Cryptocurrency Derivatives Series: What Is The Motto Behind Bakkt’s Cash-Settled Bitcoin Futures?

The ICE-backed bitcoin derivatives marketplace, ‘Bakkt’ intends to launch bitcoin futures with cash-settling facility also by 2020. The company after successful commencement of custodian service to institutional clients, as a part of its expansion plans from its ongoing physically-settled offerings, Bakkt’s COO, Mr. Adam White made an announcement at Coindesk’s Invest conference in New York this week, stating that the InterContinental Exchange-owned firm intends to launch cash-settled contracts also before 2020.

Unlike CME BTC futures contracts, where the prices are cash settled, Bakkt offers trading facility for the physically deliverable bitcoin futures contracts. Since its launch on 23rd September, it is gradually picking up the momentum in its trading volumes owing to the growing interests from the institutional investors.

Cash-settling contracts would be subject to the CME CF Bitcoin Reference Rate (BRR) for the financial benchmarks. Renowned exchanges, such as GDAX, Bitstamp, Kraken, and itBit are the constituent exchanges to provide the required data for computation of BRR.

The single largest advantage of cash settlement is that it represents a way of trading Futures & Options based on assets and securities which would practically very difficult with physical settlement.

Cash settlements have enabled the traders to buy and sell contracts on the underlying securities such as, cryptocurrencies, FX, indices and certain commodities etc which are either unpragmatic or most unlikely to physically transfer.

It is a preferred method since it helps in reducing the transaction costs which otherwise would be expenditure in case of physical delivery.

Just for an instance, the futures contract on a basket of stocks such as S&P 500 will always have to be settled in cash due to inconvenience, impracticality and high transaction costs attached with physical delivery of shares of the 500 listed companies getting traded on a daily basis. While the supply will be sufficient in these cases, whereas there would be fixed amount supply in case of bitcoin (21Mln.).

Bakkt’s physically settled futures saw a tepid start, volumes are slowly gaining popularity with a fractional amount of the volumes than that was observed on the 2017 debut of CME’s cash-settled contract and yet the firm has since reported consistent gains in trade volume, having last week crossed $1 million in open interest attracting institutional client base.

Hence, Bakkt’s keenness on launching cash-settled derivatives appears to be for the competitive advantage by luring major gain from the institutional base.