Bakkt: A Global Ecosystem for Regulated Digital Assets

November 12, 2018

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Bakkt is a new company from the Intercontinental Exchange (ICE), the organization that owns and operates the New York Stock Exchange. ICE has significant experience operating security exchanges and already owns a number of exchanges around the world.

Institutional money is coming! At least that’s what we’ve been hearing from the cryptocurrency media for the larger part of this year. Investors have had a tough time in 2018 and it’s not hard to see why many are searching for a catalyst to reignite the bulls as we head into the final months of the year. Will the big players save us from these quiet markets? Bakkt seems to think so.

The Hunt for Yield

The total amount of money (market cap) floating around in the cryptocurrency markets pales in comparison to those locked up in equity, bonds, derivatives and other traditional financial instruments. With interest rates at record lows and in some countries at negative levels, investors are looking for new ways to make money.

Bakkt estimates that the digital asset marketplace could be worth around $270 billion dollars. Many early crypto investors have reported returns in excess of 10 or even 100 times in certain cases. Volatility in other markets remains low and equity prices are at near all-time highs. It appears that with the announcement of their federally regulated and trusted exchange Bakkt may attract big investors into cryptocurrency in the search for yield.

What Is Bakkt?

A recent press release via Business Wire went on to explain the purpose of the project:

“…[Bakkt] intends to leverage Microsoft cloud solutions to create an open and regulated, global ecosystem for digital assets.”

Along with Microsoft, the project has already secured partnerships with the likes of Starbucks, BCG, and other big names. One of the first pilots will be to allow consumers to buy their daily morning dose of caffeine at Starbucks with Bitcoin.

Bakkt’s main offering is expected to be a futures exchange and clearinghouse for single day, Bitcoin contracts for physical delivery. A rather amusing term when considering Bitcoin’s purely digital nature. Regardless, this is still good news for the market overall as trading will involve the actual buying and selling of cryptocurrency. In comparison, exchange traded funds don’t actually trade in Bitcoin and are instead settled in USD.

Bakkt looks to expand their existing expertise into the blockchain arena

Bakkt will also provide a warehousing solution. While they gave no details at the time, they will presumably follow other cryptocurrency exchanges and offer cold-storage options in the coming months. The August press release noted that the futures and warehousing platform would be available as soon as this month (November 2018).

Investors of the Bakkt ecosystem include the likes of Pantera Capital, Susquehanna International, and the highly vocal founder of Galaxy Digital Mike Novogratz, who already has a stake in a fair few cryptocurrency pies.

Barriers to Entry

Despite the optimism outlined by the project, there are still a number of obstacles that face institutional investors looking to get involved in crypto.

Custodial Services & Regulation

Getting hold of and securing crypto assets in large quantity is still a concern for many would-be buyers. There probably isn’t a month that goes by without news of a hack or security flaw highlighted somewhere. Managing your own money can be stressful. Managing the money of a pension or retirement fund is another matter altogether.

The Bakkt ecosystem plans to provide an institutional-grade custodial service from the get-go. Furthermore, while other projects and exchanges have suffered from regulatory troubles, Bakkt will be working with the CFTC and other regulators to re-assure institutions that any potential investments will be compliant before trade begins.

Liquidity

There is no guarantee that contracts will be easily tradeable right from the start. But, given ICE’s deep exchange experience, they should be able to attract a number of capable market makers to get the ball rolling.

Criticisms

ICE’s focus on the project is clearly on providing the regulation needed for large players to safely invest. Cryptocurrency, however, was designed to be a deregulated worldwide exchange of value. Yet, Bakkt intends to create an open yet regulated global ecosystem of digital assets.

This statement appears to contradict itself and it’s unclear how the company plans to handle regulation in other countries where it has no authority. Moreover, questions remain on how Bakkt differs from other well-established exchanges. Coinbase and Gemini have significantly more experience in the crypto space and include institutional trading services.

In Closing: Bakkt

Will institutional buyers really usher in the next wave of the cryptocurrency bull market? Despite plenty of predictions from traders, tweeters, and hopefuls alike, it’s almost impossible to tell. Regardless, this is still good news for crypto. More exposure to digital currencies can only be a good thing.

ICE runs the largest stock exchange in the world. The introduction of this new platform indicates that mainstream adoption may be just around the next corner. Bakkt is not offering anything particularly new to the crypto investment landscape. They are, however, bakkt by a highly trusted name and several big companies. That alone might be all that’s needed to tip the scales in favor of the next flood of money into the markets.

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