August 9. 2022. 2:55

The Daily

Read the World Today

Bakkt — a revolution in crypto trading?

Investors and traders become more and more interested in a crypto exchange called Bakkt. The Intercontinental Exchange, or simply ICE, is behind the development of the platform. This company also operates the New York Stock Exchange. The launch of the Bakkt did not only give cryptocurrency prices a new boost but also had an impact on decisions such as the approval of Bitcoin ETFs.

Innovative trading platform

Bakkt is an ICE project that opens up a crypto trading platform for investors and traders, allowing them to get fast and cheap access to trading regulated crypto products. Following the now announced futures on Bitcoins, other crypto-related trading instruments are likely to be added in the future. 

The exchange also wants to further improve the global infrastructure for digital assets. If this is successful, the U.S. SEC could also come to a different decision in the future, for example, regarding Bitcoin ETFs. The applications of three providers for a total of nine Bitcoin ETFs were rejected. However, these are currently under reconsideration. No decision has yet been made on another proposal.

New futures could boost trading activity

In all rejected applications, the ETFs were based on Bitcoin futures tradable on the CBOE or CME, which came to market nearly 3 years ago. The SEC continues to question whether the futures market for Bitcoin is large enough to meet demand and provide the necessary liquidity.

The two futures offerings from the CBOE and CME are the only approved crypto products of their kind in the U.S. so far. In Europe, there are some certificates, funds, and ETNs related to cryptocurrencies. In the US, providers have also found an alteative by offering ETFs on other cryptocurrency-related products. For example, ETFs there can be used to invest in young companies that work with the blockchain. Bakkt changes the situation and ensures that there is more liquidity in the market and also more trading activity. As a result, the SEC could then also come to a different assessment.

Futures contracts on Bakkt

The Bakkt Bitcoin Daily Futures Contract is a daily futures contract that is physically settled over Bitcoins. Physical may be a somewhat confusing term in this case, as Bitcoins do not physically exist, but merely exist as cryptographic keys in a wallet. Physical here means that all contracts provide for the delivery of Bitcoins from the Bakkt digital asset warehouse. The futures are held and stored by ICE's digital asset warehouse. However, all contracts are entered into with ICE Clear US, Inc. This company is responsible for settling the futures contracts.

Settlement in Bitcoins is the biggest difference between futures from the CBOE and the CME. Bakkt daily futures are quoted in dollars. Here, the price is quoted in dollars with up to two decimal places. The minimum price movement is 2.5 dollars. A daily price limit is not specified and a new contract is quoted every trading day on Bakkt. Settlement in Bitcoins is probably the biggest difference from the CBEO and CME bitcoin futures, which are settled in fiat currencies. Once an investor buys one of the Bakkt futures, the owner gets Bitcoins transferred to his account with the settlement. Bitcoins are thus physically deposited with these futures. When the futures contract is settled, the asset, i.e. one or more Bitcoins, or the right of ownership to this asset changes hands.

Short positions possibilities

If an investor enters into a short position, he must sell and also transfer the previously agreed number of Bitcoins to his contract partner at the likewise agreed price when the contract expires. If the Bitcoin price has become higher than before, an investor with a short position suffers a loss, while an investor who has entered into a long position exits the trade with a profit. Not enough custody solutions for institutional investors

Due to the lack of custody solutions, only a few institutional clients have been active in the crypto market so far. Bakkt does another step toward in this situation. Perhaps similar to Kriptomat, the Bakkt could play an even more important role than Bitcoin ETFs. Bitcoin futures could soon be followed by other crypto-related trading instruments at Bakkt. The launch of Bakkt helped the prices of cryptocurrencies to gain new momentum.

Shortly after their launch of the platform, one Bitcoin was worth more than $20,000. However, since it was also possible to take a short position for the first time, many investors also bet on falling prices, which was then the case in recent months. Bitcoin futures were responsible for both the rising and subsequently falling prices.

Bakkt advantages

Bakkt could well be off to a good start. It was only recently announced that Adam White, a former Coinbase employee, is going to work with an exchange as Chief Operating Officer. It is quite likely that Bakkt will soon be one of Coinbase's biggest competitors.

In general, the Bakkt platform today is characterized by the following features:

  • The platform so far has one key product - Bitcoin futures with physical delivery. At the end of the contract, investors receive a cryptocurrency rather than a fiat currency amount. In other words, when buying a USD/BTC futures, the user receives 1 Bitcoin to their account. At first, trading will take place using the most popular fiat: Dollars, Euros, and British pounds. In the future, it is planned to expand the list of supported currencies.
  • The platform uses the well-proven infrastructure of futures markets. Bitcoins are contained in the inteal storage of ICE. Contracts are cleared through the aforementioned ICE Clear US exchange.
  • All cryptocurrency transfers within the site are done off-chain. This is the very autonomy we mentioned in passing above. Transactions are not included in the blocks of the global network. There is no need to wait for the miners to process the transfer. This ensures a higher transfer rate of cryptocurrencies from the service to the user. Transactions are written to the main blockchain only when withdrawing funds to a third-party cryptocurrency wallet.
  • All users are required to undergo KYC - identity verification. This is how the platform protects itself from unscrupulous investors and prevents money laundering.
  • Bitcoins of institutional clients are insured for $125 million. This is the so-called guarantee fund, which will allow avoiding defaults in case of non-payment of obligations.
  • At the time of writing, the monthly futures trading volume is 18 BTC (one contract equals one Bitcoin). In principle, not a bad indicator for a platform that works for the first day.
  • The platform has minimum contribution thresholds. To open simple contracts with daily or monthly settlements, it is necessary to deposit 3,900 dollars on the account balance. The so-called speculative initial requirement is 4,290 USD. The initial simple deposit corresponds to the total amount of funds that must be provided to open a position. The speculative parameters refer to accounts whose owners speculate on movements in BTC quotes through futures. Goveing bodies, including the already mentioned Exchange Trading Commission, monitor market dynamics to ensure that there are no abnormal deviations from the current global value.

It is worth mentioning that the managers of the service did not initially plan to introduce a margin trading option. But literally a month before the launch it became known that over time, users will be able to trade with leverage. This will allow people with small initial capital (not everyone has an extra $3,900) to enter trading.

One of Bakkt's advantages is certainly it's backing from Wall Street. In addition to ICE, Microsoft and Starbucks are also participating as partners.

Innovative market model and minimization of risks

Bakkt is also hoping to get a patent for its market model. Investors and traders should be able to trade crypto products in a regulated environment. Bakkt also wants to reduce the risks involved in trading cryptocurrencies. Nevertheless, despite all caution, enough room for maneuver should remain for innovations.

For security reasons, among other things, strict requirements are placed on the full pre-funding of transactions. In addition, each customer will receive its own storage access. Thus, people do not have to work with cryptocurrencies themselves. All customer funds are also secured via a fund. The CEO of Bakkt, Kelly Loeffler, also believes that a regulatory framework is necessary, especially for young industries. She also sees a willingness on the part of the authorities to engage in dialog with the industry.

A bright future awaits Bakkt

If you are interested in the Bakkt crypto exchange, you are welcome to try it. Bitcoin futures could also be traded there. However, these are not based on fiat currencies like the Bitcoin futures of the CME and the CBOE, but directly on Bitcoins. Trading is in dollars, but settlement is in Bitcoins. Each futures contract has a delivery of Bitcoins associated with it.

Traders and investors are able to get quick and inexpensive access to crypto trading at Bakkt. Bitcoin futures may be followed by other trading instruments on cryptocurrencies. The exchange also aims to reduce risks in crypto trading by providing a secure regulatory framework. It also aims to improve the global infrastructure of the crypto market. This could then result in the U.S. SEC reconsidering its stance and allowing the launch of a Bitcoin ETF in the future. 

Bakkt is getting backing from Wall Street. Behind the trading platform is the ICE, the operator of the stock exchange in New York. In addition, inteationally active companies could be won as partners. Bakkt could further institutionalize and stabilize the crypto market. Already the enormous price losses ultimately had the effect that the market could stabilize and mature. In addition, the volatility of cryptocurrencies decreased. If further custody solutions are now developed, more and more institutional investors can enter the market. Author: Apostol Dmitry (ADE) 

[an error occurred while processing the directive]