Viewpoint | Bakkt myth is being pierced? The disadvantage of not being a teacher does not mean that Bitcoin futures have become a "water dog"

About the author: Galen Moore is a member of the CoinDesk Research team. The opinions expressed in this article are all personal opinions of the author. The following article was originally published in CoinDesk's journal Institutional Crypto, a free internal publication for institutional investors in crypto assets.

For Bitcoin derivatives, this is a period of energy, at least for those writing relevant articles. For traders, it may be as usual.

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The Chicago Mercantile Exchange (CME) announced on Friday that it is preparing to offer options trading on Bitcoin futures contracts. This is a surprising move, because so far, the ratio of options trading to futures and swaps is zero.

Still, in the field of encryption, no trader has a reliable options counterparty like the Chicago Mercantile Exchange.

This statement provides CME with a way to offer options trading without rebuilding. Why is this possible? CME's bitcoin futures market accounts for only a small portion of its total trading volume.

However, the Chicago Mercantile Exchange may be a little anxious about its leadership in the regulated crypto derivatives market. Bakkt launched a regulated bitcoin futures contract this week, unlike the Chicago Board of Trade, which is settled in physical bitcoin instead of cash.

After all, other people who trade Bitcoins in Chicago seem to think that physical settlement of futures is important. Perhaps CME's statement made it seize the limelight of Bakkt.

Speaking of Bakkt, its monthly and daily contracts for October 2019 were launched on Monday, and the first day of the contract was only 71 BTC. This figure is insignificant compared to the futures products launched by CME in December 2017. In view of the fact that bitcoin prices are approaching historical highs when CME launches futures, Bakkt's product is clearly not the same.

Among the two contract products of Bakkt, the daily futures contract product is more interesting. If a trader uses his T+2 settlement contract to build a forward curve and continue to roll the contract, this may be a legal currency entry channel regulated by the US Commodity Futures Trading Commission (CFTC), or it may be a popular BitMEX perpetual swap. A copy of the contract (perpetual swap).

But so far, there are no traders on the top. Bakkt's single-day cargo volume on Monday was 2BTC.

Sustained myth

The first regulated bitcoin futures appeared in December 2017, followed by bitcoin prices reaching an all-time high and falling sharply by 83%. However, because the volume is less than $100 million, it is difficult to say that futures trading makes the market rational.

On the contrary, it is more likely that the slow demand for new products has broken the myth of the institution's demand for bitcoin risk exposure, which has been suppressed by the compliance department's insistence on regulated products.

Today, this myth still exists in the “analysts” of cryptocurrencies that focus on retail investors, as found in the search for “bakkt volume fail”. If you are coming in 2017, you don't need to travel through time and space to know that you are shorting Bitcoin on Monday, because you have seen this script before. Even the most unconscious people in 2019 recognized an obvious fact: institutional investors' interest in bitcoin has been slow, and in fact bitcoin is developing.

For institutional investors, derivatives provide an easy-to-understand solution to operational barriers related to custody, investability, and risk. (The structure of regulated bitcoin futures is the same as that of frozen concentrated orange juice futures.)

Despite this, the largest portion of Bitcoin trading volume still comes from unregulated exchanges, which operate in the form of clearing houses with a leverage ratio of 100 times.

While these products are interesting, no regulated asset management company will be interested in these products.

Although the reliability of the bitcoin trading volume (especially OKEx and Firecoin) has been questioned, bitcoin traders on the largest OTC trading platform know that there is liquidity in these markets. Their hedging strategy relies on this liquidity.

In addition, the trading volume of these leveraged transactions may come from encrypted hedge funds, as one trader told me, “fallen gamblers” trade on their own accounts.

The structure of Bitcoin futures is much like concentrated orange juice futures, but everyone knows that concentrated orange juice mixes with more volatile things and becomes quite flammable. There are some important differences between Bitcoin and other asset classes. Institutional investors consider the characteristics of these underlying assets when evaluating Bitcoin derivatives.

For example, the bitcoin futures market may not have a natural hedging mechanism. If you don't believe it, you'll find this by comparing the operating expenses of global gold miners with the operating expenses of bitcoin miners. This is not Kansas.

Road ahead

Derivatives may be the bricks that paved the way for institutional investment in bitcoin, but there is still a long way to go to reach Emerald City. Currently, the Chicago Mercantile Exchange futures volume is a good guide for investors to make progress on this path.

You may have seen a chart of the increase in trading volume on the Chicago Mercantile Exchange in May. Correspondingly, bitcoin prices have also tripled. In bitcoin, the Chicago Mercantile Exchange's July futures trading volume soared and has now recovered to a modest level of growth in the first quarter.

At the same time, at least four start-ups are preparing to launch new derivatives for US institutions and other regulated markets. They are all focusing on bitcoin futures in physical settlement.

Whether physical delivery will become the highlight of market participation remains to be seen. This is not always important in derivatives based on other asset classes.

One thing seems certain: no new financial instruments may “unlock” institutional needs, as most organizations are just beginning to answer the question of why they will invest in Bitcoin first.

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