Bakkt claims its new cash-settled Bitcoin futures can help combat the suspicious price moves seen around the close of CME futures contracts.
Bakkt Futures hit a new all-time high today of 3,151 Bitcoin contracts traded – or US$23 million [AU$34 million] worth.
While an encouraging sign, that’s still a very small piece of the $1 billion in total worth of futures traded daily on platforms including major competitors CME and Binance.
Part of the answer to increasing Bakkt’s slice of the pie is the company’s new cash-settled Bitcoin Monthly Futures which will launch on December 9 in Singapore.
Open to investors around the world, the contracts are settled in fiat against data from the ‘physically settled’ Bakkt Bitcoin (USD) Monthly Futures contract.
Physically settled is better
‘Physically settled’ is a fairly misleading description for an electronic transaction, but it essentially means Bitcoin needs to be delivered as part of the contract, rather than the equivalent amount of cash.
Jennifer Ilkiw, Vice President of Intercontinental Exchange Asia Pacific and Head of Business Development for Bakkt, told Micky in Singapore that tying Bakkt’s cash-settled futures to the physically delivered one helped thwart wannabe market manipulators.
“I think the one thing about CME is … the clearinghouse is regulated but the underlying spot markets that they are settling their index off is not,” she said.
“I think there’s is also now a discussion on the ‘CME gap‘ which I have recently talked about as well.
“That concern is about: are those markets being manipulated around the close of the CME contract?”
WATCH: Micky’s interview with Jennifer Ilkiw from Bakkt
Research suggests something fishy going on
Ilkiw is far from the only person to raise that concern.
A research report from Arcane Crypto found that since January 2018 Bitcoin has fallen on average 2.27% as it approaches the CME expiration date.
That compares to the average of a random day in the same period where the loss is 0.06% on average.
While this is taken by many as evidence of manipulation, the report noted it could also be a “natural effect of hedging strategies”.
Ilkiw said the issue was that CME is unable to do anything about it.
“It’s something CME can’t manage internally because they’re not managing the manipulation of their Future’s contract, they can’t manage the manipulation of that index,” she said.
So how does Bakkt manage it?
“Well we don’t have an index. That’s why we have physical delivery.”
“We’ve got a lot of processes in place … to ensure that you don’t get market manipulation … market supervision, market surveillance, constantly checking out what’s happening the market to make sure that you’re not going to have these problems.
“We have (teams) in Singapore, in the UK, and in the US, to be able to manage these markets on a 24/7 basis.”
Bakkt said when it first announced its physically delivered futures product:
“A critical element to price discovery is physical delivery. Specifically, with our solution, the buying and selling of Bitcoin is fully collateralized or pre-funded. As such, our new daily Bitcoin contract will not be traded on margin, use leverage, or serve to create a paper claim on a real asset.”
We were totally always going to introduce it
Ilkiw said the development of cash-settled futures had not been in response to Bakkt’s much publicised slow start – which she said was only to be expected given that getting a new trader a clearing account and ready to trade could take “anywhere from four weeks to nine months”.
She noted that the cash-settled product was actually a response to customer demand.
“In the Asia space we’ve had a lot of people asking for a cash-settled contract and it’s trying to … expand the pie of users.
“As soon as you start bringing in the cash-settled contract all the number of users starts to increase.”
Ilkiw also said that it appealed to people who are interested in Bitcoin but don’t know how to open a wallet or get on an exchange.
“They can simply call their broker and say ‘Listen I want you to add Bitcoin to this.’ They don’t need to have any access to Bitcoin. They’re just all of a sudden able to trade of the volatility of Bitcoin.”