Lately, there has been a lot of discussion about bringing Bitcoin to institutional investors. We have seen this news take the form of new crypto hedge funds, blockchain networks, and products that offer liquidity to institutions.
Most recently, we have an announcement from Intercontinental Exchange — the company behind the New York Stock Exchange (NYSE) — that they will create an open platform for trading digital currencies.
Intercontinental Exchange, which also goes by ticker symbol ICE, manages 23 exchanges around the world, ranging from equities to futures to commodities. The company’s revenues exceeded $5.8 billion dollars in 2017. (Yes, ICE is listed on the NYSE!)
What is Bakkt?
Bakkt is a new company, wholly-owned by ICE. Think of it as a sister company to the NYSE, and serving a similar purpose. The New York Stock Exchange is a stock exchange that allows investors to have access to equities — it provides access to millions of market participants from institutions and merchants, down to individuals managing 401(k) or IRA accounts.
Bakkt is looking to bring that same level of access to digital assets, including cryptocurrencies. Kelly Loeffeler, ICE’s head of digital assets, said: “Bakkt is designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility” (source).
If Bakkt can provide compliance and work in a similar fashion as existing exchanges (that institutional investors are accustom to interaction with), we anticipate the company to capture a significant part of the market.
The Potential Impact
Institutional investors are closely regulated. As a result, they cannot participant in all types of trading. Bakkt is hoping to provide a simple, compliant way for institutions and merchants to buy and sell digital assets, such as Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Bitcoin Cash (BCH), EOS, Stellar (XLM), and more.
Furthermore, Intercontinental Exchange is one of the most trusted figures in traditional finance. The “pitch” is very different coming from the owners of the NYSE, which is a 220-year-old institution, than from a blockchain startup. Their involvement in the crypto economy brings additional legitimacy and may spur crypto adoption for institutions, merchants, and other financial services firms.
What to Expect Over the Long Term
Over the long-term, the prospects are even more interesting. Bakkt becoming the dominant exchange for institutional investors is a massive market opportunity, but nothing close to what they are looking to do.
Eventually, Bakkt would like to use Bitcoin “to streamline and disrupt the world of retail payment”. Instead of relying on swiping credit cards or using chip-and-pin, the Bakkt management team imagines people scanning Bitcoin apps on smartphones and smartwatches. This provides an existential threat to Visa, Mastercard, AMEX, and others.
The company has leads with Starbucks and Microsoft, two giant Seattle-based companies that have much to gain in this new payment future. Starbucks would benefit from streamlined online and in-person payments, as well as reduced transactions fees. And for Microsoft, this provides an opportunity to go deeper in the payment stack: allowing the company to become indepesensible for national brands accepting crypto payments.
Today, BitPay facilitates BTC payments via their debit card and Coinbase Commerce allows websites to accept crypto through a simple API. The recent announcements by Bakkt provides yet another market entrant who is trying to break down barriers: Bakkt wants to create an “on-ramp” for institutions and merchants to buy and sell digital assets. Over the long term, the company plans to disrupt the existing payment infrastructure.
Looking to the future, we can expect to see crypto exchange-traded funds (ETFs), crypto in 401(k) and other retirement accounts, and much more. Soon enough, we may even use digital wallets for something as routine as purchasing daily coffee.
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