On Friday last week Bakkt opened the Bakkt Warehouse for its bitcoin custody business, as it prepares for ICE US’s launch of futures trading on September 23. Bakkt is counting on the warehouse to be the unique selling point as it goes head-to-head with the CME’s 21-month old bitcoin futures. Many people in the cryptocurrency community have made much of Bakkt’s delivery feature, seeming to think this feature alone will push the price of bitcoin higher. (If higher cash market prices indeed were a reliable consequence of there being deliverable futures contracts, we would see far more support for futures markets from corn, wheat and soybean farmers!)
The ICE futures contracts are the first futures contracts in the U.S. which call for physical delivery of a bitcoin at final contract expiration. Bakkt is trying to bring futures trading closer to spot trading by listing every-day contracts – separate futures contracts that expire daily, listed out up to 70 days in the future – in addition to monthly expiring contracts. The two-day delivery process is the same for both the daily and monthly contracts.
While sporting the Bakkt brand, the futures contracts will be traded on and subject solely to ICE Futures US rules. They will use its standard U.S. dollar based initial and variation margin procedures, and clearing will be handled by ICE Clear US.
The ICE bitcoin futures contracts call for delivery of one bitcoin, currently worth about $10,250. ICE Clear has announced initial speculative and hedging margins of $4,290 and $3,900, comparable to those on the CME. ICE Clear’s parent is providing the clearinghouse with an additional $35 million solely to backstop guarantee fund losses caused by bitcoin futures.
The clearinghouse will match the buyers and the sellers that have open positions at the end of trading in an expiring futures contract, according to their clearing members’ reports. In its application to the CFTC, ICE said, “As with other physically delivered contracts, ICUS [ICE Clear] will not be responsible for deliveries and will not be responsible for failures or omissions on the part of the Warehouse.”
Deliveries are made by book entry transfers of cash and bitcoins between Bakkt Warehouse accounts of market participants who are making or taking delivery. Customers who want to make or take delivery of bitcoin must have already opened an account with Bakkt Warehouse.
Transfers of bitcoins and payments for them occur on the second business day after the contract expires; that is, futures that expire Monday are settled through delivery on Wednesday.
Bakkt Warehouse is operated by Bakkt Trust Company LLC, a separate entity from the ICE exchange and clearing entities. Bakkt, the trust company’s parent, has a number of outside investors. At the end of 2018, Bakkt announced that it had raised $182.5 million from a dozen investors. Whether there are additional, or different, investors in Bakkt Trust Company to those in Bakkt, as well as what resources Bakkt is making to the trust company subsidiary, do not seem to have been disclosed yet.
The warehouse itself carries $125 million insurance against loss.
When Bakkt Trust Company received its license from the New York Department of Financial Services last month, in its press release the agency echoed Bakkt’s focus on institutional business, saying, “Bakkt will serve institutional customers.” According to sources at ICE, this does not mean that ICE’s retail futures customers are to be excluded from participating in deliveries.
Bakkt’s futures are set to compete with the CME’s cash-settled bitcoin contract, which has been up and running for more than a year and a half. The CME has already vanquished one competitor – Cboe Futures Exchange’s bitcoin futures. Averaging more than 7,000 contracts per day this year through mid August, the CME’s contract has been a modest success by futures industry standards. With each contract representing 5 bitcoins, CME traded the cash market equivalent of 36,000 bitcoins per day, a very respectable level relative to cash market platforms. In comparison, the largest U.S. bitcoin trading platform, Coinbase Pro, has been trading about 11,000 bitcoins per day for the past month, although it did average volumes as high as 24,000 bitcoins per day in May.
When the Bakkt futures launch later this month, Bakkt will face a real test of whether it can take business from the CME and cash market venues. If nothing else, with its single-day as well as monthly futures contracts, Bakkt could provide an arbitrage vehicle between cash and futures markets all on one platform. The CME, for its part, is getting ready to list options on its bitcoin futures, according to cryptocurrency press sources.