Bakkt CEO Claims Crypto Exchange Will Be for Investors
Bakkt is a crypto platform backed by ICE and Microsoft, among other big corporate names. In a recent post, Bakkt CEO Kelly Loeffler announced more details about how Bakkt will work – including the types of users the platform will attract.
In a blog post titled, “An Evolving Market: The Need for Trusted Price Formation,” Loeffler explains her concerns regarding today’s crypto investment options. Today, some of the industry’s biggest institutional investors face disappointing investment options. These firms are interested in crypto and have money on the sidelines. They’re just waiting for a safe way to participate.
Loeffler claims that Bakkt will cater to these types of institutional investors while also catering to retail investors.
“Whether you’re an investment manager seeking federally regulated, institutional trading and security solutions or a consumer looking for more choice in transacting,” Loeffler states in the blog post, “we’re working to make the vision for wider application of digital assets a reality.”
Bakkt will specifically emphasize a transparent price formation process. Price formation or price discovery refers to the ability of markets to efficiently find the price of an asset.
The SEC has frequently had a problem with price discovery in the crypto community. In fact, it’s been mentioned in many of the bitcoin ETF rejections over the past year. The SEC feels like price discovery in the bitcoin market isn’t mature enough to support an ETF, and that markets are prone to price manipulation and other types of fraud.
The SEC mentioned the lack of effective price discovery when it rejected the Winklevoss ETF earlier this summer, for example, triggering a sharp fall in bitcoin.
The Winklevoss ETF would have only used the Gemini exchange to buy and price bitcoin. The SEC saw that as a problem. The ProShares ETFs, meanwhile, would use the more established and regulated CME and Cboe futures exchanges, both of which have supported bitcoin futures contract trading since December 2017. Although the SEC rejected the ProShares ETFs last week, they stayed their decision and the status of the ProShares ETFs is currently undecided.
Clearly, price discovery is a hurdle that the bitcoin markets need to cross. So how does Bakkt plan to solve this problem?
How Will Bakkt Create Effective Price Formation?
In her latest blog post, Loeffler explains that, “trusted price formation is a fundamental part of advancing the promise of digital currencies.”
With that goal in mind, Loeffler claims that all Bitcoin contracts sold by Bakkt will be “fully collateralized or pre-funded.”
In other words, Bakkt will have real bitcoin price discovery for real bitcoin. Anyone who invests via Bakkt will be buying real bitcoin. Yes, that bitcoin will still be controlled by Bakkt until withdrawal, but Bakkt claims every bitcoin on the platform will be 100% backed, creating more effective price discovery.
Bakkt will also not allow for margin, leverage, and cash settlement. Leveraged trading has had a controversial effect on bitcoin markets, allowing the borrowing of money to fund investments. This can create ineffective price discovery as people aren’t spending “real money” for “real bitcoin”.
Loeffler also emphasizes the importance of effective, secure storage in price discovery. Markets will be able to more efficiently find a price point when they know their bitcoins are being stored safely:
“Coupled with a secure, regulated warehouse solution,” the CEO concludes, “you can begin to see how this market infrastructure can help more institutions and consumers participate in the asset class.”
Will Bakkt Ruin Bitcoin with Excessive Financialization?
Loeffler claims Bakkt’s model will support market integrity and create effective price discovery. Others, however, see it as an indicator of the over-financialization of the cryptocurrency space.
The crypto industry is based on the idea that one bitcoin equals one bitcoin on the bitcoin blockchain. The financial industry, however, is based on the idea of fractional reserve banking, derivatives, and other products. Some believe these concepts are contrary to how bitcoin is supposed to work.
Critics see a big flaw behind Bakkt’s business plan: while the exchange claims to back each bitcoin with a real bitcoin, investors on Bakkt are essentially buying IOUs. That IOU claims that Bakkt will let you withdraw your bitcoin in the future, but Bakkt still owns that bitcoin until you cash out.
Ultimately, if bitcoin wants to reach mainstream financial institutions, then we need a company like Bakkt. Crypto purists will claim that we don’t need mainstream financial institutions because bitcoin has grown successfully for 10 years without them. Others, however, claim the financialization of bitcoin will take our favorite cryptocurrency to new heights.