Bakkt Bitcoin Futures Cleared to Launch in September

Over the weekend, some news long-awaited by the cryptocurrency community finally came to fruition in the announcement that the digital asset custodian Bakkt would begin launching its physically delivered bitcoin futures contracts on Sept. 23. After months of waiting and several delays, the New York State Department of Financial Services (DFS) finally granted a charter under New York Banking Law to Bakkt Trust Company LLC to manage digital assets as a limited liability trust company.

According to Bakkt chief executive Kelly Loeffler,

“Bakkt’s bitcoin futures will be exchange-traded on ICE Futures U.S. and cleared on ICE Clear US, which are federally regulated by the CFTC. Regulated exchanges differ from trading platforms, such as crypto spot markets in many respects, including risk management, compliance and market surveillance.

The Bakkt futures contracts will also be covered by the existing guaranty fund at ICE Clear US, which has an established risk waterfall across multiple commodities markets. An incremental $35 million is being contributed to the existing guaranty fund with the addition of these new futures contracts. Importantly, we’ve designed the Bakkt Warehouse to provide regulated, secure custody of bitcoin that is protected by $125 million in insurance.”

First opening its offices in 2018, Bakkt was created by New York Stock Exchange (NYSE) owners Intercontinental Exchange with the goal of leveraging Microsoft cloud solutions to produce a regulated, global ecosystem for the transfer, trade and storage of digital assets. The company is partnered with major retailers such as Microsoft and Starbucks, as well as the Boston Consulting Group. Through creating an open, highly-integrated platform, both consumers and institutions worldwide can legally buy, sell, store and spend digital assets within the Bakkt global network.

What Bakkt Brings to Bitcoin and Crypto Markets

Among cryptocurrency traders, the formation of Bakkt has been an exceptionally big deal because it can bring legitimacy to the arena of cryptocurrency trading which it currently lacks — even if the SEC continues to rule against the formation of a Bitcoin ETF well into the future. According to the Bakkt website:

“With state-of-the-art physical and cyber security, institutional grade technology and governance, and backed by insurance for digital assets held in frozen wallets, Bakkt is delivering a new standard in digital asset custody by leveraging the cybersecurity tools on which the NYSE relies…

The new bitcoin futures contracts have been shaped by our conversations with stakeholders, and offer unique trading, security and risk management features.

Two futures contracts will be listed: 1) A daily settlement bitcoin future, which will enable customers to transact in a same-day market. And 2) a monthly bitcoin futures contract will enable trading in the front month and across the forward pricing curve.

The futures contracts will be margined by ICE Clear US, including the collection of initial margin collateral and variation margin to manage risk. This approach is consistent with capital-efficient risk management practices in global futures markets, ranging from oil and gold to interest rates and equity index futures.”

Futures Contracts Explained

With a futures contract, a purchasing party locks in a price to purchase a particular commodity with a contract; in this case the commodity is bitcoin. If the price of the commodity rises above the purchase price of a commodity, it can be sold for profit. If the price of the commodity falls, the futures purchaser is still required to pay the price for the commodity listed on the contract. While some might see this as an example of gambling, it should be noted that such futures contracts are frequently useful for those counting on buying or selling a commodity at a given price and can be seen as a way to escape market volatility. As far as what the “physical” portion of a “physical delivery futures contract” implies, it means that the purchaser of the contract is obligated to buy the bitcoin at the price stated on the contract while also serving to differentiate Bakkt’s particular form of contract from cash-settled futures, as used in currently operating Bitcoin Futures markets, such as the CME / CBoE bitcoin futures.

Many institutional-sized investors remain on the sidelines of crypto trading over worries of its legal nature. Initially, Bakkt’s Bitcoin Futures market was slated to open in mid January 2019, but it faced a number of regulatory hurdles, ultimately postponing its approval until September. Bakkt’s Bitcoin Futures market will introduce a newfound level of credibility to bitcoin trading that has not been established in similar, pre-existing crypto futures markets. This could indeed make Bakkt the perfect catalyst for a new flow of money into bitcoin, as well as other cryptocurrencies, and be just what bitcoin needs in order to resume its bull market rally.