Bitcoin’s latest white knight hasn’t slain the dragon.
Bakkt, a bitcoin-futures platform created by
Intercontinental Exchange Inc.,
went live two weeks ago. It is a high-profile bet that Wall Street and institutional investors would embrace cryptocurrencies.
Their reticence has been evident in Bakkt’s (pronounced “backed”) first two weeks of operations. Trading of Bakkt’s bitcoin futures contracts has been minuscule. Only 49 contracts were traded on Friday. In the previous nine sessions, a total of 865 contracts changed hands, according to the company.
Those figures were a letdown after months of anticipation. Bitcoin’s price has fallen about 19% since Bakkt’s launch, trading Monday morning around $8,167, according to CoinDesk. It is down about 41% since hitting a 2019 high of $13,879 in June. Futures let traders bet on whether an underlying market—such as oil, gold, stocks or bitcoin—will rise or fall.
It was unrealistic to think that Bakkt would flip the on-switch and there would be a landslide of buyers, said
head of research at Bitwise Asset Management. “Things don’t explode out of the gate,” he said. “They take days, weeks, months and sometimes years.”
Bakkt initially aimed to go live last November, but the rollout was repeatedly pushed back as ICE struggled to get regulatory approval from the U.S. Commodity Futures Trading Commission.
Bakkt, whose investors include ICE,
venture-capital arm and Boston Consulting Group Inc., said a growing base of traders and clearing firms are using the platform.
For most of the past two years, bitcoin’s proponents have staked its future on Wall Street, specifically on drawing institutional money from investors looking for alternative investments. But bitcoin’s sales pitch has been hijacked by its own risks—from extreme volatility swings to market manipulations, fraud and theft.
Then there is the problem that bitcoin is unlike any other asset class and can’t be valued using standard methods.
Bank of New York Mellon Corp.
launched a fund in Europe in February designed to give investors exposure to bitcoin’s underlying technology, called blockchain. The fund, called BNY Mellon Digital Assets, invests in companies tied to blockchain and has about $10 million in assets under management. It was constructed in a way that it can also buy cryptocurrencies directly, but so far had not actually bought any, said BNY senior researcher Erik Swords.
The inability to value bitcoin using standard metrics, Mr. Swords said, makes it hard for a portfolio manager to justify putting clients’ money into it—and would make it even harder to justify the investment if it loses money.
“I can’t sit here today and tell you we have an effective valuation model as it relates to bitcoin,” he said.
For those reasons, bitcoin’s buyers remain largely retail. Those traders have been more active lately. The number of daily transactions on bitcoin’s ledger, called the blockchain, averaged 345,000 over the past six months, up from 316,000 over the past year, according to data from Blockchain.com.
But it doesn’t appear that much of that activity represents “outside” money. The growth in the number of wallets created has “slowed to a crawl,” according to research firm DataTrek. Searches for the word “bitcoin” on Google are down sharply as well.
That said, there is a small but real institutional market for bitcoin. There are several over-the-counter trading desks that cater to hedge funds and professional traders. CME’s bitcoin futures contract launched in December 2017—at the height of the cryptocurrency bubble—and has fared decently. It set record volumes over the summer, dovetailing with a price rally.
It, too, is still small. On Friday, it saw volume of about 2,000 contracts, minuscule compared with a popular product like the e-mini S&P 500 futures, in which more than 600,000 contracts changed hands on Friday morning alone.
Next up for bitcoin: exchange-traded funds. Later this month, the Securities and Exchange Commission is expected to rule on two applications from different groups for bitcoin-based ETFs. One is from Mr. Hougan’s firm, Bitwise, and another is from partners SolidX Management LLC and VanEck Securities Corp.
ETFs have been advertised as a way for investors to get exposure to bitcoin without the complications around issues like custody. The SEC, however, has so far rejected every application, essentially on the grounds that the market is too opaque to trust.
Even if the SEC approves its ETFs, Mr. Hougan said he would expect trading to begin as slowly as it has with Bakkt.
“It’s not like someone says ‘go’ and everyone rushes across the starting line,” he said.
Write to Paul Vigna at firstname.lastname@example.org
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