Babbitt Column | Gu Yanxi: Six Impacts of Bakkt on the Bitcoin Trading Market

1. Competing with existing Bitcoin exchanges

As a tradable product, Bitcoin is still in a relatively awkward position in the US securities market. It is now generally considered a virtual commodity. Therefore, the exchanges that provide physical transactions to it are accepted by the market. These exchanges are like Coinbase and Kraken. But such exchanges are not federally-restricted exchanges officially recognized by regulators. Due to this status, many institutional investors are unable to conduct bitcoin spot trading on such exchanges. Since Bitcoin is clearly not a security, it cannot trade on exchanges like the NYSE and Nasdaq. But at the same time, institutional investors have a strong need to trade bitcoin.

The CFTC has always been very open and leading in the treatment of bitcoin. In 2017, it awarded LedgerX a derivative trading license and clearing license for encrypted digital assets. This immediately prompted CBOE and CME to start applying for trading licenses for Bitcoin futures. At the end of 2017, LedgerX launched a one-year option product based on Bitcoin. Both CBOE and CME have also launched Bitcoin futures trading products. But bitcoin spot trading has not been officially launched in federally-compliant compliant exchanges. The demand for institutional investors to trade bitcoin stocks has therefore not been met. One of Bakkt's goals is to solve this problem. The CFTC approved Bakkt's one-day, physical delivery of bitcoin as bitcoin futures. This product is actually a bitcoin spot trading product with leverage. Since the ICE Futures Exchange, which works with Bakkt, is a federally compliant exchange, institutional investors can arbitrarily trade Bitcoin stock on this exchange.

Bakkt is part of ICE, one of the three largest exchange groups in the United States. Institutional traders of derivatives, especially institutional traders of commodity derivatives, use the various exchanges of ICE to conduct transactions. Thanks to the characteristics of this physical delivery, one-date Bitcoin futures product offered by Bakkt, it is actually offered by institutional investors to provide a bitcoin spot trading opportunity. Such a product is different from the bitcoin futures trading products offered by CME. Therefore, Bakkt and CME formed a differentiated competition in bitcoin. In terms of products, Bakkt actually competes more with Coinbase and Kraken and other bitcoin spot exchanges in the world. Due to the characteristics of Bakkt compliance and its influence in the derivatives trading industry, the amount of bitcoin transactions on this exchange will rise rapidly. While this exchange attracts Bitcoin trading volume increments, it will certainly attract a portion of the trading volume of other Bitcoin trading venues.

Second, other exchanges bitcoin spot transaction price will be subject to the transaction price of Bakkt

As a trading product, Bitcoin should be the largest number of exchanges in the world, and these exchanges are constantly appearing. Due to the unregulated nature of these exchanges, fraud and market manipulation in these exchanges are inevitable. This does not guarantee the authenticity of the price of the bitcoin spot transaction. In terms of compliance and products, Bakkt provides a very good guarantee for the fairness of bitcoin spot trading prices worldwide. On the product side, since it is a one-day and physical delivery futures product, the trader must have a sufficient amount of bitcoin in kind to support its trading on the day. The one-day deadline and the nature of physical delivery create very high demands on traders. The ability of traders to manipulate market prices in cash is greatly diminished. Because of the compliance characteristics of this exchange, it must use various means to prevent manipulation in the market. The various technical means previously used by the ICE Trading Group for trading market monitoring can be used. This will further curb manipulation in the market. The trading price of this product of Bakkt will have a very strong credibility on a global scale. When the bitcoin spot trading prices of other exchanges deviate from the price of Bakkt at any time, these trading prices will be forced to trade at the price of Bakkt. The fairness of the price of bitcoin spot transactions worldwide is therefore better guaranteed.

Third, the settlement price of Bakkt's daily delivery of futures products will become an important basis for related businesses worldwide.

Due to the fairness of Bakkt's bitcoin one-day futures trading price, the daily settlement price provided by it will be recognized within the market. Any business that requires Bitcoin daily settlement price will refer to Bakkt's settlement price. Before this. The settlement price of CME is a comprehensive index provided by the Facility Group. However, since the exchanges in which the price of bitcoin is provided are not compliant exchanges, this settlement price still does not have sufficient credibility. The compliance nature of the Bakkt exchange and the characteristics of its products will allow the global financial business to believe in the settlement price of its bitcoin.

Fourth, the volatility of bitcoin spot trading prices will be reduced

The volatility of Bitcoin trading prices far exceeds that of any other financial product. This is because Bitcoin is still in the early stages of development, and it is trading in a 7×24 way on a global scale, so its high volatility is normal. In addition, bitcoin prices are easy to manipulate. This is also a major cause of its high volatility.

Due to the compliance characteristics of the Bakkt exchange, it can effectively prevent the manipulation of bitcoin market prices in its trading venues. This will reduce the volatility of Bitcoin trading prices. In addition, since the trading price of Bitcoin in other trading venues will be subject to the trading price of Bakkt, the volatility of bitcoin prices worldwide will decrease.

5. Will further promote the acceptance of Bitcoin by other financial regulators around the world.

In the US trading market, before Bakkt, there were already CBOE, CME and LedgerX offering Bitcoin derivatives trading. Bakkt's launch is a further recognition of bitcoin transactions by US financial regulators. This will definitely affect the policy of Bitcoin by regulators in other parts of the world. Bitcoin, as a trading variety, will be more widely accepted on a global scale. There will be more compliant exchanges starting to trade Bitcoin.

6. Further promote the demand for compliant encrypted digital money custodians

Bakkt is a digital asset escrow transaction. Trading services for its Bitcoin futures products are provided by its existing exchanges. The escrow of digital currency transactions cannot be completed in existing securities custodians. It will be done separately in a dedicated hosting agency like Bakkt. As there are more compliant bitcoin exchanges, there will be more demand for such custodians. Technology companies offering encrypted digital asset hosting services will therefore have more opportunities.

Bakkt's online presence has a completely different impact on different groups in the industry. But in general, this is the same as the law of any emerging industry. An emerging industry brings very good profit opportunities. Early entrants in this emerging industry gained early-stage dividends. Because of the strong demand for products in this new industry, the early stage of the industry was the seller's market. Any company that sells related products can make a profit. In the early days of this industry, users' requirements for products were not high. This is true in the emerging industries of the medical and beauty industry, mobile phones, PCs and refrigerators. However, with the further development of the industry, the market demand for products is getting higher and higher. A company that can survive and develop must be a well-managed company. The characteristics of the product itself are becoming less and less important at this stage. More important is other aspects of business operations. In the encrypted digital asset industry, this same rule applies.

For the encrypted digital asset trading business, in the early days, there would naturally be users to trade when providing a trading platform. But when companies like Bakkt enter the market, trading services are already fiercely competitive. Most importantly, the foundation of this market is still growing rapidly. The early success models of the industry are now clearly no longer replicated. The current market poses a huge challenge to existing and planned entry service providers. Bakkt's launch will directly affect Coinbase and Kraken's business, but it also does not indirectly affect trading service providers in other regions. How to win in such a market is worthy of serious consideration by the participants. The correctness of the strategy is far more important than the diligence in execution.