New Bitcoin Offerings and Volatility Reflect Challenges and Promise For Cryptocurrency

The Intercontinental Exchange (ICE) launched its physically-settled bitcoin futures trading platform, Bakkt, on September 23.  The Chicago Mercantile Exchange (CME) has been doing futures trading in bitcoin for even longer — since 2017 — and is now making plans to expand that platform by early next year with a bitcoin options contract.  It’s a market with promise, but one that’s been slow to grow — Bakkt had a particularly slow start, a problem that’s admittedly not unforseeable for any new futures market — and while CME has seen strong liquidity growth after its own tepid launch, other players like Cboe have pulled out of bitcoin futures entirely as of this year.

It wasn’t all downsides for Bakkt, of course.  Their first day of trading saw strong industry participation, with their October monthly contract showing the tightest bid-offer spreads in the regulated market for digital assets.

Regulated futures trading markets like these are absolutely vital to steering price discovery and stronger risk management to the crypto market, and they were a focus throughout Bakkt’s build-up to launch.  Crypto represents real value, and regulated, reliable infrastructure is a critical tool in building more certainty into a marketplace that traditional institutions have long viewed as too high risk.  Bakkt had to take extra steps to build in that kind of utility, serving not only as an exchange and clearinghouse for trading, but a true custodian for delivery through a license from New York financial regulators permitting a custody unit to hold customer tokens.

Other recent offerings are taking different approaches to overcoming the hurdles.  Fintech firm Amun and crypto fintech service Bitcoin Suisse announced the launch of their own Swiss franc-denominated Bitcoin/Ether exchange-trading product, trying to offer a financial hedge in the market by combining the two largest cryptocurrencies based on market cap.  Unlike exchange-traded notes on unregulated markets, The Amun/Bitcoin Suisse offering is operating under ETP principles, fully collateralized with bitcoin and ether custodied in Switzerland by Bitcoin Suisse.

The Pi Network, developed by a group of Stanford students, is looking to attract bitcoin interest from the non-professional end of the market, launching the first mobile bitcoin mining application.  Large-scale bitcoin mining through specialized computer chips has long locked out most everyday users from engaging in serious mining.  The Pi Network, through the use of the Stellar Consensus Protocol, aims to make that easier without using much data or battery power by putting users into a federated, decentralized network that is enabled to reach common agreement on computing decisions. The application is still in the testing phase, during with a focus on enhancing the user interface and overall user experience.  The network is going to be launched after the promotion phase of the decentralized network ends.

But as promising as these new approaches are, they haven’t changed the nature of bitcoin overnight — the cryptocurrency fell more than $1,000 from $9,700 the day Bakkt made its public debut, and has been sharply dumping in price ever since to its current position around $8,000.  Even that depressed point still represents a dramatic rally up from 2018 values, when the currency dropped over 80%.  That volatility, long endemic to the nature of largely-unregulated trading, is exactly what Bakkt and other traders need to change for the cryptocurrency market to flourish in a sustainable way.

That’s likely to take stronger regulation still — futures markets represent a concrete step forward, but as Securities and Exchange Commission Chairman Jay Clayton said in a September 19 statement, it’s still not nearly enough to see bitcoin on a major exchange.

“If [investors] think there’s the same rigor around that price discovery as there is on the Nasdaq or New York Stock Exchange … they are sorely mistaken,” said Clayton, the opening speaker at the Delivering Alpha conference, presented by CNBC and Institutional Investor. “We have to get to a place where we can be confident that trading is better regulated.”

CME and Bakkt’s futures efforts are a first step, but the actual coins are still nowhere near the major exchanges, and that continues to hold the asset back compared to more traditional investments.  That’s a problem when it comes to getting big banks and other major financial players to really enter the marketplace.  Attracting those kinds of investors is key to making bitcoin a more liquid market, and an increase of liquidity is the only real long-term solution to volatility.