Big names have been missing from the cryptocurrencies even as the industry has gained rapid mainstream traction. The bitcoin ecosystem is littered with names that are mostly unknown and new. That wouldn’t be such a problem if its credibility had not been further eroded by scandals and hacks. Entire cryptocurrency exchanges have closed operations due to hacks. Institutional investors, who provide capital to keep markets afloat, have mostly stayed from bitcoin due to its infamy.
That situation might change with a recent announcement by the Intercontinental Stock Exchange (ICE) last week. Along with the Boston Consulting Group (BCG), Microsoft, and Starbucks, the NYSE owner announced plans for Bakkt (pronounced “Backed”), a startup that will function as “a global platform and ecosystem for digital assets.” In simple words, this translates to a bunch of services, from trading platforms to custody solutions and infrastructure required to take bitcoin mainstream. ICE already owns several trading marketplaces across the globe and its entry into cryptocurrencies could provide a significant boost to their ecosystem. To be specific, there are three ways in which cryptocurrency ecosystems could benefit from ICE’s decision.
Increased Volumes For Futures Trading
The volatility in cryptocurrency markets makes it an ideal venue for trading on contrarian positions and earning big. For example, bitcoin skyrocketed by more than 2100 percent last year in the absence of a conclusive and specific reason for its ascent. It has fallen by more than 70% this year. A futures trader with shorts against it could have reaped significant returns.
But bitcoin futures markets at CME and Cboe have largely remained tepid. After a burst of trading activity on the day that they were introduced, futures prices have largely followed spot prices instead of the other way around.
The main reason for this is the structure of bitcoin’s futures contracts.
Up until now, bitcoin futures contracts have been based on prices at select underlying cryptocurrency exchanges. While that practice is not unusual, the absence of regulatory oversight at these exchanges has made institutional investors wary of putting their funds into futures markets.
ICE plans to introduce a 1-day physically-delivered bitcoin futures contract. “These regulated venues will establish new protocols for managing the specific security and settlement requirement of digital currencies,” the company wrote, adding that it would create a separate “guarantee fund” for investors. Regulation coupled with a fund that will ensure that investors are not shortchanged in case of a hack makes the cryptocurrency attractive to institutional investors. The introduction of physical delivery for bitcoin also heralds the maturity of bitcoin custody solutions aimed at institutional investors.
Increased Use Of Bitcoin For Payment and Retail Applications
The presence of Starbucks in the grouping has already resulted in reports that claim the coffee chain will soon begin accepting bitcoin for purchases. The reports surmised that this could prove to be a spur for widespread acceptance of bitcoin at other retail locations. But Starbucks has shot down those rumors. In a statement provided to Vice publication Motherboard, the Seattle-based chain wrote that it will not accept digital assets at Starbucks. “Rather the exchange will convert digital assets like Bitcoin into US dollars, which can be used at Starbucks,” the company spokesperson stated. Still the prospect of bitcoin (or other cryptocurrencies) being used for retail applications is a tantalizing one.
As Fortune magazine points out, Starbucks is already encouraging users to pay using mobile apps. Once network problems within the cryptocurrency ecosystem have been solved, the transition from mobile apps to crypto apps should be not be difficult. Interestingly, BCG included transacting on the Internet of Things and transforming the economics of digital content as two of the seven killer applications for cryptocurrencies in a December 2016 report.
According to Brian Kelly, founder of BKCM asset management, ICE’s announcement could lead to the introduction of cryptocurrency-related ETFs and mutual funds in the market. “They’ll now have a U.S. – regulated exchange and they have a licensed warehouse, which is how commodities are stored, and that’s going to make it a lot easier for an ETF to come through,” he told CNBC, adding that this was “huge news” and could lead to an explosion of crypto-related assets in mutual funds and exchange-traded funds. Due to their low costs and consistent returns, ETFs and mutual funds are popular with retirement accounts. According to data from the Investment Company Institute, mutual funds comprised two-thirds of the overall $5 trillion assets in workplace retirement plans. Even a small fraction of the overall amount could lead to a substantial uptick in capital for cryptocurrency markets.
The Flip Side To Institutional Investing In Bitcoin
Of course, there will be some negatives to balance out the positives due to maturity of the cryptocurrency ecosystem. Caitlyn Long, a Forbes contributor, highlighted the flip side in a post recently. According to her, it is only a matter of time before crypto-related derivatives and contracts that are not cash-settled (or require payment in cash instead of the actual delivery of underlying asset) emerge. She is referring to exotic derivatives, the sort which led to a crash in financial markets last decade, that make it difficult to track the underlying asset. According to her a requirement to physically deliver bitcoin for derivatives contracts would amplify bitcoin’s price fluctuations. Why? Because it will be difficult for Wall Street to create artificial scarcity for bitcoin as it did for credit and other commodities, when they were ripe to be converted into derivatives. In this case, the underlying asset is a digital instrument that is already, by its cryptographic and algorithmic nature, “hard to borrow”.
But HODLers (or long term investors in bitcoin, who bought the cryptocurrency in bulk, when it was priced in pennies) own a majority currently. “Bitcoin has algorithmically-enforced scarcity, and that’s a big part of what gives it value. If Wall Street begins to create claims to bitcoin out of thin air, unbacked by actual bitcoin, then Wall Street will succeed in offsetting that scarcity to some degree,” she writes.