Babbitt column | On-line physical delivery bitcoin futures, can Bakkt detonate the new bull market?

Facebook plans to launch Libra, the Chinese central bank is preparing to launch the central bank digital currency, and the two major events affecting the digital currency industry in 2019, although the momentum is huge, they are still in the preliminary design, I do not know when it will bear fruit. In contrast, the third major event in the industry that will take place on September 23: Bitcoin futures, which is officially launched on the Bakkt exchange, is particularly exciting.

Why can Bakkt attract industry attention? What is the uniqueness of its futures products and how will it affect the digital currency industry?

The trump card in digital currency

Bakkt is a subsidiary of the prestigious InterContinental Exchange (ICE). As a giant in the traditional financial trading industry, the Intercontinental Exchange is unseen in the global financial industry. Intercontinental Exchange is the world's second largest regulated exchange and clearing house operating network, and the second largest and the world's third largest futures exchange in the United States. It also owns the New York Stock Exchange, the Canadian Futures Exchange, and the Paris Stock Exchange. The 14 international securities and futures exchanges in the London International Financial Futures Exchange, as well as five clearing houses, trade more than half of the world's crude oil and natural gas refining futures.

Bakkt won at the starting line as soon as he was born. Not only the "pro-mother" is famous, but the "mothers" are also famous.

In August 2018, the digital currency industry was still in the cold winter stage. After the establishment of Bakkt, the first round of financing of 182.5 million US dollars was successfully completed, including Li Ka-shing's Horizons Ventures, Microsoft Venture Capital M12, Tencent's early shareholder Naspers, and famous 12 shareholders including Boston Consulting Group and Galaxy Digital, Goldman Sachs.

With a strong shareholder background and strong financial advantages, Bakkt formed a luxury star lineup: CEO Kelly Loeffler, a veteran of the Intercontinental Exchange Group and the wife of Jeff Sprecher, CEO of the Intercontinental Exchange Group. The chief operating officer chose Adam White, vice president of the old digital currency exchange Coinbase. Adam White joined the startup phase of Coinbase and helped Coinbase become one of the largest cryptocurrency exchanges in the United States. Bakkt also invited Rich Mackey, a nearly 100-year-old futures broker, Rosenthal Collins Group (RCG), as vice president.

Bakkt is a well-deserved and well-deserved resource. It is particularly popular in the digital currency industry, which is dominated by grassroots. For this reason, Bakkt has any wind and grass, and naturally it will become the focus of the industry.

Fist products that lead Bitcoin pricing

However, the first product launched by Bakkt was almost dystocia. Bakkt originally planned to launch Bitcoin futures in December 2018, but it was repeatedly postponed because the physical delivery of Bitcoin futures was much more difficult than expected, and will not be officially launched until September 23 this year.

Before the introduction of physical delivery of bitcoin futures by Bakkt, the 2017 Commodity Futures Exchange CME has launched bitcoin futures for cash delivery. So what is the difference between Bakkt's physical delivery of bitcoin futures?

We need to understand the delivery of futures and futures. Futures are derivatives of the sale and purchase of future prices of goods. At the deadline for the specified futures contract, both parties to the transaction are required to deliver the goods in accordance with the pre-determined price rules. Delivery is the last important part of futures trading. The delivery of futures is divided into physical delivery and cash delivery . The physical delivery means that the seller delivers the goods to the buyer according to the specified time and the agreed quality and quantity. For cash delivery, the buyer and the seller refer to the spot price, calculate the mutual profit and loss, and complete the delivery by cash transfer.

Since physical delivery needs to solve a series of complicated problems such as physical transportation, storage, qualification certification, and ownership transfer, cash delivery is convenient and quick. Most of the world's financial and commodity futures are delivered in cash, and only a small portion of commodity futures are physically delivered.

In this case, why do commodity futures in the world do not give up physical delivery and all are delivered in cash? Because physical delivery is the most critical link between the commodity futures market and the spot market, it is the most important guarantee for the commodity futures market to play the two functions of price discovery and hedging . It can be said that the operation of the commodity futures trading system is irreplaceable. effect. Due to the arduousness and importance of physical delivery, an exchange that enables physical delivery is naturally the center of storage, trading, and pricing for that commodity.

This is also the ultimate goal of Bakkt's huge financial and material resources to overcome the difficulties of launching physical delivery bitcoin futures: to become the storage, trading and pricing center for global Bitcoin.

As an encrypted digital currency, bitcoin and other futures commodities are vastly different, with the same advantages and disadvantages. Its advantages are easy transfer and unification of commodity standards. The disadvantage is that there is no mature digital currency supervision system and ecosystem, and there are huge risks of hacking and stolen in custody and storage. At the same time, it faces many strict anti-money laundering and anti-terrorism laws and regulations. This poses a huge challenge to real delivery, and is why Bakkt's product launch has been repeatedly delayed.

Although CME quickly launched Bitcoin futures in 2017, in order to avoid the problem of physical delivery, cash delivery was used, and at the time of settlement, the spot price of other exchanges had to be adopted. CME settlement uses the spot trading price of Bitcoin on five exchanges Coinbase, Kraken, Bitstamp, itBit and Gemini.

The question is, can the spot exchange price used at the time of settlement accurately reflect the real market price of Bitcoin? Not necessarily, the top exchanges in the market with the top trading volume of Bitcoin, such as currency, fire, and Okex, are not included in the CME spot price calculation system. The five exchanges used by CME, although relatively transparent, but the transaction volume can not represent the entire market, coupled with the lack of uniform regulatory standards in the digital currency exchange industry itself, the price formation mechanism of each exchange is different, resulting in the final calculation of CME The spot price of integrated bitcoin often appears to deviate from the spot price of mainstream bitcoin.

In an effective trading market, the price of futures will eventually match the spot price, so as to ensure that the futures market plays an important role in hedging and price discovery. It is difficult to achieve this goal in the bitcoin futures market where cash is delivered alone. Therefore, the strong bakkt pushes the bitcoin futures for physical delivery, and it is painstaking to apply for licenses and product design.

Bakkt's current product structure consists of three parts: Futures Trading (ICE Futures US), Clearing (ICE Clear US) and Hosting (Bakkt Warehouse). Bakkt obtained Designated Contract Markets and Derivatives Clearing Organizations from the Commodity Futures Trading Commission (CFTC) and obtained a escrow license from the New York Financial Services Authority, becoming the current digital currency industry, integrating spot and futures. The most comprehensive, safest, transparent and compliant company in the chain.

Baktt's products include not only the monthly cycle of bitcoin futures, but also the ultra-short-term bitcoin futures on a daily basis, so that Bitcoin can be settled on a daily basis, and the trader must have a sufficient number of bits. The currency is physical to support the day's trading, which will significantly reduce the possibility that market prices will be manipulated. Due to the short time, high frequency, and the fact that the spot delivery is the real basis, plus the Bakkt brand endorsement, and the application for the license blessing, the closing price of Bakkt's bitcoin date goods can reflect the price of the bitcoin market most realistically.

Far-reaching impact on the digital currency industry

The highly anticipated Bakkt products will be on the line, welcoming the eyes of everyone in the industry, and will have a profound impact on the digital currency industry.

First, open the door to the digital world of the traditional financial world. CEO Brendan Blumer once said: "95% of the institutions' barriers to blockchain assets are related to hosting." The traditional financial and encrypted digital currency world is separated by an insurmountable gap: digital currency Hosting. In view of the fact that the digital currency represented by Bitcoin is extremely vulnerable to theft, the market is full of unclear “dirty coins”, that is, the digital currency obtained by criminals in the illegal industry, so most traditional financial institutions are safe and compliant. The reason is not to dare to get involved in digital currency, unless there is a trusted digital money custodian that acts as a “digital currency bank”.

The key to digital currency hosting is security. Managed security has three meanings: technically anti-hacking, anti-theft and self-stealing in operation, and legal compliance of the custody service. Among them, technical security is relatively easy to solve; in terms of operations, as long as it is a credit endorsement of a large company, it can reduce the possibility of self-stealing; the most difficult part is that the custody service is approved by the supervisor. Bakkt has now successfully launched bitcoin futures for spot delivery, which means that the regulatory approval and acceptance of the hosting services and processes adopted by Bakkt has undoubtedly given the digital currency industry a boost, and more companies are pouring into the digital market. In order to more effectively serve enterprise customers involved in digital currency, including banks, trading platforms, hedge funds, and even traditional family funds and pension funds.

Second, the formation of the bitcoin authoritative price mechanism accelerated the launch of the Bitcoin ETF.

Bakkt's credibility, coupled with its unique physical delivery product design and fully compliant operations, actually provides a large institution with an opportunity to conveniently hold and trade Bitcoin stock. With the influx of large institutions and the increase in transaction volume, Bakkt will certainly have an important weight in the bitcoin trading market, forming a pricing standard for bitcoin, which has become an important reference for Bitcoin prices worldwide.

The most direct reason for the US Securities and Exchange Commission's SEC's repeated veto application for Bitcoin ETFs is the inability to confirm that Bitcoin's custody and market prices are not being manipulated. In June of this year, SEC Chairman Jay Clayton reiterated the preconditions for the approval of the Bitcoin ETF: "Hosting is the main question. How does the SEC really know that investors own digital assets?" Now Bakkt is about to launch a one-day futures based on physical delivery. The price is fair, transparent and secure, and it fully satisfies the regulatory requirements for the hosting of Bitcoin ETFs, thus eliminating the biggest obstacle to the introduction of Bitcoin ETFs.

Finally, Bakkt will impact the ecology of the existing exchange industry.

For existing futures and spot exchanges, Bakkt's impact on it is clear and straightforward. With the client resources, technology and brand advantages of the parent company Intercontinental Exchange, coupled with Bakkt's unique physical delivery one-day futures, and its depository business, Bakkt's futures products not only bring a large number of new users, but also directly Grab old customers of existing futures exchanges.

Spot exchanges are also subject to serious threats, mainly from two sources. First, the bitcoin stock of the exchange wallet will be reduced. Because Bakkt futures products require physical delivery, the counterparty needs to transfer Bitcoin to Bakkt in advance. However, the new supply of Bitcoin is limited, and the newly added bitcoin for mining is currently only 1800 per day. The increase is limited, and the stock becomes the focus of competition. The more bitcoins there are on the Bakkt exchange, the less bitcoin there are on other exchanges. Second, the volume of spot exchange business will decrease. Investors buy Bitcoin futures that Bakkt expires in one day. If the market does not sell in the reverse direction, then the physical delivery will be equivalent to having the corresponding bitcoin in kind, which means that investors can pass safe, transparent and The futures market of the regulation, in disguise to achieve spot trading, is very attractive to institutions. Bakkt further squeezes the existing space of existing spot exchanges through one-day futures products, which intensifies competition and evolution in the exchange industry.

Bakkt, a halo, launches a unique star product, which is of course a long-term positive in the industry, but this does not mean that Bitcoin will inevitably rise, because there was a bloody lesson . In December 2017, CME launched Bitcoin futures, which was undoubtedly the same sensation in the industry at the time. Bitcoin then went out of a big bear market, falling from $18,000 to $3,000 at the end of 2018. In the past, Bitcoin is not a mature investment product. Its short-term ups and downs are affected by many factors.

It is believed that Bakkt's on-line physical delivery futures can detonate the bull market, perhaps the investor's wishful thinking .

Author: Cai Kailong