The Bakkt Bitcoin futures exchange, backed by the owners of the New York Stock Exchange (ICE), launched last month with much ambition and promise for what it could do to take Bitcoin mainstream.
But the exchange has been wracked by persistently low trading volumes from its beginning—with some analysts even suggesting its poor start contributed to the recent crash in the Bitcoin market.
Yet after days of mostly horizontal movement, trading volumes for monthly contracts at ICE’s futures platform showed signs of life yesterday, skyrocketing by 796 percent from previous day figures.
An average of 224 contracts for monthly Bitcoin futures were traded on Bakkt on Wednesday (a new all-time high), as compared to the 25 contracts that changed hands the previous day.
The spike proved to be short-lived, however. Trading volumes fell rapidly this morning, reaching a nadir at 8:45 am U.S. Eastern Time, before beginning a climb back up. As the moment, only 80 monthly bitcoin futures contracts are on the trading floor.
Charles Phan, chief technology officer at Interdax—a crypto derivatives platform, says traders were reacting to news about the rejection of Bitwise’s Bitcoin ETF. “Now that the outcome is clear, volumes have settled back down again,” he told Decrypt.
Market makers may have also played a role by shifting funds across exchanges. “When someone trades with the market makers on one exchange, the market maker might also hedge on another, hence the correlated volumes across exchanges,” explained Phan. In this case, Bakkt was a beneficiary of market maker activity because it received funds from traders after the SEC announced its ETF decision.
A problematic return to normalcy
The return to business-as-usual might be a comforting state of affairs at other exchanges. At Bakkt, however, it is problematic.
An average of 139 monthly futures contracts have exchanged hands daily on Bakkt, as of today. The size of each Bakkt monthly futures contract is one bitcoin, meaning that an average of 139 bitcoins are traded on the exchange daily.
Meanwhile, its competitor, the CME Futures Group, has raced ahead. Trading volumes for monthly contracts of Bitcoin futures at the Chicago-based exchange reached an all-time high in July this year and it has doubled position limits for monthly contracts due to demand.
In fact, the wide disparity between trading volumes at the two venues was sharply outlined yesterday. Investors traded an average of 5,212 contracts, with an average contract size of 5 bitcoin per contract, at CME. This means that an average of 26,060 bitcoin were traded on CME yesterday as opposed to the Bakkt count of 224 bitcoin.
Why does Bakkt have low trading volumes?
The inflow of trader funds towards CME is generally construed as a sign of institutional investors becoming comfortable with Bitcoin futures. But their reticence towards Bakkt seems puzzling.
Some say it may be due to the fact that Bakkt’s contracts are physically-settled. This means that traders receive physical Bitcoin upon contract expiry. CME’s contracts, on the other hand, are cash-settled, meaning traders receive cash equivalent to the price of Bitcoin upon expiry.
“Cash settlement is more appealing to the speculative investor who invests more for cash gains,” said Vaibhav Kadikar, founder and CEO of CloseCross—a decentralized market prediction platform. “Given that these types of bitcoin futures tend to attract more speculative investors, there will be higher demand for cash-settled contracts.”
The popularity of cash contracts for Bitcoin futures also points to deeper, fundamental problem.
“It seems to me that Wall Street still doesn’t understand the concept (of physically-settled Bitcoin futures),” said Mati Greenspan, senior market analyst at trading platform eToro. According to him, one of the most important attractions of Bakkt contracts is that you can own Bitcoin, an asset which is rare and has significantly appreciated in price recently, after expiration.
Bitcoin ownership might be one part of the answer to Bakkt’s low trading-volume puzzle. The duration of its contracts may be another. There is no publicly available data about the trading volume for the exchange’s daily Bitcoin futures contracts, but Greenspan says it is “very, very low.”
This might be because they are not suitable hedging instruments for cryptocurrency miners. “Futures contracts are essentially for miners so that they can hedge production costs and lock their profits. That’s not something you can do (effectively) with a daily contract,” said Greenspan.
A chicken and egg problem
Correcting the problem of low volumes at Bakkt will take time due to a “chicken and egg” situation, says Ryan Alfred from Digital Assets Data—a company that provides data feeds to crypto hedge funds. In its essence, the situation is one in which Wall Street takes its time vetting Bakkt even as the platform struggles with low volumes for its products.
According to Alfred, institutional investors held off on investing in Bitcoin due to the absence of qualified custodians for Bitcoin. Bakkt, which has a regulated custody solution, might be a possible candidate for their funds. But they need to thoroughly inspect it before allocating money. That inspection is contingent on efficient functioning of the platform which, itself, depends on trading volumes. The circular turn of events means it might be a while before Bakkt receives Wall Street’s blessing.
That said, Bakkt may be positioned well to reap the rewards of its patience. “Big domestic institutions are not likely to want to do significant volumes on offshore derivative exchanges—Bitmex, OKEx, Huobi, Deribit—when they can face off with a counterparty they are already familiar with (ICE),” explained Alfred.