Crypto Commentary: September – GSR Trading

Bakkt’s Disappointing Volumes

The Bakkt futures exchange launched this month but with disappointing volumes. It brought in $6.8 million in its first week. By comparison, CME Bitcoin futures traded $48.2M in its first 24hrs and $460 million in its first week. The CME did launch its futures product when the cryptocurrency market was at the height of its hysteria in December of 2017, but the difference in volume is still substantial. The launch of Bakkt futures has been widely discussed for many months but did not live up to the hype that was created with its initial announcement.

Many believed its launch would be favorable to the Bitcoin price, due to the reputation of Bakkt’s parent organization, its regulatory clarity, and Bakkt being a viable option for institutional investors. However, new institutional players did not arrive, what transpired instead was a first day of low volumes and a market sell-off the day after.

Many crypto-market commentators have cited lower-than-expected volumes for the ICE futures contract as the main contributor to the market’s recent drop. The influence of Bakkt on Bitcoin’s recent losses is difficult to define with certainty. Rather than the market move being tied to one catalyst, it’s also highly possible that the market was cooling off from the recent bullish gains that began in May — it stands to reason that large traders and/or miners may have wanted to hedge their exposure and take profits. Regardless of the volumes traded, having more regulated products being offered by reputable institutions like Bakkt helps move crypto towards becoming a legitimate asset class.

Bitcoin in the Face of Mass Uncertainty

The narrative emerged in recent months that Bitcoin is being used as a hedge to the mass uncertainty that currently grips the financial and political world. Interestingly, during what was arguably the most volatile political month in recent memory, Bitcoin’s performance was poor.

This month, House Speaker Nancy Pelosi announced that a formal impeachment inquiry would be launched in response to an alleged conversation between Mr. Trump and the president of Ukraine, Volodymyr Zelensky. In the same week, the British Supreme Court unanimously ruled that UK Prime Minister Boris Johnson acted unlawfully when he shut down parliament for five weeks in the run-up to Brexit.

On September 18th, the New York Federal Reserve launched a special operation aimed at easing stress in the financial markets. This repo operation was conducted with primary dealers for up to an aggregate amount of $75 billion. The central bank attempted to ease pressure in markets by purchasing treasuries and other securities. The goal was to pump money into the system to keep borrowing costs from rising above the Fed’s target range. It was the first time New York Fed’s had carried out such a rescue operation since the financial crash of 2008. Reserve balances have now fallen to an 8 year low. Such drastic measures may put confidence in the Fed at risk, as its actions did seem slightly abrupt.

Bitcoin’s recent poor performance highlights that maybe it is premature to call it an uncorrelated safe-haven asset, as some would like to believe. The current combination of financial precariousness and political uncertainty is a powerful mix that should inspire investors to look for a safe asset to store their wealth. Gold is currently trading around the $1,500 mark and has held on to its substantial gains from this Summer. Seeing large financial institutions in trouble should play into the hands of the crypto market, as a shift away from traditional monetary policy is at the core of why Bitcoin was developed. It is more likely, however, that major players in the crypto market, such as miners and whale traders, still have more influence than any overarching narrative that would appeal to the masses.

Regulatory Cat and Mouse

A collection of companies and exchanges in the space announced a new council this week which attempts to determine if popular digital assets are complying with U.S. securities law. The general cryptocurrency market is in agreement that most digital assets should not fall under an existing regulatory approach, as the traditionally used Howey Test appears outdated when considering digital assets. The consortium of companies, called the Crypto Ratings Council, consists of Coinbase, Kraken, Circle, Bittrex, Cumberland, Genesis, Anchorage and Grayscale. This movement was likely born from frustration with a perceived lack of action and on the regulatory front. Exchanges have the arduous task of determining which assets are more than likely not securities, so they can then list and offer them to their retail trading base.