still in the preliminary design, and it is not known when they will bear fruit.In contrast, the third major event in the industry that will happen on September 23: the Bakkt exchange officially launched physical delivery of Bitcoin futures, which is particularly exciting.
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Ace Army in Digital Currency
Bakkt is a subsidiary of the well-known InterContinental Exchange (ICE). As a giant in the traditional financial trading industry, Intercontinental Exchange is known to everyone in the global financial industry. Intercontinental Exchange is the second largest network of regulated exchanges and clearing houses in the world, the second largest futures exchange in the United States and the third largest futures exchange in the world. It also owns the New York Stock Exchange, the Canadian Futures Exchange, and the Paris Stock Exchange. 14 securities and futures exchanges, including London International Financial Futures Exchange, and 5 clearing houses, trade more than half of the world's crude oil and natural gas refining futures.
Bakkt was born to win at the starting line. Not only are the "pro-mothers" famous, but the "godmothers" are also famous.
In August 2018, the digital currency industry was still in the cold winter stage. After its establishment, Bakkt successfully completed the first round of financing of 182.5 million US dollars. 12 shareholders including Boston Consulting Group and Goldman Sachs Galaxy Digital.
With the help of a strong shareholder background and strong financial advantages, Bakkt has formed a luxurious star lineup: CEO Kelly Loeffler is a veteran employee of Intercontinental Exchange Group and the wife of Jeff Sprecher, CEO of Intercontinental Exchange Group. The chief operating officer chose Adam White, vice president of Coinbase, a veteran digital currency exchange. Adam White joined Coinbase in its early stages and helped build Coinbase into one of the largest cryptocurrency exchanges in the United States. Bakkt also invited Rich Mackey from Rosenthal Collins Group (RCG), a futures broker with a history of nearly a century, as a vice president.
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Leading Bitcoin Pricing Fist Products
However, the first product launched by Bakkt was almost difficult to produce. Bakkt originally planned to launch Bitcoin futures in December 2018, but due to the difficulty of physical delivery of Bitcoin futures far exceeding expectations, it has been repeatedly postponed, and it will not be officially launched until September 23 this year.
Before Bakkt launched physically-delivered bitcoin futures, the Chicago Mercantile Exchange CME had launched cash-delivered bitcoin futures in 2017. So how is Bakkt's physically delivered Bitcoin futures different?
We need to know a bit about futures and futures delivery. Futures are a type of derivative that buys or sells the future price of a traded commodity. On the stipulated deadline of the futures contract, both parties to the transaction need to deliver the commodity to be traded according to the pre-determined price rules.Delivery is the last important link in futures trading.The delivery of futures is divided into physical delivery and cash delivery. The physical delivery means that the seller hands over the traded commodity to the buyer according to the specified time and the agreed quality and quantity. The cash delivery means that the buyer and the seller refer to the spot price, calculate the profit and loss of each other, and complete the delivery by cash transfer.
Since physical delivery needs to solve a series of complicated issues such as transportation, storage, qualification certification, and ownership transfer of physical objects, cash delivery highlights its convenience and speed in comparison. Most of the financial and commodity futures in the world are settled in cash, and only a small number of commodity futures are physically delivered.
That being the case, why don't commodity futures around the world give up physical delivery and all use cash delivery?Because physical delivery is the most critical link linking the commodity futures market and the spot market, and is the most important guarantee for the commodity futures market to perform the two functions of price discovery and hedging,It can be said to be the magic needle for the operation of the commodity futures trading system, and it plays an irreplaceable important role. Due to the difficulty and importance of physical delivery, an exchange that can achieve physical delivery will naturally become the storage, trading and pricing center of the commodity.
This is also the ultimate goal of Bakkt spending huge financial and material resources and overcoming various difficulties to launch physical delivery bitcoin futures: to become the global bitcoin storage, trading and pricing center.
As an encrypted digital currency, Bitcoin is very different from other futures commodities, and its advantages and disadvantages are as obvious. Its advantages lie in its ease of transfer and unified commodity standards. The disadvantage is that there is no mature digital currency regulatory system and ecosystem, and there is a huge risk of being stolen by hackers in custody and storage. At the same time, it faces many strict anti-money laundering and anti-terrorism laws and regulations. This poses a huge challenge to achieve physical delivery and is why Bakkt's product launch has been repeatedly delayed.
Although CME quickly launched Bitcoin futures in 2017, in order to avoid the problem of physical delivery, cash delivery was adopted, and the spot price of other exchanges had to be used for settlement. CME settlement uses the comprehensive transaction price of bitcoin spot on 5 exchanges Coinbase, Kraken, Bitstamp, itBit and Gemini.
The question is, can the spot exchange price used for settlement truly reflect the true market price of Bitcoin? Not necessarily, Binance, Huobi, and Okex, the major exchanges with the highest bitcoin trading volume in the market, are not included in the CME spot price calculation system. Although the five exchanges adopted by CME have relatively high transparency, their trading volume cannot represent the entire market. In addition, the digital currency exchange industry itself lacks unified regulatory standards, and the price formation mechanism of each exchange is different, resulting in CME’s final calculation. The comprehensive bitcoin spot price of BTC often deviates from the mainstream bitcoin spot price.
In an efficient trading market, the price of futures will be consistent with the spot price in the end, so as to ensure that the futures market can play the important functions of hedging and price discovery. It is difficult to achieve this goal by relying on the cash-delivered bitcoin futures market alone, so the powerful bakkt pushes for physical delivery of bitcoin futures, and has worked hard on license applications and product design.
Bakkt's current product structure consists of three parts: futures trading (ICE Futures US), clearing (ICE Clear US) and custody (Bakkt warehouse). Bakkt has obtained a trading license (Designated Contract Markets) and a clearing license (Derivatives Clearing Organizations) from the Commodity Futures Trading Commission (CFTC), and a custody license from the New York Financial Services Authority. In the link, the company with the most complete license, the safest, transparent and compliant.
Baktt's products include not only monthly bitcoin futures, but also daily ultra-short-term bitcoin futures, so that bitcoin can be settled by spot delivery every day, traders must have a sufficient number of bitcoins To support the transaction of the day, it will greatly reduce the possibility of market price manipulation.secondary title
Far-reaching impact on the digital currency industry
The much-anticipated Bakkt product will be launched soon, attracting the attention of everyone in the industry, and will have a profound impact on the digital currency industry.
First, open the door to the digital currency in the traditional financial world.
Brendan Blumer, CEO of Block.one, once said: "95% of the obstacles to institutional acceptance of blockchain assets are related to custody." Between traditional finance and the world of encrypted digital currencies, there is an insurmountable gap: digital currency hosted. In view of the fact that the digital currency represented by Bitcoin is very easy to be stolen, and the market is full of "dirty coins" of unknown origin, that is, digital currencies obtained by criminals engaged in illegal industries. Therefore, most traditional financial institutions are The reason is that they dare not get involved in digital currency unless there is a trustworthy digital currency custody institution that acts as a "digital currency bank".
The key to digital currency custody is security. Custodian security has three meanings: anti-hacking in technology, anti-theft in operation, and compliant and legal custody services. Among them, technical security is relatively easy to solve; in terms of operation, as long as the credit endorsement of a large company can reduce the possibility of self-stealing; the most difficult thing is to obtain regulatory approval for custody services. Bakkt's successful launch of spot-delivered bitcoin futures means that the custody services and processes adopted by Bakkt are recognized and accepted by regulators, which undoubtedly gave the digital currency industry a shot in the arm, and more companies are pouring into the large market of digital currency custody , and then more effectively serve enterprise-level customers involved in digital currency, including banks, trading platforms, hedge funds, and even traditional family funds and pension funds.
Secondly, the formation of an authoritative price mechanism for Bitcoin has accelerated the launch of Bitcoin ETFs.
The credibility of Bakkt, coupled with its unique physical delivery product design, and fully compliant operations, actually provides large institutions with an opportunity to conveniently hold and trade Bitcoin spot. With the influx of large institutions and the increase in transaction volume, Bakkt is bound to occupy an important weight in the Bitcoin trading market, forming a pricing standard for Bitcoin and becoming an important reference for Bitcoin prices worldwide.
The US Securities Regulatory Commission SEC has repeatedly rejected the application of the Bitcoin ETF. The most direct reason is that it cannot confirm that the custody of Bitcoin and the market price are not manipulated. In June of this year, SEC Chairman Jay Clayton reiterated the prerequisites for the approval of Bitcoin ETF: "Custody is the main problem, how does the SEC really know that investors own digital assets?"Now Bakkt is about to launch a one-day futures based on physical delivery. Its price is fair, transparent, and safe, and it can fully meet the regulatory requirements for the custody of Bitcoin ETFs, thus eliminating the biggest obstacle for the launch of Bitcoin ETFs.
Finally, Bakkt will impact the existing exchange industry ecology.
For existing futures and spot exchanges, Bakkt's impact on them is obvious and direct. Relying on the customer resources, technology and brand advantages of the parent company Intercontinental Exchange, coupled with Bakkt's unique physical delivery one-day futures and the custody business it provides, Bakkt's futures products can not only bring a large number of new users, but also directly Grab old customers of existing futures exchanges.
Spot exchanges will also be seriously threatened, mainly from two aspects. One, the Bitcoin stock in the exchange wallet will decrease. Because Bakkt futures products require physical delivery, traders need to transfer bitcoins to Bakkt in advance. However, the new supply of bitcoins is limited, and the new bitcoins mined are currently only 1,800 per day. The increment is limited, and the stock becomes the focus of competition. The more bitcoins stored on the Bakkt exchange, the less bitcoins stored on other exchanges. Second, the business volume of spot exchanges will decrease. Investors who buy Bakkt’s one-day-due Bitcoin futures, if they do not reverse sell and close their positions on the same day, then after the physical delivery on the same day, it is equivalent to owning the corresponding physical Bitcoins, which means that investors can trade through safe, transparent and reasonable contracts. The standard futures market can be realized in a disguised form, which is very attractive to institutions. Bakkt further squeezes the living space of existing spot exchanges through one-day futures products, and intensifies the competition and evolution of the exchange industry.
Bakkt, which is full of halo, has launched a unique star product, which is of course a long-term benefit to the industry, but this does not mean that Bitcoin will inevitably rise sharply, because there are bloody lessons before.. In December 2017, CME launched Bitcoin futures, which was undoubtedly a great news that also caused a sensation in the industry at the time, but Bitcoin then went out of a big bear market, falling from 18,000 US dollars to 3,000 US dollars at the end of 2018. Lessons learned from the past, Bitcoin is not yet a mature investment product, and its short-term ups and downs are affected by too many factors.
It may be wishful thinking of investors to think that the launch of physical delivery futures on Bakkt will detonate the bull market.
