ICE’s Bakkt platform is offering a regulated way to store bitcoin which could lure Wall Street institutions

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• The Intercontinental Exchange (ICE) announced the
  launch of Bakkt, a new digital asset platform, on
  Friday. 
  The move, which represents one of
  the biggest moves by a Wall Street firm into crypto, swept
  financial news. 
• But many experts think headlines missed a key aspect of
  the plan, which could help bring the bitcoin market to the next
  level. 
• The Bakkt platform, which will facilitate the trading
  of a physically delivered bitcoin futures contract, offering a
  regulated way to store bitcoin. 
• This could lure big institutional traders to the
  market. 

“This is what the market has been crying for.”

David Mercer, the founder of UK trading firm LMAX, is typically
critical of the futures markets for cryptocurrency. He doesn’t
think the underlying spot market is mature enough yet for a
futures one on top of it. 

But he, like many other experts, saw Friday’s news
that the parent company of the New York Stock Exchange was
launching Bakkt, a crypto ecosystem, as a positive step to
the market. But it’s not the fact that the platform might make it
possible for someone to convert their crypto into USD to buy a
latte at Starbucks that has Wall Streeters excited. It’s
something a bit more pedantic to the non-trading wonk. 

The first step in the platform will be a crypto futures contract
that physically delivers bitcoin. Elsewhere, at rivals CME and
Cboe Global Markets, bitcoin futures settle in cash. 

What does that mean?

At the end of a futures bet that’s cash-settled, a trader
receives or pays the difference between the price at which they
bought the contract and its settlement price. In contrast, with a
physical-settled future, a trader would take their payment in
physical bitcoin. 

As Business Insider previously reported in February, traders from
firms like DRW, DV Trading, and B2C2 were
clamoring for physically-delivered bitcoin futures. At the
time, however, it wasn’t clear whether such a set-up could exist
because it require complex systems to store bitcoin. 

The fact that traders will be able to trade bitcoin futures that
physically deliver would make trading less risky and would better
facilitate an arbitrage trade, according to Garrett See of DV
Chain, a crypto trading firm. 

If bitcoin is trading at a discount in the spot market relative
to the futures market, a trader can go long bitcoin and short the
future for a profit. This is hard when a future settles in cash
because it requires a trader to make another trade.

 Max Boonen, the founder of B2C2, a UK-based crypto
market-making firm, said that such a settlement infrastructure
would be difficult to implement.

“Basically the clearing houses and [brokers] would need a bitcoin
infrastructure to transfer crypto,” he said in an e-mail to
Business Insider.

Physically settled bitcoin futures would also need to get the
green light from the Commodity Futures Trading Commission. 

But Bakkt plans to get that infrastructure in place. According to
the news release on Friday: 

“As an initial component of the Bakkt offering,
Intercontinental Exchange’s U.S.-based futures exchange and
clearing house plan to launch a 1-day physically delivered
Bitcoin contract along with physical warehousing in November
2018, subject to CFTC review and approval.”

‘A very, very big deal’

Aside from the fact that physically-settled bitcoin futures could
make lives easier for traders, it could also point to a key
development in the market.

The thing stopping large Wall Street institutions from diving
into the market right now are the lack of prime services — such
as margin finance — and secure, regulated custody. 

“Bakkt is going to be a regulated custodian,” an investor in
Bakkt, who declined to be named, told Business Insider. 

The insider said every broker
dealer connected to ICE would be able to connect to Bakkt
and then trade, knowing their bitcoin will settle in their
warehouse.

“That’s massive. A very, very big deal,”
Patrick Rooney of Trading Technology said in a
message. 

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