Produced | Odaily (ID: o-daily)

Produced | Odaily (ID: o-daily)

Affected by this, the encryption market became active again. BTC once broke through the $10,000 mark, and the increase was close to 40% in two days.

On October 26, Bakkt, known as the "light of the bull market", issued a document stating that the single-day trading volume of its Bitcoin futures contract reached 1,179 BTC, setting a new historical record.

However, Bakkt transaction volume still fell short of expectations. Compared with CME (Chicago Mercantile Exchange), there is still a big gap, which has a trading volume of about 50,000 BTC during the same period.

Previously, the reason why the market placed high hopes on Bakkt was inseparable from the performance of CME and CBOE in 2017.

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Source: unfolded

On the first day of Bakkt's launch, the transaction volume was only more than 70 BTC; two days after the launch, the price of BTC fell in a waterfall, falling to $7,700 at one point, with a maximum drop of 20% within the day.

The same compliance, but a completely different situation, can not help but make people worry, does Bakkt's performance indicate that compliance exchanges are in a difficult situation and are no longer recognized by the market?

Why did Bakkt fail, and are institutional investors ready to enter the market? The market has picked up recently, and the trading volume of Bakkt has picked up. Does it mean that institutional users are entering the market?

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Why did Bakkt encounter Waterloo?

"The short-term failure of Bakkt does not mean the failure of Bakkt, let alone the failure of compliance." AAX Exchange CEO Thor Chan told Odaily. In its view, only by accepting supervision and moving towards compliance, can exchanges embrace institutional users and introduce incremental funds to the encryption market.

According to CME data, open interest on CME has continued to increase over the past few quarters, and the number of open interest contracts in the third quarter of 2019 increased by 61% compared with the same period last year.

At the same time, trading volumes on the non-compliant exchange BitMex continued to slump. On October 11, the intraday trading volume of BitMex was only 948 million US dollars, setting a new low in several months.

A series of data shows that compliant exchanges are increasingly favored by the market, leaving less and less space for non-compliant exchanges.

However, why did Bakkt, the highly anticipated compliance exchange, encounter Waterloo?

Thor Chan believes that, first of all, Bakkt’s threshold is too high, which hinders the entry of institutional investors and individual investors. This is the main reason why the launch has not been immediate.

As a compliant exchange, Bakkt is regulated by the US government and follows traditional market account opening rules. In addition to the need to pass KYC verification, institutional users also need to pass the CFTC (U.S. Commodity Futures Trading Commission) qualification review and 1 V 1 inquiry.

In itself, the decision-making process of institutional investors is long, and it takes a certain amount of time to enter the market. In addition, the entire review process is long and cumbersome, which is time-consuming and labor-intensive even for institutional users.

Individual investors are even more tortuous: they need to find a special intermediary - FCM (futures commission merchant) when trading on Bakkt. However, FCM does not directly deal with investors. Investors can only contact their brokers (brokers), thus forming an "intermediary intermediary" account opening process. However, the current FCM and Broker in the cryptocurrency market have not formed a climate, causing individual investors to be temporarily shut out.

"This has also led to many ordinary investors who want to enter the market, such as high-net-worth miners, either cannot find a good FCM, or are still on the way to get an account." King of Qitao Capital also expressed the same opinion.

Secondly, Bakkt's futures contracts adopt physical delivery, which has been sought after by many before the product goes online. It is considered to be the differentiation and competitiveness of Bakkt. However, it will take some time for the traditional financial market to accept physical delivery.

Bakkt's "physical delivery" means that Bitcoin is delivered when it expires, and the recognition of Bitcoin in the traditional financial market needs to be further deepened. Many traditional financial people are still not optimistic about the development prospects of Bitcoin, and they are urged to hold Bitcoin through "physical delivery", provided that they need to recognize Bitcoin.

"Cash settlement is more attractive to speculative investors. Those speculative investors choose to invest more in CME Bitcoin futures contracts to obtain cash income, and the market demand will be higher." Founder of CloseCross, a decentralized market forecasting platform Vaibhav Kadikar explained. The 75-fold difference between CME and Bakkt's trading volume on the first day also verifies that cash delivery seems to be more attractive.

Furthermore, the Intercontinental Exchange (ICE), the parent company of Bakkt, does not support Bakkt enough.

ICE, the parent company of the New York Stock Exchange, has a large number of institutional user resources, but it has not converted to Bakkt's customers. Since its launch, Bakkt's trading volume has not seen a significant increase. The current highest single-day trading volume is only 1,197 BTC. During the same period, CME's single-day trading volume exceeded 13,000 BTC.

Finally, in terms of external factors, the launch of Bakkt did not come at a good time, and market transactions began to slump.

"In the early stage of Bakkt's launch, the market was too optimistic, so there was a gap; CME's contract was born in a bull market, and the market sentiment was high." Thor Chan explained.

In December 2017, CBOE and CME launched Bitcoin futures contracts. At that time, after the market experienced a "94" waterfall fall, it ushered in a retaliatory rebound, and the wealth-creating effect of Bitcoin also attracted a large number of emerging investors to enter the market.

By the time Bakkt went online, the wealth effect brought about by the IEO (Initial Coin Offering) at the beginning of this year had gradually faded away, the market stock funds were insufficient, and Bitcoin began to decline from a high of $14,000.

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AAX, which the London Stock Exchange is deeply involved in

In fact, in recent years, it has been common for traditional financial stock exchanges to enter the encryption market, and most of them are concentrated in the exchange field.

Recently, the cryptocurrency exchange AAX, which is backed by the London Stock Exchange, announced that it will be launched soon, and the front alliance of traditional capital to fight against the encrypted world has also expanded. AAX thinks it has some unique advantages over others.

Needless to say, the confidence of AAX cannot be separated from the strong support of LSE.

Unlike the New York Stock Exchange behind Bakkt, LSE will be deeply involved in AAX operations and bring a large number of potential institutional user resources to AAX, thanks to LSE's partner network.

"The London Stock Exchange has a Partner Network (partner network), which has access to more than 300 companies, including large financial institutions, regulatory agencies, and banks and financial institutions such as Merrill Lynch, Morgan Stanley, Goldman Sachs, UBS, and CICC. giant.” Thor Chan explained, “Our strategic cooperation with the London Stock Exchange makes AAX the highest-level partner in this network. Through this network, we can directly connect with the institutional clients of the London Stock Exchange, which is the only one in the market. (resources) that exchanges don’t have.”

Odaily's query found that companies such as British Telecom Group (with a market value of 25 billion US dollars), trading and clearing technology provider Cinnober, etc., are all on the Partner Network list of the London Stock Exchange. With this layer of network, AAX may open a new breakthrough for institutional users to enter the market.

In terms of operation, Thor Chan told Odaily that, as a strategic partner, LSE will also provide AAX with related operations and brand promotion support, including the risk control design of the exchange. “LSE engineers are running AAX with us during the beta phase.”

In addition, as an established exchange, LSE not only has experience in compliance, but also has more resources, which can help AAX improve its compliance system and enhance internal self-regulation.

"We refer to the UK FCA (UK Financial Conduct Authority) regulatory framework to strengthen internal self-regulation." Thor Chan explained that in addition to self-regulation, AAX is also actively applying for licenses in multiple regions and markets around the world.

To meet the huge volume of transactions, solid technical support is the foundation, and LSE has a leading matching engine technology.

In January 2019, the London Stock Exchange Group (London Stock Exchange Group, referred to as "LSEG") announced to provide technical support for the AAX exchange - Millennium matching engine technology.

For institutional users, due to their huge volume, they have higher requirements for transaction performance. Millennium is a professional engine for institutional users. It has been used in more than 40 traditional financial markets around the world, including first-tier markets such as the Singapore Stock Exchange and Hong Kong Stock Exchange.

The features of the engine include: high concurrency, which can handle millions of transactions per second; low latency, with an interval of 0.0001 seconds between orders; high stability, with an accuracy rate of 99.999%.

After using the matching engine of the London Stock Exchange, AAX can handle complex and large institutional transactions under various types of market conditions, and effectively respond to violent market fluctuations,

On top of technical support, AAX has optimized the user review process and product design.

AAX CEO Thor Chan believes, “Compared to Bakkt, we can lower the entry barrier for institutional users.”

Thor Chan said that the current review process of AAX for institutional users is not as cumbersome as Bakkt.

Similarly, AAX has relatively low barriers to entry for individual investors. Users can trade through KYC verification after registration on the website without going through an intermediary.

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After a long period of polishing, the organization that welcomes the runners to enter the venue

The birth of a compliant exchange is destined to be full of thorns.

In August 2018, ICE announced the launch of Bakkt. However, it took more than a year and experienced three delays before Bakkt was finally launched.

The root cause of the delay is mainly that Bakkt faces difficulties from regulatory and technical testing. Bakkt, unwilling to give up halfway, finally resolved them one by one.

On the one hand, Bakkt successively acquired DACC (a digital asset custody company) with a DCO license, and obtained a custody license issued by the New York State Regulatory Department of Financial Services (NYDFS) in August 2019, solving compliance issues.

On the other hand, since Bitcoin futures involves multiple processes such as trading, clearing and custody, Bakkt has conducted repeated technical tests.

Polishing technology and testing have also become the main theme of AAX's work in the past 10 months.

Thor Chan said that in the cooperation with the London Stock Exchange, the biggest difficulty is how to put the matching system of the financial market into the digital currency market, which took a lot of time for the team.

For example, there are several decimal places after the decimal point in the cryptocurrency market, but only two decimal places in the traditional financial market, so the trading system needs to be modified; in addition, the traditional financial market can be closed, how to ensure that the matching engine runs 7 * 24 uninterrupted in the encrypted market , is also a challenge; moreover, the system of the London Stock Exchange can do futures and spot, but the perpetual contract in the cryptocurrency market is an innovative product that is different from the traditional market, which also needs to be adjusted.

From the perspective of technology and compliance, Bakkt has achieved industry foresight.

Although the data at the beginning of the launch was not outstanding, in the past month, Bakkt's transaction volume has risen steadily and set new historical records many times. Among them, on October 26, it reached 1179 BTC. Although there is still a big gap compared with CME in the same period, Bakkt's upward momentum is already very obvious.

"I think traditional institutions need to give some time to react. We understand that institutional users' confidence in cryptocurrencies is increasing, and we ourselves are very confident in the digital currency market." Thor Chan said.

Thor Chan’s words are not unreasonable. According to CME data, institutional investors’ interest in the cryptocurrency derivatives market is gradually increasing. “Institutional liquidity remains strong with 454 new accounts (in Q3 2019).”

While institutional users are running into the market, cryptocurrencies are trending well under the influence of policies.

On October 25th, BTC rebounded from $7,400, and broke through $10,000 on the 26th, an increase of nearly 40% in two days.

The market has begun to pick up, and AAX will be officially launched in November.

"At the end of November, we will hold the AAX London conference on the London Stock Exchange." Thor Chan explained that the London Stock Exchange will provide support for the AAX conference, and there will also be a bell ringing event on site. "We will also invite representatives from partners and super leaders to go to the London Stock Exchange to watch the ceremony and ring the bell together."

Facing the wave of digital currency, whether it is the New York Stock Exchange, Nasdaq, or the London Stock Exchange, these three world's top exchanges do not want to miss it.

Bakkt and AAX have been launched successively, marking that both the New York Stock Exchange and the London Stock Exchange have officially entered the market. The power to promote the cryptocurrency wave has once again strengthened, and it is expected to become another booster for the market.

This also sends a signal to the traditional market: cryptocurrency has already embarked on the road of compliance, and it is only a matter of time before it is accepted by the mainstream society.

(For details, please visitwww.AAX.com ）