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What Will Bakkt Do For Crypto?

In August, crypto changed forever.

The Intercontinental Exchange, operator of the world’s largest stock exchange, launched Bakkt, a global cryptocurrency platform allowing private and institutional investors alike to buy, sell, store, and spend digital assets like Bitcoin. The platform is also paving the way for one-day bitcoin futures and BTC warehousing, meaning they’ll be purchasing huge amounts of Bitcoin to back up their bitcoin investment vehicles and keeping those funds out of circulation. Many feel that ETFs won’t be long on the way given that such a major institution has stepped up to the plate and made a stance on crypto.

According to the announcement, Bakkt is an open ecosystem launched in partnership with BCG, Microsoft and Starbucks. The idea is that investors used to logging into brokerage accounts won’t need to go through the pretty cumbersome process of trying to figure out what to do with public and private keys, how to set up a crypto exchange account, etc.

Bakkt mainstreams crypto in a way that hasn’t been done before on this scale, and offers insurance and other safeguards that institutional investors will require before getting involved. ICE customers can now trade Bitcoin on the global market just like stocks.

Having said that:

https://twitter.com/RedditBTC/status/1034391220515221504

The CEO has stated that the platform is more for long term investors who want to buy bitcoin – or rather, bitcoin contracts, given that Bakkt will be holding the bitcoin and not investors.

Important: Investors aren’t buying Bitcoin, Bakkt is

Just to make that clear – what Bakkt sells is actually exposure to Bitcoin price movement, not the actual cryptocurrency itself. Sounds familiar, right?

Wrong – this is a whole new ball game. Unlike other services offering futures contracts, Bakkt is offering direct exposure as opposed to indirect exposure – yes, the investors that don’t buy any Bitcoin and are essentially gambling on the price action. However, the contracts are all pre-funded, meaning Bakkt actually buys the Bitcoin first and then allows investors to buy exposure making it a backed investment vehicle quite unlike other services like CBOE futures.

Many prominent figures see the Bakkt evolution it as both a positive and inevitable change.

Fundstrat’s Thomas Lee referred to it as “a roadmap that shows major institutions are creating supporting infrastructure for crypto.”

He pointed out in a Twitter thread that Bakkt came with several advantages. While it is much the same in many ways as buying from Coinbase or Binance:

“ICE already has existing and approved trading relationships with banks like JP Morgan etc and means that this is a natural pathway for traditional retail investors to access Bitcoin via their brokers. ICE is owner of the New York Stock Exchange.”

Lee added that ICE has revenues of $6 billion and assets of $85 billion, dwarfing any major crypto exchange out there by a wide margin and leaving it as a highly secure and liquid counterparty in terms of financials, albeit a centralized one controlled by Wall Street execs.

Good or Bad?

It’s a complex situation. While Lee is all for it, other figures like Wall Street vet Caitlin Long and ‘Bitcoin Godfather’ Andreas Antonopoulos aren’t so keen on Wall Street sticking its nose into crypto.

Subtle and insidious is how that tweet continues, in case you were wondering.

Long points out that two terms, rehypothecation and commingling, are about to become more relevant to crypto due to Bakkt, and they don’t spell good news. Here’s what they mean.

Commingling means that the CCP or custodian will hold client collateral (bitcoins, in this case) in a commingled, or “omnibus account,” rather than segregating them for each client in their own wallets.

Rehypothecation, on the other hand, is the process by which a lender receives an asset as collateral for a loan, and then pledges that collateral to cover its own exposure to a separate party, which then pledges that same collateral to a different party, etc.

You see banks doing this all the time, and it’s precisely what led to the 2008 banking crash – bankers literally passing the buck around until a maelstrom of unpaid, nearly impossible-to-track debt collapses the entire system.

This means traditional banking practices now have a major foothold in the Bitcoin markets, and Long believes that treating the decentralized cryptocurrency with fractional reserve banking techniques goes against the very reason Bitcoin was supposedly created in the first place.

So we’ve heard some of the negative aspects:

What’s good about it?

Banking practices also means all the usual bells and whistles that go with it which crypto is of course sorely lacking in. Derivatives, custody solutions, asset-tokenisation systems, merchant and consumer applications.

Founder and Chairman and CEO of Intercontinental Exchange Jeffrey C. Sprecher said that building a connected infrastructure would help build “confidence” in crypto asset class on a “global scale” consistent with the company’s track record of bringing transparency and trust to “previously unregulated markets.”

Of course – the whole point of Bitcoin was that it’s trustless, right?

The main bonus, if it plays out that way, is that the market cap could be abouut to totally explode which may contribute to another bull run, and that’s what has everyone who supports Bakkt so excited.

There’s no denying that Wall Street investment could be good for the price movement. However, die-hard crypto believers are likely to feel that this is essentially a commercialization of cryptocurrency that will only serve to regulate it to the point of being nearly indistinguishable from fiat currency.

Andreas Antonopoulos touched on this when he explained his thoughts on why ETFs are a bad move for Bitcoin, citing the potential for market manipulation as the main concern.

“If there is ever a fork debate, which is very likely to happen again in any cryptocurrency, then the fund that controls that Bitcoin now has a very large voice. Their shareholders don’t. They don’t get to choose which fork the fund is going to follow in a Bitcoin debate…

We already saw that level of influence during the August 1st fork, user activated software forks, Bitcoin cash, the scaling debate… Large custodial exchanges had a very strong voice in the ecosystem. They were able to decide if they were going to support or not on behalf of 10 million customers… an ETF will do that and it will do that on an even bigger scale”

OK, OK. That was more negative stuff, and I think we get the picture there.

Bakkt brings with it traditional banking practices that could put a lot of power and manipulation capabilities into the hands of the bankers, but it could boost the market cap. Is that it?

That’s not all

Apart from the market cap, Bakkt could really help with general adoption, no question. It makes crypto easier to access, something that really could bring in a lot more new investors. As well as sending everything on a moon mission, anyone who wants crypto to succeed wants to see it widely adopted and provided as a payment solution in stores and services. Bakkt will raise crypto’s profile and perhaps lead to more merchants worldwide accepting crypto.

As well as that, Bakkt facilitates tokenization of more assets. The name even hints at the idea of things being “backed” by crypto, and the tokenization of everything is an exciting concept that we’ve talked about here at Crypto Is Coming before.

Art, real estate, and other forms of physical property can be digitized and sold as tokens, enabling regular people to invest in things that were previously for the elite only.

All this change spells more interesting ideas and innovation, more adoption, more real use cases, and more money in the space.

But at what cost? How much of the core ideas behind the invention of cryptocurrency will be traded away to facilitate the new era of crypto?

We’ll have to wait and see, because there’s not much else we can do about it. Like it or not, it’s already on its way.

Remember folks, Crypto is comin!

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What Role Will Coinbase Play in The Crypto Space?

Coinbase has long been one of the most well-known cryptocurrency exchanges, providing a gateway for people to exchange fiat for Bitcoin which can then be held or moved to other exchanges with more trading pairs.

While Coinbase currently only offers Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, most exchanges don’t allow customers to purchase with fiat directly due to regulatory complications associated with doing so, allowing Coinbase to establish itself as a fundamental piece of infrastructure in the crypto-space.

The exchange has an estimated 20 million users and just shy of 1 million followers on Twitter, about 100,000 more than Binance which is the largest exchange in the world by volume.

Founded in 2012, the company dominated the space early on with the Coinbase iPhone app becoming the most downloaded app of last year when the company generated $1 billion in revenue. The company was valued last year at $1.6 billion by a number of firms and raised $100 million in funding from outside investors. At that time Coinbase offered employees a share buyback, which almost none of them accepted due to the idea that the shares would increase in value – and they were right.

Verto Analytics cited over 4 million active monthly users on the exchange as the value and usage increased, and the company is likely now worth billions – in fact, the company recently placed a valuation of $8 billion on itself.  Forbes states that Coinbase CEO Brian Armstrong is now a billionaire, or thereabouts with an estimated net worth of $900 million to $1 billion.

The exchange is a vital part of the ecosystem, although not without its own controversies and even rumors that the company will soon change hands.

Facebook Acquisition Incoming?

There have been persistent rumors that Facebook is closing in on Coinbase, seeking to absorb the highly profitable crypto-exchange with its tens of millions of users and connect both firms together, most likely integrating Facebook functions on the Coinbase interface.

The rumors are partly fuelled by the former head of Facebook messenger David Marcus joining the Coinbase board, which he announced over Twitter (probably Facebook too!).

Since 2005 Facebook have acquired 66 companies including Whatsapp for $19 billion, Occulus VR for $2 billion, and Instagram for $1 billion, meaning Coinbase is certainly within their grasp financially.

Director of Communications for DFinity supercomputer told CryptoNewsReview:

“Coinbase is a bargain at any price. If Facebook went ahead with the acquisition they could become the world’s biggest finance company, as well as benefiting from a once-in-a-generation event: the emergence of a new capital market. Coinbase is one of a handful of companies poised to capture uncountable billions of dollars.”

CEO Brian Armstrong on BTC/BCH

The soon-to-be-billionaire is a well-known figure in the cryptocurrency space, and unlike other CEOs of prominent companies, hasn’t been too shy about voicing his personal opinions on controversial issues within the community.

Armstrong has on occasion shown his support for Bitcoin Cash over Bitcoin Core, despite essentially BTC still being the most widely traded currency on the exchange. Coinbase staggered the release of BCH as an exchange asset between December and January.

https://twitter.com/Tom_Horvath/status/949207156338946048

In January 2016 Armstrong voiced his opinion that bigger block sizes was the solution to the scaling problem in a blog post, and Coinbase didn’t immediately adopt SegWit when it was released.

In 2016 r/Bitcoin mod Theymos removed Coinbase from the bitcoin.org’s list of suggested websites along with a number of other helpful and relevant resources as part of the ongoing BTC/BCH feud. Armstrong had previously suggested to the Reddit CEO that Theymos be removed as moderator from the sub due to the concerning amount of censorship taking place on site.

Regulatory Issues

The site reportedly had some trouble with the IRS over the requirement to disclose user information for the purposes of gathering data pertaining to the payment of capital gains tax in the US, to which Coinbase complied.

Coinbase is now on the way to becoming a federally regulated securities firm, to mixed reactions from within the community, many of whom are strongly opposed to regulation and government interference.

Coinbase COO Asiff Hirji recently published a blog stating that the company was obtaining a broker-dealer license, an alternative trading system license and a registered investment advisor license. At that point the company intends to seek approval from the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) to offer blockchain-based securities.

Competition

The company has some pretty stiff competition from emerging startup Robinhood which saw great success with its stock trading app before turning to cryptocurrency. The crypto app is also becoming very widely used and the company is now valued at $5.6 billion, rapidly gaining in valuation on Coinbases somewhat disputed $8 billion valuation.

The Robinhood CEO recently stated his intention to rival Coinbase with a recently acquired funding round of $363 million from investors. Unlike Coinbase, Robinhood is already a licensed broker with the SEC, giving the company a significant advantage in that area.

For many, the question isn’t whether Coinbase or Robinhood should end up on top, but whether such companies are good for the crypto space in general.

Undeniably the entry point Coinbase has provided people with over the last few years has been a fundamental piece of infrastructure that greatly aided adoption in a big way, with Robinhood offering similar ease of access to a world often viewed as overly complicated or technical for the lay investor.

However, the close ties to the SEC make others question the nature and motivations of the exchange – those seeking to escape the situation they are already in with fiat where they are beholden to government authorities to whom they must entrust their earnings do not view regulated exchanges as trustworthy or safe.

However, with the advent of decentralized exchanges like IDEX available, the crypto market arguably has the best of both worlds, with the dApp exchanges serving those wishing to go off-grid with their funds and engage in truly private and peer-to-peer exchange of assets, and giants like Coinbase and Robinhood catering to those who simply want to buy and trade some crypto.

Right now Coinbase is inarguably the crypto community’s biggest institutional evangelist….but is it the hero crypto needs?

Interested in other cool crypto posts….check out Mining Wars: Bitmain vs Dragonmint and The Price of Bitcoin vs Cost of Mining.

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