Attracting institutional investment money seems to be the new holy grail of cryptocurrency, just shy of Mainstream acceptance.
There are powers of money floating through the institutional investment sphere, currently tied up in stocks, bonds, and other financial instruments. Bringing that money into cryptocurrency would increase the total market cap of the sphere by orders of magnitude.
In addition to the financial benefits, a large surge of institutional money would give cryptocurrency the legitimacy it needs to really make inroads into Mainstream acceptance and adoption.
When Goldman-Sachs or Bank of America finally starts basing major business plans around movements in the cryptocurrency market, the thinking goes, cryptocurrency will have graduated from technophile toy to serious financial tool.
Enter Bakkt. Bakkt plans to enter the cryptocurrency market with an open platform for all manner of cryptocurrency services, including trading and warehousing.
What sets Bakkt apart from the pack is its backers and its founding company. Bakkt is a product of the same company that spawned the vaunted New York Stock Exchange, and it plans to enter the market with the support of a self-described “marquee” of big names — including BCG, Microsoft, and Starbucks.
Simply put, it’s institutional investment geared toward creating more institutional investment.
We’re going to take a look at what Bakkt is, what it plans to do, and what the market is saying about this potentially game-changing entity.
An Introduction to Bakkt
In August 2018, Bakkt’s parent company Intercontinental Exchange released a statement announcing its intention to use Microsoft’s cloud service Azure to “create an open and regulated, global ecosystem for digital assets.”
This new company, dubbed Bakkt, would start right off the bat with the inclusion of federally regulated markets and auxiliary services, like warehousing.
It would even feature Bitcoin to fiat conversions, a feature that is rare on cryptocurrency exchanges and one of the major differentiators between market-movers and also-rans. In total, Bakkt expects to serve a digital marketplace that moves $270 billion per year.
“In bringing regulated, connected infrastructure together with institutional and consumer applications for digital assets, we aim to build confidence in the asset class on a global scale, consistent with our track record of bringing transparency and trust to previously unregulated markets,”
Intercontinental Exchange founder and CEO Jeffrey Sprecher said in the statement.
Bakkt’s flagship offering a U.S.-based futures exchange and clear-house plan for single-day, physically delivered Bitcoin contracts coupled with physical warehousing.
Eventually, Bakkt hopes to service all levels of the cryptocurrency supply chain, from casual investors to mega-merchants, like Starbucks.
In fact, Starbucks will be the first major merchant to work with Bakkt on ways to “convert their digital assets into U.S. dollars for use at Starbucks,” according to Maria Smith, Starbucks vice president for partnerships and payments.
Other investors and potential Bakkt partners include a laundry list of well-known financial institutions, including Alan Howard, Pantera Capital, Fortress Investment Group, Eagle Seven, Galaxy Digital, Protocol Ventures, Susquehanna International Group, and Horizons Ventures.
“Bakkt is designed to serve as a scalable on-ramp for institutional, merchant and consumer participation in digital assets by promoting greater efficiency, security, and utility,” Bakkt CEO Kelly Loeffler said in the statement. “We are collaborating to build an open platform that helps unlock the transformative potential of digital assets across global markets and commerce.”
What the Market Is Saying
It’s likely no coincidence that “Bakkt” sounds suspiciously like “backed.” After all, it’s a project of the company that founded the New York Stock Exchange, it’s built on Microsoft technology, it has a slew of big-name institutional investors already on board, and its first major merchant is none other than the ubiquitous Starbucks.
In the wildest fever dreams of cryptocurrency enthusiasts, it’s hard to imagine a more complete slate of market players. All that’s missing is an Amazon endorsement and a gilded letter from the U.S. Securities and Exchange Commission promising Bakkt unfettered access to the market.
And yet, that’s close to the reality that Bakkt is proposing. By beginning operations with an eye toward regulatory scrutiny, Bakkt is attempting to leapfrog the regulatory hurdles that have challenged cryptocurrency throughout its decades-long rise — and in 2018, in particular.
Crypto market observers have identified a few key advantages of this new player, which all seem positive from an adoption point of view.
The first is the obvious nod toward institutional investment. Bakkt has that covered with its initial slate of venture capital firms.
If these firms are willing to stick their necks into the crypto arena, so the thinking goes, it’s just a hop-skip-jump for even larger firms to come onboard. This is particularly likely if Bakkt plays by the regulatory rules and secures approval for its operations moving forward.
Oddly, this argument also works in reverse. If big-ticket investors are fine with Bakkt’s operations, then it follows that small-time investors should come on-board, as well. It’s a known fact in the financial world that little money follows big money, the way little fish trail bigger fish to feed on scraps.
If a large venture capital firm is confident in Bakkt, the firms that look to it for guidance will follow suit. This has the potential to bring in a slew of capital from previously untouched resources — credit unions, retirement accounts, and 401(k)s.
By nature, these types of holdings need to be conservative. They exist, after all, to help investors prepare for the future. Without significant institutional backers, the crypto market has been famously volatile. In kind of a vicious circle, that lack of institutional money due to volatility has prevented an injection of capital which could keep volatility to a minimum.
It’s obvious, then, that Bakkt’s entry into the market can only calm the fears of naturally conservative investment vehicles.
This works on a tech angle, as well. Bill Gates, founder of Microsoft, has been famously hard on cryptocurrency, going so far as to say that it’s killed people in a “fairly direct way.”
And yet Bakkt is built upon Microsoft’s cloud services platform Azure, which implies at least a little tacit endorsement of cryptocurrency as a legitimate entity by the tech giant.
Since Microsoft enjoys a hefty majority share of the personal computing and general software markets, it’s likely that smaller developers will follow in its wake as far as integrating Bakkt’s offering into their own products.
Few companies set out to build applications or platforms based on unproven or little-adopted technology. With Microsoft at the forefront, it’s virtually guaranteed that developers will fall in line.
Bakkt Bitcoin Futures Arrive September 2019
In September 2019 Bakkt launched its first physically-settled bitcoin futures products, and to much ado.
Since New York Stock Exchange owners Intercontinental Exchange (ICE) announced the Bakkt platform and associated plans for bitcoin futures, it’s been the hope of many stakeholders in the cryptoeconomy that the enterprise’s rollout could mark a turning point for mainstream attention around cryptocurrencies.
Of course, it remains to be seen how precisely Bakkt will fare in the years ahead. But the venture has major backers, and as of September 23rd it now has major derivative offerings — daily and monthly contracts that track the bitcoin price — that in the very least will further legitimize the cryptocurrency going forward and introduce so-called “digital gold” to new audiences.
The first Bakkt Bitcoin Futures trade was executed at 8:02pm ET at a price of $10,115
— Bakkt (@Bakkt) September 23, 2019
On the news, Bakkt chief executive officer Kelly Loeffler echoed that sentiment, saying the start of the company’s derivatives operations should lead to more mainstream investors feeling comfortable with bitcoin:
“As institutions enter this emerging asset class, they will continue to look to secure infrastructure and the regulatory certainty that it provides. Importantly, these futures contracts now serve as benchmarks established by a trusted price discovery process upon which investors can rely.”
The futures launch went according to schedule, as Loeffler revealed last month that September 23rd was the target release date for the derivatives. However, Bakkt had previously delayed the offerings multiple times as it worked to finalize its preparations.
With the futures contracts now publicly available, Bakkt joins the likes of mainstream derivatives marketplace CME Group, which launched its first bitcoin futures product in December 2017.
The Chicago Board Options Exchange (CBOE) shuttered its own bitcoin futures unexpectedly earlier this year, meaning Bakkt and CME Group are the main providers in the arena for now.
A New Kind of Bitcoin Futures, But Low Demand to Start
Notably, the Bakkt Bitcoin Futures products are the first in the U.S. to deliver BTC to buyers at contracts’ expirations. These deliveries are facilitated by the exchange’s custodial wing, Bakkt Warehouse.
However, the derivatives didn’t experience a considerable flurry of trading activity to start.
Low volume on the contracts’ first day led to a boon of social media commentary, with some poking fun and others expressing surprise at the perceived lack of interest around the offerings. By the end of Monday, 71 monthly contracts and 2 daily contracts representing 72 bitcoin — or roughly $700,000 at current prices — had been purchased.
Larry Cermak, Director of Research at cryptocurrency trade publication The Block, noted on Twitter that initial volume around Bakkt’s futures was all but meager compared to the almost $50 million in bitcoin futures that CME Group handled intraday at that point. But Cermak wasn’t pessimistic about Bakkt’s long-term prospects.
In comparison, CME Bitcoin futures had a 24-hr traded volume of $48.2M. pic.twitter.com/4BlvxnZejj
— Larry Cermak (@lawmaster) September 23, 2019
“The activity will take week/months to get going and I really think it will,” Cermak wrote.
Three Arrows Capital CEO Su Zhu was of the same mind, having estimated earlier that “Bakkt will be likely first a trickle and then a flood.”
Bakkt Opens Its Bitcoin Custody Warehouse to “All Institutions”
In November 2019 Bakkt opened the doors of its custody services to all the institutions of the world.
In operating as a limited liability trust company in New York, Bakkt announced the pivot on November 11th upon the startup having received approval from the New York Department of Financial Services (NYDFS) to “offer bitcoin custody to all institutions.”
With the NYDFS’s approval, the facility can now directly secure enterprises’ bitcoin holdings even if futures aren’t involved.
And while saturation is already accruing near the top of the cryptocurrency custody sector, Bakkt is hoping to beat out the competition by offering its clients a superior service. As the company’s chief operating officer Adam White explained on Monday:
“While technology provides the foundation by which we securely store customer funds, the Bakkt Warehouse employs extensive physical, operational and cybersecurity safeguards too. Our relationship with Intercontinental Exchange (NYSE: ICE), a Fortune 500 company that owns and operates the market infrastructure upon which the world’s largest financial institutions already rely, enables us to uniquely address client needs in the digital asset custody space […].”
Per Bakkt, the first oncomers to use its widened custody offering will be cryptoeconomy mainstays Galaxy Digital, Pantera Capital, and Tagomi.
It’s Not All About Institutions
Bakkt is also focusing on efforts to cater to merchants and consumers.
In Ocotober 2019, Bakkt revealed the coming launch of a consumer app, which will be aimed at helping users pay for goods and services from merchants using cryptocurrencies, among other things.
“Our vision is to provide a consumer platform for managing a digital asset portfolio, whether they wish to store, transact, trade or transfer their assets,” Bakkt chief product officer Mike Blandina said at the time.
On the flip side, the ICE-backed company is also developing a merchant portal, of which popular coffee chain Starbucks will be a launch partner.
Bakkt Bitcoin Futures Volume Explodes Past $30 Million
Bakkt reported in the middle of the day on November 2019 that the volumes for its Bitcoin futures reached a record high, surpassing 4,443 contracts — up 60% from the exchange’s last record-setting day last week.
This is equivalent to about $32 million as of the time of writing this. (For some perspective, the cash-settled Bitcoin contracts from the CME Group have seen nearly $500 million worth of volume today, though that market is nearly two years old.)
Sure, this is far from the hundreds of millions (sometimes billions) that market leaders Binance, Coinbase, and Kraken see each every day, though it’s an improvement from the sub-$2 million daily volumes seen at Bakkt earlier this month.
Two months after their debut, Bakkt Bitcoin Futures reached a record high of 4,443 contracts traded today – up over 60% from our last record-setting day
We look forward to building on this momentum as we approach the launch of the Bakkt Bitcoin Options contracts on Dec 9th
— Bakkt (@Bakkt) November 27, 2019
It is important to note that at the time of Bakkt’s above tweet, the trading day wasn’t even complete. As of the time of writing this article, the exchange has seen nearly 5,000 Bitcoin worth of contracts traded, which is not a sum to sneeze at — that’s for sure.
While Bakkt’s volumes are a sign of institutional trading interest, Bakkt’s open interest metrics are signs of institutions’ propensity to hold Bitcoin.
Cryptocurrency data Twitter page Ecoinometrics recently noted that the open interest in the Bitcoin futures contracts has surged by hundreds of BTC over recent days. This implies that “some people are seeing the price dip as a good occasion to get in long.”
Oh boy! Look at that surge in open interest! Some people are really seeing this price dip as a good occasion to get in long.
— ecoinometrics (@ecoinometrics) November 26, 2019
Bakkt Looks to Build on Momentum
Bakkt is looking to build on the exponentially-increasing volumes of its futures market.
Just last week, the Intercontinental Exchange — the owner of the New York Stock Exchange and seeming majority owner of Bakkt — revealed that its Singapore branch will be launching the Bakkt Bitcoin Cash-Settled Monthly Futures for the island state.
The cash-settled contracts will be settled against the prices of Bakkt’s flagship product, the U.S.-regulated Bitcoin futures that were mentioned earlier in this article. Lucas Schmeddes, president of ICE Futures and Clear Singapore, said on the matter:
“Our new cash settled futures contract will offer investors in Asia and around the world a convenient, capital efficient way to gain or hedge exposure in bitcoin markets.”
The options contract will allow institutional investors to “hedge or gain bitcoin exposure, generate income, and offer cost and capital efficiencies,” according to a blog post on the matter.
While it isn’t clear if the launch of these products will have a material impact on the Bitcoin market, investors are hoping that this will draw in more institutional players, thus increasing the chance that money enters the market and pushes prices higher.
Will Bakkt Bring Mainstream Acceptance?
ICE’s backing of Bakkt cannot be overstated, at least when it comes to the exchange’s potential.
In owning and operating some of the world’s largest mainstream exchanges and marketplaces, ICE is as well positioned as any company when it comes to having the resources and know-how to help spearhead the cryptocurrency exchange of the future.
This dynamic has some projecting that Bakkt has what it takes to become one of the most successful crypto exchanges ever. To be sure, only time will tell if the platform does end up rising to the top of its field. But betting against ICE is indeed a big bet, and they’re betting Bakkt will prove fruitful.
Finally, there’s the real holy grail — Mainstream acceptance. This is often the hardest thing to get. Large financial institutions and technology companies alike burned a lot of their public clout in the years since the Great Recession of 2008.
Large banks caused many folks to lose their homes via complicated and opaque financial movements, and technology companies wantonly sold private data for a profit while neglecting to keep their own systems secure.
In fact, these twin failings are part of the reason cryptocurrency came to the fore when it did.
That said, the retail investor still has most of its money and its tech tied up in these folks, and with that comes a certain level of forced trust. The average person has to believe that Microsoft and their local branch of a major bank have most of their interests at heart. If nothing else, the average person knows they have far more experience in the field.
This, then, marries two Mainstream concerns for an overall win. Crypto seems more democratic, but it’s untested. Big business seems more knowledgeable, but the trust component has been damaged.
By opening themselves up to the crypto market, these large entities are simultaneously giving credibility to cryptocurrency and choice to consumers. This may be the thing that really pushes cryptocurrency out of its current financial backwater and into everyday dealings.
After all, what could be more everyday than grabbing a morning coffee at Starbucks?