Bakkt strips out core Bitcoin value propositions like censorship-resistance, yet it’s still a price discovery mechanism.
Just a few weeks ago people were making ridiculous predictions about how Bakkt would burst onto the crypto scenes and instantly start riding rising Bitcoin prices like some kind of NYDFS-compliant surfer catching a wave of institutional interest.
Then trading began today, and nothing happened.
In the five or so hours since trading began, Bakkt is showing volume of only 17 BTC, while the crypto markets don’t appear to be too thrilled with the new entrant.
Of course, there was no realistic reason to expect thunderclaps and angelic choirs to accompany the Bakkt launch. But given all the hype to date, it would have been nice to get more than a lone angel on the harmonica.
Still, it’s enough, and exactly what everyone wants.
What we have here is a theoretically sensible price discovery mechanism for Bitcoin.
To be more exact, we have 17 BTC (and counting) worth of futures contracts, which will finish trading on 17 October and be delivered on 18 October. So when someone holds one of those contracts on the expiry date, they’ll receive one Bitcoin per contract held.
Right now, at the time of writing, those contracts are being priced at $9,972.50.
The point is that Bakkt is a regulated, squeaky-clean institutional-grade market, so people can look at the trades happening on that market, and use that as a valid window into how much Bitcoin is really worth and how much trading is really going on.
Today’s Bakkt trading will close 22 hours after it began, the markets will catch a couple of hours of sleep, and then it will all begin again tomorrow, and then the day after tomorrow, and the day after that, for eternity.
Then at some point, while squeezing into its suit and tie, Bitcoin will catch its own haggard reflection in the mirror and think to itself what happened to you, man? You used to be a cypherpunk surfer.
If you want a real sense of whether people people actually buy Bitcoin whenever the global economy does something that makes you wince, Bakkt is great. You can look into that price window and be confident that there are actually people potentially using Bitcoin as an alternative asset.
But it’s a double-edged sword. A lot of people took it as a given that Bakkt would inevitably show a huge amount of institutional interest for Bitcoin. But it always had a chance of going the other way. Maybe it’s just all wash trading, and maybe no one actually wants that Bitcoin stuff? It’s widely accepted that the crypto markets are predominantly made up of fake volume, so why would anyone expect to find a rosy picture underneath once you peel it all away?
On the other hand, Bakkt may be the key to driving real volumes further down the line, by acting as a beacon for new entrants to the market and helping prop open the door for other Bitcoin products such as ETFs. A sluggish start doesn’t mean Bakkt isn’t every bit as amazing as everyone hoped it would be.
But if those are the edges, there are also some miscellaneous factors on the flat of the blade. For example, in keeping with its squeaky clean image, Bakkt also aims to track Bitcoin provenance and turn away dirty money. Clean Bitcoin is known to attract premium prices, which may have implications for its ability to track prices.
Back to Bitcoin basics
There’s also the question of who exactly “institutional” traders are, and the actual functions of Bitcoin, which calls into question expectations that Bitcoin would ever find success as a corporate instrument through markets like Bakkt.
Firstly, anyone interested in using Bitcoin as a hedge against potential tribulations in the traditional financial system would think twice about doing so through a venue that’s so firmly entrenched in that same financial system. If the point of Bitcoin is that it’s still worth something when everything else goes belly-up, why would you do Bitcoin through a platform that’s also also risk of going belly-up in that kind of situation?
Secondly, Bitcoin’s core functions are to be censorship-resistant, and to be hard to confiscate. When you use Bakkt’s custodial service, those functions disappear. And yet, when you speculate on Bitcoin via Bakkt, you’re still trying to factor in the value others will find in Bitcoin for darkweb shopping trips. It’s a weird situation. The people actually speculating on Bitcoin through Bakkt don’t need or use any of Bitcoin’s core functions, but we’re also looking at them as a gauge of how much a Bitcoin is really worth.
And then you have considerations like the fact that Bakkt is trading a BTC:USD contract, yet American high net worth individuals are less likely to be interested in cryptocurrency than the global average.
Either way, it will be interesting to see what happens next.
If Bitcoin really wants to supplant gold, markets like Bakkt are a necessary step.
Disclosure: The author holds BNB, BTC at the time of writing.
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