Cryptocurrency investors are patiently waiting for the arrival of the Bakkt cryptocurrency exchange, with the hope that it will bring institutional investors, more retail participants, and maybe even Bitcoin availability in 401k accounts. Its launch is planned for November of this year, and it is backed by the trading titan Intercontinental Exchange (ICE), owners of the New York Stock Exchange (NYSE), so there’s good reason to be excited. ICE has also partnered with Microsoft, Starbucks, and Boston Consulting Group.
With the SEC’s recent denial of numerous Bitcoin ETFs, the hope is that Bakkt will introduce a product which is appealing to institutional investors who have so far avoided the cryptocurrency markets, due to worries of manipulation or the lack of trustworthy custody options.
Bakkt Wants Institutional Investors
Bakkt has been touted as a potential onramp for institutional money. The company themselves revealed in a tweet this week that it is “designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility.” But are these pledges enough to attract investors who have so far steered clear of the cryptocurrency markets? Many believe that some institutional investors have already quietly entered the cryptocurrency markets, but can the NYSE owners bring them in droves?
Bakkt is designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility
— Bakkt (@Bakkt) August 30, 2018
Is It Suitable?
We reached out to many experts in the space to gauge the likelihood of Bakkt becoming a hit with institutional investors. Some were of the belief that Bakkt is the solution that some of these potential new participants have been waiting for, with one caveat: the lack of margin trading will limit volume and adoption.
Nodari Kolmakhidze, Chief Investment Officer at Cindicator, has five years of experience of active trading and asset management. Kolmakhidze believes that Bakkt’s association with ICE and their partners shows that more and more traditional market participants and retailers are interested in cryptocurrencies and their underlying technologies. He told [blokt]:
“The usage of the established market infrastructure of Intercontinental Exchange in connection with the goal of creating a fully regulated market can certainly inspire trust and can lead to more institutional participants entering the field. For Bakkt it will be crucial to build up knowledge about crypto market specifics either through internal learning, hiring or experienced professionals.”
Andrew Yang, COO at BlockFuse, told [blokt]:
“Bakkt will help as it offers a custodial solution for institutional investors. But more importantly, it will look and feel like a traditional stock to them. This will only make it easier for people to invest in Bitcoin rather than having to go through the process of downloading a cryptowallet.”
Aleksander Dyo, President and Co-Founder of Token IQ, said that “The alignment of Bakkt and Coinbase will likely have a catalyzing effect of legitimizing the blockchain space in the eyes of institutional investment.” Dyo believes, however, that the inability to use leverage for trading on Bakkt will mean that we won’t necessarily see huge amounts of money flooding into the platform. He said:
“This does not mean, however, that institutional investment dollars will flood in to participate in such an ecosystem. This is because it does not preclude those same investors from entering into the crypto space by leveraging alternative methods. Put simply, since BTC still gets its price discovery through amalgamated scores from existing exchanges, educated and savvy investors will need to have a lot of incentives to move away from those exchanges and services.”
Craig Kellogg is the Co-Founder of WORBLI. He has 20 years of fin-tech experience – including Wells Fargo, US Bank, and GE Capital. Kellogg echoes Dyo’s beliefs: that the lack of margin trading will prevent adoption by serious institutional traders:
” Asset-backed (auditable) exchanges will instill greater public confidence than the current standard of off-blockchain trading systems with no public transparency. Institutional investors though will not find comfort in the lack of margin trading available with this approach. It is a good next step, but not the “end game” in the mainstream integration of cryptocurrency into the traditional equities markets.”
Constantin Gurdgiev, Professor of Finance at Middlebury Institute of International Studies at Monterey, CA, also makes some interesting points on the limitations within the Bakkt platform. Gurdgiev says that the positive features of the Bakkt platform, namely “‘Physical’ underlying and a delivery system that excludes primary leverage,” will create an environment with limited volume. He told [blokt]:
“Both features can lower market price and volume volatilities, and improve market liquidity. However, the lower the leverage and the shorter the option underlying the product, the more restrictive the volume traded on platform. In other words, the stronger quality of the offering comes at a price.”
“Bakkt platform is more likely to be attractive to the marginal cypto investor – a buy-and-hold younger investor currently less likely to wade into pure trading platforms/exchanges, but risk tolerant enough to take a small diversifying exposure in Bitcoin. This type of an investor is also more sensitive to execution platforms, and in this context Microsoft and ICE backing for Bakkt does represent a relative advantage over crypto-only venues. An added value to Bakkt for buy-and-hold investors is platform’s better risk resilience to hacking, as ‘physical’ settlement system can limit potential risk exposure across the trading volumes that can be subject to cybersecurity risk. However, Bakkt is not likely to attract professional or institutional traders and investors, because they either require leverage or are relatively hedged against leveraged trading risks. This problem presents a dilemma for Bakkt. In order to generate significant volumes of trading to secure liquidity and efficient price discovery, Bakkt trading will require some access to leverage, if only outside the platform. Financialization of Bakkt contracts outside the exchange – on the balancesheets of investors and traders – will most likely be an issue down the road.”
Building the Foundation for a Bitcoin ETF Approval
With the trusted NYSE name behind Bakkt, and a regulated, compliant platform available to investors, regulators may be satisfied that the cryptocurrency market is approaching maturity. The SEC stated previously that the existing Bitcoin Futures market is not big or mature enough to power a Bitcoin ETF. Maybe the Bakkt platform can put the SEC’s mind at rest.
Carol Lin at Bx3 Consulting said:
“I believe Bakkt is the cure to a lot of ills for the cryptocurrency community. Traditional investors trust the NYSE name and brand, and so do regulators. Institutions will have a much easier time investing know the people behind the exchange. The fact that we will finally have a fully compliant and regulated exchange leads me to believe ETF approval is on its way.”
It’s not just compliance that the SEC will be looking for in an exchange providing the underlying to a Bitcoin ETF. A sound custody solution and ownership of the physical assets are essential factors, both of which Bakkt will provide.
Kolmakhidze told [blokt]:
“The arrival of a new market participant with a successful track record and the goal of creating a fully regulated market could also have a positive impact on the approval of financial instruments such as an ETF, as the SEC has stated among its reasons for rejecting the latest ETF proposals that the market is not yet mature enough and is subject to manipulation. Bakkt has communicated that it sees the physical delivery of Bitcoin as a critical element in its solution and that margin trading will not be supported.”
“Bakkt is listening to and learning from the EFTs which have not been approved by addressing the issues related to futures/derivatives markets and source of truth for asset pricing. By addressing these issues, once reviewed the SEC will need to approve or move their objections on to a new level of depth which we have not yet seen.”
According to the experts, the lack of margin trading on Bakkt could put off some of the larger institutional traders, but what is clear now, is that we are heading towards market maturity. With this maturity, we will see more traditional products and investors come to the market, maybe sooner than expected.