Bitcoin ETFs vs. BAKKT – in Layman’s Terms
Backing the Bakkt
Crypto embraces many youngsters and often shows up as the first touchpoint to individuals when it comes to trading and the world of finance. Yeah, there wasn't a more hip thing than to own Bitcoin Dec '17 and even the price dropped like a rock – the young generation is yet mesmerized by cryptocurrencies. Understandable that many questions arise – many see themselves deep in a rabbit hole.
When it comes to Hopium, the Bitcoin ETF approval is still #1 on the list, which is considered as a catalyst to make the price great again. But once you start your research engine, you will discover critical voices, denying that these kinds of ETFs will be good for the crypto economy – those often see BAKKT as the holy grail to recover the invested college funds. Let's break these two down for you and check what they are and how they differ from each other.
Bitcoin ETF versus BAKKT which of them will bring us forward?
In the past few months, excited investors have been waiting with baited breathe for the SEC to approve Bitcoin ETF. While in August of this year the SEC rejected a total of nine ETFs, stakeholders believe that its only a matter of time before ETFs are approved. One of the underlying message delivered by the SEC during these rejections was that the rejection did not hinge on the viability of Bitcoin and blockchain has valuable utility but on the basis of uncertain investment models.
Amidst the Hype and clamor for Bitcoin ETFs, leading security exchange operator ICE has announced the launch of digital asset platform in the name of BAKKT. ICE the company behind 23 global exchanges including the NYSE has partnered with Microsoft, BCG, and Starbucks to create an open and regulated, global ecosystem for digital assets. Below we aim at examining these two platforms with an aim of determining which one is more appropriate for investors. OK – you promised to explain this stuff, and instead you put up more question marks, I hear ya!
What the hell is a Bitcoin ETF?
By definition, an Exchange Traded Fund or ETF is a security used to track assets such as commodities, bonds, equities or in this case cryptocurrencies. By principle, ETFs take custody of an asset and issue shares that represent ownership of the underlying assets. Shareholders are therefore able to own an as an asset without having to hold the assets physically. In the case of a Bitcoin ETF, investors are now allowed to hold Bitcoin without having to mine or trade on cryptocurrency exchanges.
ETFs are largely attractive for investors with interest in Bitcoin but lack the technical know-how to either mine or purchase the coins. There are two types of Bitcoin ETFs, those that physically hold Bitcoin and others that purchase Bitcoin derivatives. Bitcoin ETFs typically track Bitcoin benchmark index and replicate its performance. Traders are therefore able to open brokerage accounts with the ETF and make an investment without getting involved in the technical process of purchasing and storing Bitcoin.
OK, but what are the Cons of Bitcoin ETFs?
The biggest challenge of Bitcoin ETFs is their susceptibility to manipulation. ETFs are legally obligated to disclose their holding daily they are also required to benchmark their holdings on an index. This requirement allows those trading ahead of reconciliation to manipulate prices. Just like in traditional ETFs if activities of institutional investors would cause significant variation in prices. Ironically, creating the same problem Bitcoin was developed to solve.
Additionally, the use of Bitcoin ETFs will further undermine the democratic principles which form Bitcoin foundation. With ETF shareholders do not have access to Bitcoin but rather the approved participant (ETF manager) holds the coin. The approved participant(AP) has the key to the Bitcoin and is the one responsible for making decisions on behalf of the shareholders. In case of important decisions on the Bitcoin network that needs voting it is obvious that the ETFs who own a substantial amount of Bitcoin will dictate the outcome of the process. This undermines Bitcoin of decentralizing power to the people.
ETFs are also bound to attract more regulation from government agencies and regulators. Since Bitcoin will be now seen as securities ETFs will be required to increase transparency by disclosing important user information to be approved. This will consequently, affect the ability of users to transact transparently.
OK got it, but what's gud with this BAKKTeria?
For most people, BAKKT has been largely associated with Starbucks and coffee. However, these perceptions have been largely missed the point, there is more to it than coffee and Starbucks. BAKKT is developed to be a complete ecosystem for digital assets, it only happens that Starbucks is the first pioneers of the platform. Courtesy of ICE reputation as one of the world’s largest exchange owners and its partnership with partners such as Microsoft and Starbucks.
BAKKT has generated massive interest from the general public BAKKT will be an open, seamless global cryptocurrency platform and network that will allow consumers and institutions to buy, sell, store and spend digital assets simply, safely and efficiently. The platform will also offer physically settled one-day Bitcoin futures contracts and digital assets warehousing with an aim of an aim of de-risking Bitcoin for ICE customers.
According to BAKKT's CEO, Kelly Loeffler, the platform will be primarily focused on trading and conversion of Bitcoin to the three major fiats, pairing against the US dollar, British Sterling pound, and the Euro. This is in a bid to allow business to leverage on the potential of digital assets using their current financial infrastructure.
In an announcement made in August, BAKKT revealed that its physically delivered Bitcoin contracts futures will be launched in November, subject to approval by CFTC. Ideally, BAKKT will allow customers to buy BTC one day and expect delivery of the currency the next business day in tangible form. This will help in establishing consistency with regulation and enhancing transparency and efficient price discovery.
More so, BAKKT will not support margin trading, leverage, or cash settlements and all contracts must be fully backed with collateral. This company will also offer secure and regulated warehousing for the digital assets these measures are put in place to ensure market integrity and promote trust in the platform.
Too much information, which one will bring 20k again?
Over and above, the BAKKT ecosystem will be able to combine the benefits of cryptocurrencies and regulatory compliance. Investors can, therefore, benefit from the increased privacy and security of Bitcoin while also enjoying regulatory compliance. That the platform is backed with real-life assets further reduces the risk of volatility that is inherently associated with cryptocurrencies. The overall outlook for cryptocurrencies tends me to say, that BAKKT is more healthy to the ecosystem.
The challenges of price manipulation, decentralization and increased regulations associated with ETFs can be overcome using the BAKKT platform. Crypto users have direct access to Bitcoin keys and are hence can participate in decision making on the platform. Additionally, BAKKT will not be responsible for holding digital assets hence chance of manipulation are significantly reduced. BAKKT also offers users and institutions with functionalities and applications that would otherwise not be possible with ETFs.