Research Report | From the Bakkt online to see the way traditional institutions lay out digital assets

Summary

On September 23, 2019, Bakkt, which was postponed three times, finally launched its bitcoin futures contract products using physical delivery, including intraday contracts and monthly contracts. The first day of trading on the line was cold , with a total of only 72 bitcoins traded. This paper focuses on Bakkt and conducts in-depth analysis and discussion on the digital asset market derivatives market.

Starting from the background of Bakkt, this article introduces its rough road to birth and its efforts in compliance transactions. Focusing on the analysis of Bakkt's contract product design and comparing it with CME's contract, it is found that the institutional contract structure designed by Bakkt is very different from the contract for daily trading. The salient feature is that the contract has more complex margin requirements and weakens the speculative nature of the contract , and avoids price fluctuations through exchange price limits in traditional financial markets.

In addition, horizontally comparative analysis of compliance trading platforms and fund institutions in early-stage digital asset markets, such as CME, CBOE, and grayscale investments, as well as ErisX and LedgerX, which are currently being actively deployed. It is believed that regardless of the timing of the admission, it is important that long-term cultivation and product innovation and operation capabilities, sustained and effective efforts can become the biggest winner in the future .

Overall, the impact of Bakkt's launch on traditional financial institutions and the blockchain industry is a milestone, but as an emerging business, its growth path is also tortuous . On the one hand, Bakkt, which is only a trading platform, cannot attract cautious institutional investors to enter the market. Business development is not a matter of course. On the other hand, Bakkt, as an innovative product with strong experimental nature, must not be verified. To experience constant polishing.

Bakkt itself cannot be a direct factor in detonating the bull market, but the rise of such institutions is a necessary prerequisite for the arrival of the next bull market.

Chapter 1 Bakkt with a golden key

1.1 The family is huge and the genes are excellent.

Bakkt is a subsidiary of the traditional financial trading industry giant InterContinental Exchange (ICE), with a large family and excellent genes.

ICE has built a huge system in the traditional financial field. It is the second largest regulated exchange and clearing house operation network in the world. It is also the second largest and the world's third largest futures exchange in the United States. It also owns the New York Stock Exchange. 14 world-renowned securities and futures exchanges on the Canadian Futures Exchange, the Paris Stock Exchange, the London International Financial Futures Exchange, and five clearing houses. Intercontinental clients include tens of thousands of trading companies from more than 70 countries around the world, as well as market data for futures, options, and OTC swap contracts for customers in 120 countries. Backed by the Intercontinental Exchange, Bakkt can share the parent company's vast resources to cover the world's major trading countries.

It is precisely because of the birth of the golden key that the traditional financial industry has shown positive closeness and support. In August 2018, digital currency entered a long-term bear market, but even after the establishment of Bakkt, the first round of financing of 182.5 million US dollars was successfully completed. The investors include Li Ka-shing's Horizons Ventures, Microsoft Venture Capital M12, and Tencent's early shareholder Naspers. 12 prominent shareholders including the famous Boston Consulting Group and Galaxy Digital.

With a strong shareholder background and strong financial advantages, Bakkt also formed a luxurious star management: CEO (CEO) Kelly Loeffler, a veteran of the Intercontinental Exchange Group and CEO of the Intercontinental Exchange Group Jeff Sprecher's wife has participated in the acquisition of the New York Stock Exchange and the New York Stock Exchange and the initial public offering of ICE. Chief Operating Officer (COO) Adam White is the vice president of Coinbase, a former veteran digital currency exchange. Adam White joined the Coinbase startup phase 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. Matthew Johnson served as Bakkt's vice president of blockchain engineering. He was the co-founder and chief product officer of Digital Asset Custody Company (DACC), a digital asset custodian that was acquired by Bakkt on April 29, 2019. .

1.1 Birth and bumps, after many twists and turns

Although it grows with a golden key, it does not mean that the process of its birth is smooth sailing. In August 2018, the Intercontinental Exchange Group (ICE) first announced its planned launch of the Bakkt on September 23, 2019, and it has experienced three delays.

The first postponement : Bakkt was originally scheduled to go live in November 2018, but due to insufficient preparation, it was postponed until December 2018;

The second postponement : Bakkt, which was scheduled to go live in December 2018, was postponed again. The reason was still insufficient preparation. Bakkt CEO Kelly Loeffler also specifically explained the delay: “ As is often the case with product releases, new processes, risks, and mitigations require repeated testing, and in the case of cryptocurrencies, these resources are being applied to a new asset class. Therefore, adjust us The timetable is meaningful" and announced a postponement until January 2019.

The third postponement : After two delays, Bakkt, which was scheduled to go live in January 2019, was still postponed on the grounds that the release date was extended indefinitely due to the need to continue to cooperate with the regulator to obtain the necessary approval for the issue.

Three trips to the line have delayed the patience of many blockchain practitioners and investors, and some even believe that Bakkt died beforehand. However, when most people have no hope for Bakkt, in May 2019, Bakkt announced that it will begin testing its bitcoin futures contract in July and successfully implement it. On September 23, 2019, it was officially launched.

Judging from the public information, Bakkt faced three delays on the line, and the main difficulties came from three aspects: regulatory requirements, financing needs and technical testing. First, regulatory requirements have been postponed three times. Bakkt acquired DCC (a digital asset custodian) with a DCO license in April 2019 and was officially launched after receiving a escrow license from the New York State Department of Financial Services (NYDFS) in August 2019. This is enough to show that Bakkt has been solving compliance issues during this time. Secondly, in January 2019, Bakkt received investment from 12 investment institutions such as M12 and Galaxy Digital. The financing time was postponed for the second time. This shows that Bakkt is financing and winning support from traditional financial institutions dominated by Wall Street. It took a lot of time and effort. Finally, because Bakkt is the first Bitcoin futures trading platform to settle in kind, and involves multiple processes such as trading, clearing and custody, it is necessary to conduct repeated technical tests to ensure smooth trading and reliable user assets. It takes a lot of time to be safe.

After overcoming the difficulties of 1981, Bakkt finally ushered in the official launch on September 23, 2019.

1.2 Embracing supervision and embracing the mainstream

In the past year, Bitcoin's ultra-high yields almost outperformed all investment categories, and Wall Street investors were eager to move, but they were struggling with non-compliant deposit channels and could not achieve Bitcoin allocation. Compliance is a prerequisite for the sustainable development of products and services in the financial sector. Bakkt is designed to target qualified investors and institutional investors, providing them with a compliant access channel and trading platform, thus opening a compliance path. Be the most critical part of the success of the project. Specifically, Bakkt has to carry out the corresponding licenses in the three parts of trading, clearing and custody, and it is very difficult to have these licenses at the same time.

The transaction link corresponds to the DCM (Designated Contract Markets) license, which uses the DCM license provided by the parent company ICE's ICE Futures US, Inc. to address the demand. The clearing process corresponds to the DCO (Derivatives Clearing Organizations) license, which was resolved by Bakkt in April 2019 through the acquisition of DACC (a digital asset escrow company) with a DCO license. The most difficult is the license plate. Bakkt's repeated delays and jumps were also caused by the delay of the regulatory authorities. It was not until August 2019 that it was awarded the custody of the New York State Department of Financial Services (NYDFS). license.

Chapter 2 Analysis of Bakkt Contract Products

2.1 Overview

On September 23, 2019, Bakkt launched two intraday and monthly bitcoin futures contracts as scheduled, which may further enrich product types. On the first day of the launch of these two products, the trading performance was very dull. The monthly contract only traded 71 bitcoins, and the daily contract trading volume was only 1 bitcoin, totaling about 720,000 US dollars. As shown below. The bitcoin spot market has not caused additional waves due to the launch of Bakkt. It can be said that this is a very flat online .

In contrast, CME and CBOE's Bitcoin futures contracts, which went live in December 2017, reached $70 million and $50 million respectively on the first day (according to the bitcoin price of the day), which is Bakkt's $720,000 transaction volume. 97 times and 69 times.

In order to attract investors to try new products, Bakkt will not charge transaction fees until December 31, 2019. Bitcoin, which is hosted in Warehouse on intra-day and monthly contracts, will also receive a free hosting service until June 30, 2020.

Warehouse provides hosting services for Bakkt's digital assets, including online hot wallet storage and offline cold wallet storage, and has purchased $125 million in insurance for it, currently sufficient to cover its hosted digital assets. Market value, to ensure safety. If the assets under its custody increase, Bakkt should also increase its insurance coverage accordingly. ICE has been working in the futures trading field for many years. It has rich experience in financial product design and alternative asset custody, but it is still in the exploratory period in the field of digital assets. Whether it can provide reliable custody services will take time to test.

In addition, Bakkt's Bitcoin futures products are designed to be qualified to investors and institutional investors in the United States, and to take a compliant trading route. The existing digital asset derivatives trading platform will not form a direct Competitive relationships and business impact.

2.2 Analysis of contract transaction depth

Bakkt announced two new delivery contracts. The following are the details of the contract terms:

There is a clear distinction between this institutional level contract and the contracts that are common in the secondary market:

First, the specification of the contract is a forward contract, and the subject of a contract transaction is a BTC. Since the contract is a physical delivery, the contract price does not need to quote any index.

The margin level is determined by the ICE-specific margin model, which is relatively complex and takes into account the risk of the investor's original position. According to the latest documents released by ICE, the initial margin ratio is 37%. And BTC itself cannot be a collateral for a contract. Such a complex margin model is also a natural arrangement, because the BTC contract is only a common contract on the ICE exchange, the exchange also provides a complex number of multiple options contracts, and the margin management of these products is more complicated than the delivery contract. The margin between different products of customers may affect each other, and different combinations of strategies also have different requirements for the level of margin. For example, the calculation of the margin of the exchange also considers the contractual combination of inter-temporal arbitrage, reducing the probability of a customer exploding using such a low-risk strategy. Instead of using a simple position margin to manage a customer's position, the exchange provides customers with a risk control manual to introduce these rules.

The contract trades for 22 hours a day, but only on the exchange's business day. Such an arrangement poses a potential risk to the large fluctuations in BTC in the US holiday.

This contract uses three factors, NCR, RL, and IPL, to prevent irrational fluctuations in prices in the short term. Contracts in the secondary market are often frequently inserted by retail rickets in the transaction process. The NCR, RL and IPL indicators of the exchange limit the irrational fluctuations of prices in the short term.

The NCR (No cancellation range) specifies the non-cancellable range of the transaction. Determined by marking the price of the up or down 50 dollars. Transactions that occur within this range will not be rolled back in most cases.

RL (Reasonability Limits) refers to the reasonable range of transactions. This indicator is used to prevent traders from making a wrong order and causing market price changes. This is the forcing limit set by the exchange for the price, which is not accepted on the exchange marked RL or the RL outside the RL range.

IPL (Interval Price Limit Functionality) is a short-term fuse mechanism. IPL has three variables, namely IPL calculation cycle, IPL magnitude, IPL pause time. The IPL of the BTC contract will be calculated every 5 seconds. If the price fluctuates within the period of time beyond the marked price up or down the IPL magnitude, the transaction will not be able to close.

These three indicators are used to control abnormal pinning behavior.

The structure of such an institutional contract is very different from the contract for daily trading. The salient feature is that the contract has more complex margin requirements and weakens the speculative nature of the contract, and avoids price fluctuations through exchange price limits in traditional financial markets.

In addition, it is worth comparing the CME bitcoin contracts. The following table extracts information from some of the contracts:

We can see that the CME contract is a cash delivery contract, and the exchange has customized the index price for the contract. If the spot price deviates significantly from the contract price, the contract must rely on the investor to arbitrage the contract to level the price difference between the two. CME also has a special margin level customized for BTC and a maintenance margin of 90%. The deposit for cash delivery is naturally simpler. The CME contract also designed a similar fuse-proof mechanism and limited the maximum opening amount of the contract. The idea is very similar.

third chapter   Traditional institutions contend for the first place, who is the future winner

3.1 Early layout, how is the status quo

Bakkt is not the first traditional financial institution to enter the digital asset market. Before it had done some preliminary exploration and experimentation.

The Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) both launched Bitcoin futures contracts back in December 2017. Among them, CBOE is the largest options exchange in the United States , mainly providing stock options, index options and ETF options. CME is the world's largest futures exchange , mainly providing futures and options trading of interest rate, stock index, foreign exchange and commodities. Both are excellent representatives of traditional financial markets.

CBOE's exploration of the Bitcoin futures business was unsuccessful. Due to the small transaction volume, the Bitcoin futures business was closed in June 2019. According to tradeblock data, from January 18, 2019, to May 19, 2019, CBOE bitcoin futures trading volume is less than one-tenth of CME.

CME is still operating. As of now, the trading volume of CME in the past month is as shown in the following figure. It fluctuates between 1680 and 7909. The average daily trading volume of the first 7 trading days is 3,281 lots (one hand and five bitcoins) ), the trading volume of 16406 bitcoins, that is, the daily trading volume of about 160 million US dollars (calculated according to the current bitcoin of 10,000 US dollars). According to CoinMarketCap's current corrected data, the daily trading volume of the highest trading volume is 1.22 billion US dollars, and the trading volume of 160 million US dollars can be ranked 45th in the CMC exchange ranking. CoinBase Pro, the US compliant digital asset exchange, had a trading volume of $230 million on September 24, 20, and CMC ranked 42. Overall, CME's business development is still smooth.

Figure 3. CME Bitcoin monthly futures contract volume

In addition to the traditional financial institution layout, there are also some innovative institutions to arrange digital assets for compliance investment channels, such as GrayScale, which has been working quietly since 2013, and has grown into a well-known digital asset management fund in the industry. More than 90% of its funding comes from institutional investors and pension funds, and it holds approximately $3.5 billion in encrypted assets at its peak. According to the data released by the grayscale company, as of May 31, 2019, the digital currency invested by the grayscale company includes: BTC, BCH, ETH, ETC, LTC, XRP, XLM, ZEC, and ZEN. Among them, the Bitcoin Trust Fund (GBTC) has risen nearly 300% this year. As of July 9, 2019, the grayscale investment instrument has appreciated by 296% so far this year, compared with the mainstream investment of the S&P 500 index (18.7%) and the global Dow Jones Industrial Average (12.9%). The increase is amazing.

Table 3. Compliance transactions and fund platforms for early deployment of digital assets

The above table is a few compliant transactions and fund institutions in the early layout of the digital asset market. As the oldest trading institution, the CME layout is earlier, and the current status is also relatively good, while the CBOE bitcoin futures products of the same period have already collapsed. Bakkt's first day's trading volume is about two orders of magnitude different from CME and CBOE, which is a dull start. The earliest entry of grayscale investment, its fund management scale has been rising, and the investment categories have gradually enriched. Currently, it has covered 9 kinds of digital assets, and it has become the head institution in the field of digital asset funds.

3.2 Late entry, actively preparing

After Bakkt announced the launch of the bitcoin futures contract for physical delivery, there was a wave of followers immediately following the market, represented by ErisX and LedgerX.

Compared to Bakkt, the background of ErisX is not to be underestimated. ErisX was founded by former Citigroup executive Thomas Chippas and currently has spot trading in BTC, ETH, LTC and BCH. In October 2018, ErisX announced the completion of the first round of financing, ErisX shareholders are no less than Bakkt, including CBOE, Bitland, Fidelity Investment, Nasdaq Ventures, Monex Group and Pentera Capital. On July 18, 2019, ErisX joined the Chamber of Digital Commerce, a political lobbying organization that includes heavyweights such as the R3 Alliance, Fidelity Investments, and Fidelity Investments.

ErisX obtained the DCM (Designated Contract Markets) license in 2011 and received the CFTC (Commodity Futures Trading Commission) Derivatives Clearing House License (DCO) on July 1, 2019 to conduct Bitcoin futures trading. . In order to carry out the bitcoin physical delivery futures business, there is still a lack of custody licenses, which is currently being actively prepared.

Founded in 2013, LedgerX is comprised of Goldman Sachs, MIT and CFTC alumni, and early investors including Google Ventures and Lightspeed Venture Partners received $1.5 million in seed round financing. On May 22, 2017, it received $11.4 million in Series B financing from Digital Finance Group and Miami International Holdings.

LedgerX has already registered the DCO (Derivatives Clearing Organization) license in 2017. In 2018, LedgerX applied to the CFTC contract market DCM (Designated Contract Markets), and in 2019 A DCM license was obtained on June 24. LedgerX has not yet received the consent of CFTC in terms of the license plate, so it has not yet been able to launch its Bitcoin futures products.

A brief comparison of Bakkt, ErisX and LedgerX, all with the support of a well-established and powerful traditional financial institution, ErisX and LedgerX have been deployed in the field of digital assets and many years of business exploration, bitcoin futures for physical delivery The contract business is also very important and is actively promoting. With Bakkt's compliance license breakthrough and model exploration in asset custody, it is only a matter of time before ErisX and LedgerX get a license.

3.3 Who is the winner?

Whether it is the earliest CME or the just-entered Bakkt, or the upcoming ErisX and LedgerX, they have already opened the curtain of traditional finance entering the digital asset derivatives market, a new field to industry practitioners and investment. They open.

At this stage, it still belongs to the very early stage of the digital asset market. Although there are first-mover advantages in the first entry, there are also greater risks. To eat the industry dividends depends on their own skills and luck. For example, CBOE chose to close after opening the Bitcoin futures business for a year and a half. Obviously this exploration failed. The gray-scale investment of 6 years of quiet cultivation has achieved good performance and industry status, of course, this is inseparable from the development of large industries.

Regardless of the early layout or the late entry, the important thing is the long-term cultivation and product innovation ability. It is still too early to talk about winning or losing. It is possible to continue to be effective and cultivated to become the biggest winner in the future.

Chapter 4 Blowing the Horn of the Bull Market?

Since the launch of Bakkt, Volkswagen has been full of expectation and enthusiasm for Bakkt, expecting it to be a hero to save the big bear market, but is it really the SuperHero? Will the market pay for it?

Undeniable milestone historical event

From the overall industry perspective, the impact of the introduction of Bakkt and Libra on the traditional institutions and the blockchain industry is very similar, with milestone significance, which is mainly reflected in two aspects.

On the one hand, the impact and innovation of its own business model on the current industry is enormous. Libra's innovations include anchoring a basket of currencies, managed by members of the association, and so on. The innovation of Bakkt lies mainly in the way in which Bitcoin physical contracts are traded, which will more directly affect the supply and demand relationship of spot Bitcoin, and will also amplify the trading demand for physical Bitcoin.

On the other hand, the introduction of Libra and Bakkt represents the traditional giants behind it to formally enter the blockchain industry. One is the Internet giant, and the other is the financial giant. The energy and resources behind it are driving the blockchain industry. Landing and development are exciting. The difference is that Libra is still struggling to move forward on the road to compliance, and Bakkt has three licenses in hand to focus on business development.

Destined tortuous road

Although Bakkt has opened up the deposit channel for traditional institutions to enter the digital asset market, it is a milestone for the industry, but as an emerging business, its growth path must be tortuous.

On the one hand, Bakkt, which is just a trading platform, cannot attract cautious institutional investors. Institutional investors represent traditional finance and represent the power of mainstream finance. They are very cautious and strict in the choice of market, the choice of targets, and the formulation of strategies. Although Bakkt provides a channel for deposits, it does not mean that institutional investors will enter the digital asset trading market. Compared with traditional financial derivatives, Bitcoin is difficult to make reasonable pricing and valuation, and its high risk of high volatility has become an important factor for institutional investors to hesitate. In addition, the total market value of the digital asset market is still very small compared to the traditional financial market, and the large amount of capital entering will inevitably lead to violent fluctuations in the market.

Therefore, the compliance exchange has only opened a bridge, and it is still the investment target to really attract investors. Only the overall digital asset market as a whole is improving, gaining more and more common recognition, so that everyone can see the huge development potential brought by it, which can really promote the admission of a large number of traditional institutions, bringing a real big bull market to the industry.

On the other hand, Bakkt is one of the many innovative products in the ICE system, and the road to success is not a matter of course. Although the family behind Bakkt is huge and powerful, the industry is highly concerned, but for ICE Group, Bakkt is only a pathfinder and experimenter in exploring new areas of digital assets. If the test is successful, ICE Group will enjoy the first exclusive bonus for eating crabs. If the test fails, it will only accumulate experience. The group cannot pour all resources to ensure its success. Therefore, the launch of Bakkt does not mean that it must be successful, and it is likely to end in failure. In addition, for a brand new business, it needs to be tried and explored in business promotion and product design, which also requires a long iterative process.

Regardless of the external environment or internal products, as the first business to eat crabs, Bakkt has never verified the business. Entering a brand new market is a high-risk operation. It can only be explored step by step. The difficulty of advancement is conceivable. Known.

Blowing the horn of the bull market?

The reason why Bakkt is full of expectation and enthusiasm is that it has established institutional funding channels and the demand for physical bitcoin. Let us calm down and feel calm and calmly think about it.

In terms of institutional funding, Bakkt is not the first. CME launched the Bitcoin futures contract as early as December 2017, which has provided traditional institutions with a compliant investment channel for bitcoin. From the transaction volume analyzed in the previous section 3.1, after the opening of the compliant funds deposit channel, it did not attract large-scale qualified investors to enter the market. From this point of view, Bakkt, the benefits brought by the deposit channel to the industry may be excessive. Overrated.

The demand for physical bitcoin is the biggest difference between Bakkt and CME. CME relies on legal currency funds for contract delivery and clearing, without the need to purchase bitcoin, while Bakkt needs to use actual bitcoin for trading. Admission funds must be first equipped with Bitcoin, which does increase the demand for Bitcoin purchases and boost the market. However, the effect of boosting the market is heavily dependent on the amount of funds entering the market. If the amount of funds entering the market is insufficient, what will be boosted. The amount of admission funds depends on the investor's cognitive maturity and recognition of Bitcoin's subject matter, but this is often not a day's work in the rigorous traditional financial world, and it is necessary to wait for the time to mature.

Therefore, Ba kkt itself cannot be a direct factor in detonating the bull market , but Bakkt has successfully triggered the attention and interest of traditional markets in digital assets, allowing more people outside the blockchain industry to understand and recognize emerging assets such as Bitcoin. It has accelerated investor education and injected new vitality and resources into the industry. These are the necessary prerequisites for the further development of the blockchain industry and the necessary prerequisite for the arrival of the next bull market .

 

This article produced by the Institute of Fire currency block chain, this report Published September 25, 2019, Author: Yuan Yuming, Li Hui, Weng Yi-ming

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