People in the space have hyped up Bakkt’s new futures contracts like never before. So naturally, when the volume was abysmal in the first few days, it created a lot of negative sentiment and FUD. These people seem to misunderstand the value proposition of Bakkt and what effect it has on the Bitcoin price; so let’s explore this misconstrued narrative.
We already have CME Bitcoin futures, and it’s doing well in terms of activity and volume, so why did we even need Bakkt? Well, Bakkt is essentially physically settled; this means when a person who holds the contract, they don’t make a gain/loss in cash – they make it in BTC. On CME futures, the difference is settled in cash and those who made a profit have their gains settled in fiat. Bakkt allows for settlement in BTC itself.
Institutional speculators are happy with CME futures, especially because the payout is given in dollar terms based on the Bitcoin price at expiry. Bakkt futures have a target audience of institutions involved in complex Bitcoin trades and merchants who purchase and sell goods for Bitcoin.
Let me use an example to make this easier to understand: Starbucks had tied up with Bakkt as a partner for the futures contract (yes, this is real). Now, Starbucks starts accepting Bitcoin payments in exchange for food and beverages at their outlets. They’re now holding Bitcoin and are exposed to volatility risks. The $100 they just collected could become $90 in the span of a day. In order to hedge against this risk, Starbucks enters into a contract to sell a certain amount of Bitcoin (the amount they received) at a fixed price in order to hedge against the volatility.
Since Starbucks is accepting Bitcoin and is naturally exposed to a long position, they have to enter a short contract on Bakkt.
Not many merchants who accept Bitcoin can pay for their input material with Bitcoin. This is because adoption is limited and a handful of merchants are willing to be paid in a volatile cryptocurrency plagued by regulatory uncertainty. So I imagine that most contract demand on Bakkt is from merchants who hold Bitcoin and want to hedge the risk, making demand skewed toward short contracts.
In the future, as Bitcoin becomes more dominant and gains adoption, many merchants will start accepting Bitcoin for goods and services as well as using some to pay for their inputs. This will bring equilibrium to the demand for being on the long and short sides of the contract.
However, today’s scenario is much more different. Bitcoin is primarily used for speculation, and value transfer/payments come second. Bakkt will gain a huge amount of traction once Bitcoin is being used and needs to be hedged. Expecting Bakkt to start off roaring when the underlying factors contributing to the product’s success haven’t been achieved yet, is naive.
Speculators cannot be expected to care about physical settlement, but institutional investors and merchants looking to hedge their spot investments will.