Physically-settled Bitcoin futures on the horizon, Bakkt begins user testing

Bakkt began user acceptance testing for its Bitcoin futures contracts today. Unlike other contracts, Bakkt’s will be redeemable in the underlying BTC providing greater opportunity for institutional price discovery while increasing real trading volumes for the cryptocurrency.

Bakkt, a subsidiary of the Intercontinental Exchange (ICE), which owns the New York Stock Exchange, announced that it has begun “user acceptance testing” for its Bitcoin futures contracts today.

Today kicks off user acceptance testing @ICE_Markets for the Bakkt Bitcoin Daily & Monthly Futures contracts

Testing is proceeding as planned with participants from around the world

— Bakkt (@Bakkt) July 22, 2019

The announcement was met with optimism, with pundits suggesting more Bitcoin-oriented financial products will help drive institutional adoption.

congrats to @Bakkt on the beta launch of their physically settled bitcoin futures contract!

the market for bitcoin is changing, and quickly. futures, derivatives, and synthetics will fundamentally change the nature of the bitcoin market. see below what happened to gold ? pic.twitter.com/PI8KKadjFY

— Meltem Demirors (@Melt_Dem) July 22, 2019

There are a number of different firms attempting to create different Bitcoin and Ethereum-related financial products, including Bakkt, Fidelity, the Chicago Mercantile Exchange (CME), Bitwise, VanEck, and a host of other pioneers. The number and size of these entrants may indicate institutional demand for cryptocurrency is strong.

This is further evidenced by a recent report from Grayscale, a cryptocurrency hedge fund, which tripled its assets under management—increasing from $926 million to $2.7 billion—largely driven institutional demand for Bitcoin. Many of the financial products these firms want to offer are still awaiting regulatory approval from the Commodity Futures Trading Commission (CFTC) or the Securities Exchange Commission (SEC). Speculators believe that unmet institutional demand will cause the price of BTC to surge once these products are approved.

There is other evidence suggesting there is strong institutional demand. April data from the CME’s show $563 million in volume on Apr. 4th while the top 10 crypto exchanges at the time traded $685 million, suggesting there is demand for Bitcoin exposure among institutional traders.

The CME’s futures are paper BTC contracts settled in dollars. Bakkt is attempting to change that with its flagship product, globally traded futures with physical settlement, meaning futures contracts can be redeemed for the underlying Bitcoin at maturity rather than merely tracking its price.

These contracts from Bakkt and LedgerX may have a greater impact on Bitcoin spot prices than the currently available paper contracts by directly influencing supply. These contracts may also prove valuable to businesses, such as industrial crypto miners, who need to guarantee the future sale or purchase price of their BTC inventory.

Bakkt’s futures will go live once it receives regulatory clearance from the CFTC. Given that LedgerX’s physically settled futures were approved in June, it might not be long before Bakkt gets the greenlight.

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