Martin Weiss: Juan Villaverde is busy programming and automating his analysis of Bitcoin cycles. So, I’ve asked Dr. Bruce Ng to contribute today’s story.
Bruce is a respected educator in the field of Distributed Ledger Technology (DLT) and has been a lead crypto-tech analyst for Weiss Cryptocurrency Ratings since shortly after their launch.
Unlike most analysts in the space, he combines three things: The strict discipline of a Ph.D. in physics, robust experience as a software developer, and deep knowledge of blockchain. The result is uniquely scientific and 100% objective reviews of individual coins and the space as a whole.
Dr. Bruce Ng: Thanks, Martin. The timing of your portfolio strategy couldn’t be better, especially given what’s coming down the pike in January:
The launch of Bakkt, a project that promises to
transform the entire crypto world for the better.
Bakkt first burst into headlines in August, and shockwaves of the news have been reverberating on the web ever since.
The reasons for the excitement are clear:
- Bakkt will provide a scalable crypto trading platform for institutions.
- It will include regulated custody service for the secure storage of Bitcoin.
- It will be a payment platform that will allow consumers to pay with crypto for anything from a Starbucks coffee to computer products.
- And it has a very big name behind it: ICE, the owners of the New York Stock Exchange.
The buzz is that Bakkt will draw big institutional money into crypto and usher in a new bull market. Some financial experts go so far as to say that Bakkt will have more impact on the market than any Bitcoin Exchange-Traded Fund (ETF) that might come along.
But will Bitcoin be Bakkt? In other words …
Will the launch of Bakkt truly set off the price surge/bull rally that everyone in the cryptoverse is hoping for? And …
Will Bitcoin itself really be backed as claimed?
For some answers, let’s start by taking a closer look at …
The Big Names Behind This Project
ICE (Intercontinental Exchange) is one of the most trusted institutions in international finance. It not only owns the NYSE but also ICE Data Services, SuperDerivatives, TMC Bonds, The Clearing Corporation, Singapore Mercantile Exchange (SME) and many more.
Last year, ICE reported revenues of $5.8 billion. It has about 5,000 employees. And its reputation is stellar.
Under the leadership of CEO Kelly Loeffler, Bakkt aims to create a regulated market for Bitcoin and transform it into a global currency with widespread usage.
Meanwhile, Bakkt’s partners could play an equally large role …
- Microsoft will provide the cloud infrastructure to run the trading platform for institutions and the payments platform for consumers. Microsoft may also contribute artificial intelligence (AI) technology. Plus, it’s possible that Microsoft Pay will get into the act, creating some level of integration with Bakkt.
- Boston Consulting Group is also a major partner, opening the door to a host of Fortune 500 companies who should help drive the promotion and widespread adoption of the Bakkt platforms.
- And Starbucks could be especially critical to help stimulate mainstream adoption by millions of average consumers globally.
Surprised that Starbucks is also diving headfirst into this project? You shouldn’t be because Starbucks is the U.S. leader in mobile app payments (at 23 million users), making it even bigger than Apple Pay (22 million) and Google Pay (11 million).
No, the average consumer won’t be able to buy a Starbucks Vanilla Latte with Bitcoin directly. Instead the Bakkt exchange will convert digital assets like Bitcoin into U.S. dollars, which can then be spent at Starbucks.
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| Starbucks is teaming up with Microsoft and the soon-to-launch Bakkt cryptocurrency exchange that will allow its customers to pay for their coffee with Bitcoin and other cryptos. |
Given the volatility of crypto, this makes sense. But no matter how you slice it …
Starbucks’ 23 million app users will be exposed to crypto like never before!
Also impressive: Bakkt’s list of investors includes a group of venture heavyweights: M12 (Microsoft’s venture capital arm), an affiliate of Fortress Investment Group, Eagle Seven, Galaxy Digital, Horizons Ventures, Alan Howard, Pantera Capital, Protocol Ventures and Susquehanna International Group.
The Bakkt Roadmap
Bakkt will launch its first product, Bitcoin futures trading, on Jan. 24. Although Bitcoin futures already exist on the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), Bakkt is taking a giant step beyond: Its futures contracts will be backed by physical Bitcoins stored in ICE’s Digital Asset Warehouse.
So, unlike the CME and CBOE Bitcoin futures, which can only be settled in cash, any Bitcoin bought on Bakkt will be added to custody — directly boosting demand and, naturally, its price. Likewise, any Bitcoin sold on Bakkt will be removed from custody, with the opposite effect.
Plus, the Bakkt futures contracts, each representing a single Bitcoin (BTC), will be settled in 24 hours. This means that as soon as you buy a futures contract from Bakkt, you get an actual Bitcoin the next day.
The contract size of 1 BTC could also make the trading attractive to institutions and large speculators, implying high trading volume.
And we suspect that, in order to provide liquidity for its January launch, Bakkt is already starting to buy — or will soon be buying — Bitcoin on the crypto Over-the-Counter (OTC) markets.
Then, the other Bakkt products will come later.
What are the pros and cons? Let me start with the latter …
The Cons …
Some crypto investors welcome institutions to the space. The more buying power the better, they say.
But there are also some who don’t like it one bit.
They worry Wall Street could someday control cryptocurrencies by adding a lot of leverage to the game.
They fear high-risk crypto derivatives — the same kind stuff that helped aggravate the 2008 debt crisis that, in turn, gave rise to the invention of Bitcoin.
Bitcoin, they argue, was supposed to be a part of the solution — not a new part of the same old problem.
And, they say, it could get worse: Big Wall Street institutions could use the derivatives to manipulate or exaggerate the price of Bitcoin and other cryptos. Or, they could use their Bitcoins stored in custody to leverage other investments.
Some crypto advocates hate this because it goes against the fundamental principles of cryptocurrencies. The mere thought of something akin to “cryptocurrency paper” sends a chill up their spine.
The response from the folks at Bakkt? “Cool it.” They promise there will be no leverage, commingling or rehypothecation. But is that enough to stop other derivatives mavens from doing so in the future? We shall see.
The Pros …
It’s hard to imagine a scenario in which Bakkt will NOT open the floodgates for large institutions to buy crypto. And the consequences are potentially far-reaching:
Larger trading volume. Right now, the combined CME and CBOE Bitcoin futures daily volume is only 9,000 Bitcoin (BTC). That’s puny in comparison to the total daily volume on exchanges — as much as 1.6 million BTC.
With the launch of Bakkt, institutional volume could not only grow by leaps and bounds, it could even rival (if not surpass) the trading volume on the exchanges.
Another plus: We expect many institutional investors to move from the opaque OTC markets to more transparent platforms like Bakkt. Result: More liquidity and lower volatility for crypto investors.
ETF Approval. Right now, we count 10 crypto ETFs that have already been rejected by the SEC. And the regulators’ reasoning is twofold: No trusted price information and over-reliance on futures markets. But Bakkt could help resolve both issues, greasing the way for the launch of future ETFs like the VanEck/SolidX ETF in 2019.
Custody. Bakkt solves the custody problem, which has so far discouraged large institutions from investing in Bitcoin. But with Bakkt, clearing members will no longer be required to handle Bitcoin themselves.
Regulated ICOs. Bakkt will attract more corporate issuers to raise capital via ICOs. And on the next round, we expect to see greater clarity, especially when it comes to the distinction between utility and security tokens.
Utility tokens are akin to Chuck E. Cheese coins or American AAdvantage points. They’re almost invariably lousy investments. In contrast, security tokens come with many of the key protections that investors get with common stocks.
Most people don’t know this. They don’t even know which tokens are which. Hopefully, the launch of Bakkt will pave the way for positive security tokens regulation and help shift them into the mainstream.
Warning: There’s no guarantee that Bakkt will lead to higher prices immediately. Heck, from everything we can tell, large institutions have already been buying Bitcoin throughout the year — especially on the OTC markets, which are mostly off the radar. And this buying was apparently not enough to prevent Bitcoin from breaking critical support at $5,800.
In the long term, however, the outlook is much clearer: Projects like Bakkt could greatly enhance the liquidity, stability and overall size of crypto, helping to create a multitrillion-dollar global marketplace unlike any we’ve seen before.
Best wishes,
Bruce