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Custody and Conventional Trading Will Not Be Enough to Expand the Bitcoin Market

Early last month the Intercontinental Exchange announced the creation of the Bakkt crytpto custody/trading platform, set to launch in November this year. It offers strong custody and physical delivery of digital aEarly last month the Intercontinental Exchange announced the creation of the Bakkt crytpto custody/trading platform. The exchange is sessets. Investors welcomed the news as most people are waiting for a catalyst to turn the market around.  In the following days, the staying order of the Futures Exchange Trade Fund (ETF) rejection added to the hope for the SEC to approve the proposed CBOE ETF.  This creates a bullish sentiment and outlook for future growth of the market. However, the lack of margin and leverage trading may limit the volume of traders. And there is no certainty that an ETF will compensate for shorting and Futures markets.

Trading

Bakkt plans to trade and store Bitcoin as well as operate a Futures Market. However, unlike BitMEX, Bitfinex, and Huobi, Bakkt will refrain from leverage trading. Bakkt CEO Kelly Loeffler stated that the exchange will not trade on margin, or otherwise. This is not only policy but a legal, mandated requirement by the Commodity Futures Trading Commission (CFTC). The CFTC regulates the Futures market and compliance is necessary in order for the trading of Bitcoin Futures on Bakkt. According to Loeffler, all trading on Bakkt will be “fully collaterized and prefunded.”

While this sanitized approach to trading will showcase transparency, and appease manipulation anxiety, it will do little to entice the major margin and options traders in Wall Street. That is because large investors opt for riskier instruments and profits; tools like leverage, margin trading, commingling, and rehypothecation. All of them are related in one way or another and they all define the same thing: larger profits. They are all part of the practice of trading on credit; borrowing against an actual, usually smaller, collateral investment. Then, using it to bet on a trade an “X” number of times, and reap the profits if the trade pays off.

The trading of borrowed, high risk assets, carry a far larger return potential than ordinary crypto currencies do on their own. Fractional Reserve banking is thus a necessary staple in a large securities market. It allows a string of participants to share a single and shoulder the risk and rewards. A lack of these trading practices will most certainly diminish institutional interest and will force Bitcoin to transform in order to fit Wall Street trading methodology or fail to integrate.

Shorting / Futures

In addition, simple trading will compete with the lucrative shorting market. Given the prolonged Bear market, it makes more financial sense to short Bitcoin than trade or HODL it. Since the inception of the CME Futures market, Bitcoin’s prices experienced a steady decline. And exchanges are working on introducing Futures for Ethereum and other high profile coins. This will suppress the market in a number of ways.

Analysis

The allure of a $131 trillion dollars, securitized, Bitcoin market will create an unnatural union between crypto and Wall Street. The two are inherently antithetical to each other. The technologies contrast and their trading mechanisms do not meld.  Wall Street trading is long established and unlikely to change. Therefore, unless Bitcoin is redesigned to fit the model, it is unlikely it will achieve the success the majority of investors is hoping for.

No riches will be made without the alteration and by definition, restructuring of Bitcoin. Without leverage, custody and trading of Bitcoin will not be sufficient to achieve the critical mass demanded by institutional investors. Unfortunately, this involves introducing highly speculative financial devices (like commingling and rehypothecation) and strategies that endanger stability. It is likely that a Bitcoin ETF will pass in the near future and Bitcoin will become just another controlled asset.  This will lead Wall Street to use Bitcoin to once again start the creation of speculative trading instruments or “Financial weapons of Mass Destruction.”

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