Fundstrat’s Thomas Lee Explains Why ICE/Bakkt’s One-Day Physically Settled Bitcoin Futures Product Is Such a Big Deal

On Thursday (9 August 2018), Thomas Lee, the Head of Research at independent research boutique Fundstrat Global Advisors, explained on Twitter why he believes that institutional investors will find buying Bitcoin via ICE/Bakkt much more attractive than via existing crypto exchanges such as Coinbase and Binance. 

Before we examine Lee's argument, it is worth recalling that on 3 August 2018, the parent company of the New York Stock Exchange (NYSE), Intercontinental Exchange (ICE), announced that it was launching a new company called Bakkt that would be "building an open, seamless global network to enable you to buy, sell, store and spend digital assets simply, safely and efficiently." The ICE press release said that one of Bakkt's first products would be a fully-regulated Bitcoin futures product:

"As an initial component of the Bakkt offering, Intercontinental Exchange’s U.S.-based futures exchange and clearing house plan to launch a 1-day physically delivered Bitcoin contract along with physical warehousing in November 2018, subject to CFTC review and approval. These regulated venues will establish new protocols for managing the specific security and settlement requirements of digital currencies. In addition, the clearing house plans to create a separate guarantee fund that will be funded by Bakkt."

The Bakkt website provides a little more information on this product:

"In November, ICE Futures U.S. and ICE Clear U.S. plans to launch its first physically delivered bitcoin futures and warehouse in coordination with Bakkt, subject to regulatory review and approval. This will enable access for institutional investors via regulated market infrastructure."

But to get a full description, we need to take a look at the relevant products page on the ICE website:

"ICE Futures U.S. offers physically delivered daily futures contracts on Bitcoin traded in BTC/USD (subject to regulatory approval). These contracts will be traded on ICE’s electronic trading platform, which offers industry-leading speed and reliability, regulated by the CFTC. All trades are cleared and guaranteed by ICE Clearing US, the central counterparty for all ICE cleared forex futures trades. Trades will result in physically delivered Bitcoin in ICE’s regulated Digital Asset Warehouse. Market participants are eligible to transact with any other market participants. ICE physically delivered bitcoin futures offer trading and hedging opportunities."

And here are the full specifications:

Market Specifications Trading Screen Product Name BTC/USD Futures Trading Screen Hub Name ICUS Contract Series Daily Futures Trading Hours 8:00 pm to 5:00 pm EPT Commodity Code BTC Contract Size 1 Bitcoin Price Quotation U.S. dollars per Bitcoin to 2 decimal places Minimum Price Fluctuation .01 ($0.01) Daily Price Limit None Last Trading Day 5:00 p.m. Eastern Prevailing Time (EPT) on the Business Day of the Daily Contract Date Final Settlement Last Trading Day MIC Code IFUS Clearing Venues ICUS

Note that the contract size is "1 Bitcoin".

Now, let's look at the two reasons why Lee thinks that it is better for institutionals to buy 1-day bitcoin futures contracts through ICE/Bakkt than via spot exchanges such as Binance:

 Now, as Lee notes in the following tweet, approval for this futures product is up to the U.S. Commodity Futures Trading Commission (CFTC) and not the U.S. Securities and Exchange Commission (SEC):

The reason why it matters which regulatory body needs to approve this product is that the CFTC's approval process for a new futures product is much simpler/quicker than the SEC's approval process for a new ETF/ETP since in the case of the former, there is a "self-certification process" that futures exchanges use to "bring the vast majority of new products to market." This is the same process that was used by CBoe and CME in order to launch their Bitcoin futures products in December 2017. Here is how the CFTC explained in its "CFTC Backgrounder on Self-Certified Contracts for Bitcoin Products" fact sheet back then why exchanges such as CME could do this:

"Prior to listing new contracts, the Commodity Exchange Act (CEA) provides designated contract markets (DCMs) with the option to either submit a written self-certification to the CFTC that the contract complies with the CEA and CFTC regulations, or voluntarily submit the contract for Commission approval."

Since ICE Futures U.S. is a DCM, it can use the self-certification process for its upcoming 1-day physically-settled Bitcoin futures product, and therefore, it is highly likely that ICE will be able to launch this product in November 2018 as planned.


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Trans-Fee Mining Crypto Exchange 'FCoin' Insolvent After Mistakenly Being Too Generous

One of the first cryptocurrency exchanges to adopt the controversial trans-fee mining (TFM) model, which has been called a “disguised ICO” has paused trading and withdrawals over a shortage of crypto worth up to $130 million.

According to a statement published by FCoin’s founder Zhang Jian, a former Huobi CTO, the exchange is now unable to process withdrawals as its reserves are down by between 7,000 to 13,000 bitcoin, worth over $130 million at press time, over an issue that’s “a little too complicated to be explained in a single sentence.”

Zhang’s statement details the cryptocurrency exchange wasn’t hacked, nor is it pulling an exit scam on its users. He detailed that an internal system error gave users more mining rewards than they should have received, noting the error wasn’t detected for a long period of time.

The transaction-fee mining model, which saw FCoin’s trading volume surpass $5 billion per 24 hours numerous times, sees the cryptocurrency exchange incentivize trading via its own token, FT. FCoin reimbursed users for transaction fees paid in BTC or ETH with FTs until 51% of the coin’s supply was distributed, and redistributed 80% of the BTC and ETH it collected to those holding FT tokens.

The controversial model drew criticism and saw Zhang defend it, claiming it was a misunderstood invention. At the time, he said:

If you look back at history, all new things were not recognized at the beginning. Many were believed to be fraud. Jack Ma was recognized as a fraud when he first promoted the internet in China.

Various cryptocurrency exchanges started adopting the TFM model shortly after, with research showing these platforms had unusually thin order books and low traffic taking into account the trading volumes they had.

According to Zhang, the errors in FCoin’s system gave away too many tokens in mining rewards from mid-2018 to mid-2019, when a complete back-end auditing system was implemented. As throughout 2019 the price of FT kept on dropping, Zhang and his team reportedly used their own funds to buy back tokens and drive up demand, a decision he claims was an error.

This, as it gave users a chance to sell their FT tokens and withdraw as much as possible from their accounts, while FCoin bought up tokens that kept on losing value. Zhang’s announcement came shortly after FCoin suspended its platform over a risk-control issue.

Zhang is now reportedly manually processing users’ withdrawal requests sent via email. The founder of the exchange claimed he will “switch tracks” to start again, and noted he hopes he can use the profits made from new ventures to “compensate everyone for their losses.”

Featured image via Unsplash.