Can Li Ka-shing's Bakkt really make Wall Street buy Bitcoin?

After putting the pigeons in the currency for more than half a year, people finally ushered in good news – the Bitcoin Futures Exchange Bakkt Bitcoin futures contract is being tested and is expected to be officially launched at the end of September.

More than a year ago, Bakkt announced that it had received $183 million in financing from 12 top institutions. Even in the bear market, its valuation exceeded $740 million.

People regard Bakkt as the light of a bear market. The market believes that traditional institutions are waiting for a formal channel to enter the market; as long as the market is supported by traditional institutional compliance tools, the future cryptocurrency market will certainly expand tenfold or even hundreds of times, and the currency price will also follow the admission funds. Growth has risen.

But this is not an easy task. Since August last year, Bakkt, which has been postponed many times, faces multiple regulatory difficulties. The Bakkt opening test seems to mean that the launch of compliant Bitcoin futures products is just around the corner. Industry interpretation:

“Regulators have turned green for Bakkt”.

When regulation and compliance are no longer a problem, accepting the test of the market has become a new challenge. With a compliant channel, will the organization really enter the market? What is the mentality of institutional investors in investing?

NYSE parent company enters the cryptocurrency circle

In August 2018, the ICE Intercontinental Exchange announced plans to establish a subsidiary, Bakkt. In ICE's expectations, Bakkt aims to create an open, regulated global ecosystem for the digital asset market.

The advancement of the ICE Intercontinental Exchange is clearly the first nerve that Bakkt has provoked people. As the world's second-largest regulated exchange and clearing house operations network, ICE's business covers 14 securities and futures including the New York Stock Exchange, the Canadian Futures Exchange, the Paris Stock Exchange, and the London International Financial Futures Exchange. Exchange, and 5 clearing houses.

The introduction of Bitcoin futures is the first step in Bakkt. Unlike CME and CBOE, which already have Bitcoin futures products, Bakkt's bitcoin futures are delivered in real bitcoin rather than in dollars.

Soon, ambition Bakkt announced that it has received $183 million in financing from 12 investors, including Li Ka-shing's Victoria Harbour investment, Tencent's largest shareholder Naspers, Microsoft Venture Capital M12, Goldman Sachs Galaxy Digital, Boston Consulting Group, Intercontinental Exchange (ICE), etc.

This list of gold-rich investors is clearly enough to be the second trigger for the detonation of the financial world. What the market is looking at is its regular army as a traditional financial industry. It not only leads Bakkt in the process of compliance, but also has the unlimited potential to open the Wall Street capital valve.

This scene is so familiar. Two years ago, it was also in the bear market. The Chicago Mercantile Exchange Group (CME, "Chiba Business") officially launched the Bitcoin futures product, a sensational encryption circle.

The world's largest and oldest futures exchange is open to Bitcoin. Since then, Bitcoin has ushered in a big bull market for the entire cryptocurrency circle for a year.

Two years later, Bakkt returned with an upgraded version of Bitcoin futures, which undoubtedly added to the high hopes of opening up the bull market.

Bakkt paves the way for traditional institutions to enter the market?

In the past year, Bitcoin's yields have continued to outperform almost all assets. However, considerations including compliance and financial security have made traditional financial institutions' funds stagnate against cryptocurrencies.

Bakkt, born with a gold spoon, bears the role of becoming a model of compliance and paving the way for large institutions to enter the market.


Criteria for cryptocurrency exchanges

“The reason why traditional funds don’t allocate bitcoin is first, they are compliant and cannot be configured.” Liu Yang, a traditional securities practitioner, revealed to Odaily’s Planet Daily that “the big institutions are chasing very tightly, and they are stuck in the tax payment process first. You can say that you are not a financial product."

The importance of compliance is self-evident. Previously, at the beginning of the launch of the Gemini exchange with Wall Street financial background, industry insiders revealed to the Odaily Planet Daily that its valuation was higher than that of the largest cryptocurrency exchange, precisely because of its compliance and license. .

But compared to the Bitcoin ETF, the bitcoin futures products that Bakkt is preparing to launch clearly have more optimistic regulatory expectations. Former Suning Financial Block Chain Leader Hong Yining told the Odaily Planet Daily that the CFTC responsible for supervising futures products has always been more open to Bitcoin. There have been precedents for the approval of CME and CBOE non-physical delivery futures, provided that the exchange Solve the tasks of trusteeship, confirmation, and anti-money laundering involved in the physical delivery process.

In the market expectation, whether the CFTC is more open-minded, or the strong background of Bakkt, such as the parent company of the New York Stock Exchange, the industry is quite optimistic about its compliance process.


Different from CME and CBOE physical delivery mode

Previously, there were no non-compliant bitcoin futures, and the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) had previously launched bitcoin futures. Unfortunately, CBOE, which was caught up by the latecomer CME, became even more bleak. And ended the last bitcoin futures contract transaction on June 20th, Beijing time.

Compared to CME and CBOE cash-settled bitcoin futures products, Bakkt bitcoin futures are settled using bitcoin. The latter's highlight is that when the contract is closed, the real BTC must be used, and a large amount of bitcoin needs to be reserved, which is undoubtedly a big advantage for the spot market.

Improve the basic solution of asset custody

Physical delivery has higher requirements for exchanges, and futures exchanges that are settled in bitcoin require solutions for custody and warehousing and delivery.

In addition, the absence of cryptocurrency asset custody has also been a hindrance to institutional funds entering the cryptocurrency market. Encrypted assets are currently facing the risk of loss of private keys, hacking and stealing money, and the need for professional third-party custodians to conduct asset custody, so that institutional users can dispel the suspicion and enter the game with ease.

The compliant hosting plan is not only the global asset management giant Fidelity, the technology giant IBM, the world's largest digital currency trading Cinbase is in the field of layout, but also Bakkt is working hard.

However, the trust license responsible for custody is the biggest uncertainty in the current Bakkt official launch.

Bakkt's online time has been postponed repeatedly. In an interview, J. Christopher Giancarlo, chairman of the US Commodity Futures Trading Commission (CFTC), talked about the reasons for the blockage of the Bakkt proposal. He said that one of the challenges facing the organization is to assess how futures exchanges store cryptocurrencies.

In order to comply with regulatory requirements, in January of this year, Bakkt launched a delivery warehouse (“Bakkt Warehouse”) and filed a BitLicense application with the New York State Financial Services Authority (NYSDFS) in April this year to qualify as its own delivery warehouse. The primary compliance program for custodian identity. However, it has not yet obtained the status of a qualified custodian recognized by the CFTC.

For the problem of delay in passing, the Institute for the Advancement of the Economy told the Odaily Planet Daily that due to the lateness of the requirements for compliance and escrow of encrypted digital assets, there is no precedent for US regulators to refer to, so the approval of qualifications is extremely Be cautious, and because of the anonymity of encrypted digital assets, it hides its custody and ownership.

For exchanges, physical delivery may have additional risks than cash delivery:

1. Warehouse default. That is, the delivery warehouse cannot deliver the digital assets that meet the requirements of the futures contract to the standard warehouse receipt holder within the time limit, which may include the loss of the bitcoin in the warehouse, the wrong address transmitted by the warehouse, and the like.

2. Lack of hedging. At present, companies offering digital asset insurance on the market are rare, and it is difficult for exchanges to pass on this risk.

3. Or lack of enough bitcoin to register in the warehouse. Many physical Bitcoin holders may not be willing to pay taxes for trading digital currencies. Once they enter the market, the physical bitcoin registered for storage will be fully incorporated into the financial system's view, which may result in insufficient exchange warehouses. Registered bitcoin available for trading, or caused abnormal price fluctuations. This is different from a spread contract, which can be created out of thin air.

On April 29, Bakkt announced the acquisition of Digital Asset Hosting Corporation (DACC). CEO Adam White said that DACC's native support for 13 blockchains and more than 100 assets will be an important accelerator for Bakkt. Clearly, DACC is an important addition to the new regulatory services.

In addition, Bakkt said it will also work with BNY Mellon, which will establish a “geographically distributed” private key storage system for Bakkt. To hedge risk, Bakkt will also provide insurance for offline storage. White said that Bakkt has purchased a $100 million policy from the world's leading insurance company for assets in the cold wallet. Digital currency analyst Joseph Young commented on this: Bakkt is expected to change the landscape of the bitcoin market through compliance hosting and insurance.

The latest news is that the Bitcoin futures settlement platform Bakkt will begin testing on July 22. On July 18th, the board of directors of the New York Stock Exchange (NYSE) held a launch ceremony for Bitcoin settlement futures. The foreign media believes that the event has shown that Bakkt has obtained the approval of the US Commodity Futures Trading Commission (CFTC) through self-certification. After a long period of negotiations, the old rules and regulations have also been adjusted.

This is at least a good sign, and the Nuggets have finally sailed slowly.

Are institutional investors really willing to enter the market?

If Bakkt's compliance program is really implemented, then for institutional investors, compliance is no longer a problem.

But as a wild faction in the financial circle, Bitcoin is more of a new thing for traditional investment institutions. Can we really hope that Bakkt's Bitcoin futures will bring more old money to the entire digital currency industry?

The Gansu Institute concluded that traditional investment institutions prudently invest in Bitcoin mainly because of three points:

1. The most important reason for traditional investment institutions is the lack of compliant standard products and custodians. As a result, Bitcoin is more similar to alternative assets such as wine and painting, and it is difficult for fund organizations to be included in the assets.

2. According to the different attributes of institutional investors, the investment targets of most funds are limited, such as stock-type, bond-type, and private equity funds. These funds have signed contracts with investors at the beginning to agree which assets can be invested. So even if the fund manager is personally optimistic about the encrypted digital currency, it can't invest.

3. Encrypted digital currencies seem to have no intrinsic value on the surface, or cannot use traditional valuation methods to calculate intrinsic value, resulting in many investors “don't understand” or think that their investment margins are extremely low, leading them to Can't afford to be interested.

Bakkt is working hard to resolve the first two points, but the third point, "Bakkts" can't change for a while.

“In general, an institutional investor conducts qualitative and quantitative analysis when investing in a new category. Qualitative is to look at the industry, consider industry trends and current policies that benefit the industry, and quantify is to look at it. Valuation model.” An industry insider explained to Odaily Planet Daily the institutional mindset of institutional investors.

Value investing is the investment philosophy of most traditional financial institutions. Through the valuation model to calculate and analyze the investment target, the investment institution needs to seek more rational data support when making investment decisions.

In fact, the current stock market valuation model is very complete, DCF (cash flow discount method), P / E (price-earnings ratio) and EV / EBITDA (enterprise value multiple) three common valuation methods are common in the military Number of roads. Gold also has a set of applicable cost-benefit valuation methods when it comes to valuation.

But in the world of Bitcoin, no institution currently has a valuation model for Bitcoin, which is a big threshold for Bitcoin to enter traditional financial institutions.

“People think that Bitcoin is still very difficult to estimate. The key is to estimate by what kind of money, whether by currency or by asset. If the currency depends on the value of its corresponding economy, the asset depends on scarcity or future cash flow. Wang Fang, an analyst in the securities industry, believes that there is no suitable valuation method for Bitcoin, so organizations cannot invest in it.

“We need to know the whole environment when we invest in a thing, that is, we can judge and perceive the risk of the entire Bitcoin operation, and we cannot rely on suggestions or guidance from external organizations.” Another traditional securities practitioner, Zhang Jian, admits that most of the traditions The organization has not yet thought about how to value Bitcoin.

“No one can even say the reason behind every bitcoin price rise and fall.” An investor commented,

“In this 24-hour trading market, there are thousands of investment targets, and the bull market is not defined.”

However, some people hold different views. Song Shuangjie, CEO of Tong Zheng Tong Project, holds a completely different view:

"Bitcoin still has an estimated model, digital gold, and the worst case, the valuation can be aligned with gold."

In his view, incorporating a low-relevant asset into the portfolio will significantly improve the performance of the portfolio. And the organization incorporates Bitcoin into the organization's portfolio and makes decisions based on simple historical data backtesting.

In fact, the concept of using Bitcoin as digital gold has not been recognized by the entire financial industry. The valuation problem of Bitcoin is still an unresolved pain point.

The Coin Research Institute believes that there is only a cost valuation method, which can be used as a reference for the valuation of Bitcoin. However, the cost valuation is also affected by the price of the currency itself, that is, the currency price affects the computing power, and then the calculation affects the digging. Mine difficulty; and since the bitcoin mining difficulty adjustment is a two-week cycle, the cost valuation method can be used to estimate the price downline within a week or two, so this valuation method only makes sense within one or two weeks. For the investment institutions looking at the long-term, the significance is not great.

Institutional investors have entered, or are illusions?

For a long time, the advancement of institutions has always been recognized as the beginning of an industry's mad growth.

When people look for the rising logic behind the skyrocketing bitcoin, speculation about "institutional investor admission" is always the first to be mentioned.

But this statement is almost invisible except for information from Grayscale Investments. Although the founder of the grayscale is a traditional secondary market, it is a native emerging cryptocurrency fund. It seems that the traditional financial institutions in the true sense have failed to enter the market.

At the end of May 2019, a chart published by Grayscale showed that the company managed a total of approximately $2.1 billion worth of cryptographic assets. The Bitcoin Investment Trust (GBTC) reached $1.97 billion, accounting for nearly 94% of the market. . The Institute of Currency Security said that

“The size of US$2 billion can be ranked in 200-300 in 2,294 ETFs (mainly public funds) in the United States, and the scale is about 90% of US stock ETFs.”

(As of May 31, 2019, the types of investment funds issued by the grayscale and the products invested by each fund)

After the recent bitcoin rally, BitMEX co-founder and CEO Arthur Hayes also overturned the agency's boost, saying:

“This rise is still the result of retail investors. I compared the trading volume of CME and other exchanges. If institutional investors really believe in the prospect of cryptocurrency, they will definitely buy futures directly on CME. The warehouse contract will explode."

Zhao Changpeng, CEO of the Currency Exchange, holds a similar view. He has said that retail investors are still playing a key role in pushing the price of Bitcoin to rise sharply, and have not seen institutions grow at a faster rate, despite the institutional and retail transactions of the currency. Both are growing, but retail investors account for about 60% of the transaction volume, roughly the same as last year.

Arthur Hayes analyzes the mentality of institutional investors:

“They definitely want to trade in a multi-billion dollar trading market, not a million-dollar market. Institutional investors can buy Bitcoin futures on the CME to make a profit, but they don’t do it. This is not of much value to them or traditional investors."

Arthur Hayes points to the basic fact that the cryptocurrency market is too small for traditional institutions.

The market value of Bitcoin is more than $170 billion; in contrast, the market value of an Apple company is close to $1 trillion, much more than the entire cryptocurrency market. Obviously, the size of the cryptocurrency market cannot carry huge amounts of money.

A former Wall Street practitioner believes that for traditional institutional investors, not investing in bitcoin is because traditional businesses are enough to make money and do not need to open up new markets: "But many funds do not need to configure BTC and are very profitable."

“Blindly thinking that the launch of Bakkt is too optimistic to solve all problems, because the entry of traditional institutional investors is a systematic project.” Song Shuangjie said. The above-mentioned traditional fund practitioner Zhang Jian also acknowledged this point of view. He believes that the new investors are actually some “big individual investors, or part of large institutional funds.” The former can make quick decisions, but financial The organization is "very slow."

Nowadays, under the trend of bitcoin skyrocketing, for institutional investors who want to make heavy asset allocation, there will be more uncertain risk factors. And for traditional institutions, Bitcoin's existing valuation model is more suitable for analyzing short-term gains.

Obviously, traditional big money is invested in Bitcoin mining, and financial and technology giants such as the three major exchanges, Fidelity, JPMorgan Chase and Facebook are all arranging cryptocurrencies, but they are far from being swift in terms of regulation and decision-making.

Perhaps, when the Nuggets ship really sails and moves at a high speed, people will find that the capacity that the ship can carry is far less than the desire of people to go up.

(Note: Liu Yang, Wang Fang, and Zhang Jian are all pseudonyms in this article)

文 | 昕楠 Aloe

Produced | Odaily Planet Daily (ID: o-daily)

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