In the official FCM Brochure of Bakkt, two passages have been discovered that would suggest that the futures contracts are not fully collateralised in bitcoin.
This was noted on Twitter by trader Alex Krüger, who commented as follows:
“Myth: Bakkt futures fully backed by bitcoin. Reality: Bakkt futures 37% backed by dollars or treasuries”.
Myth: Bakkt futures fully backed by bitcoin.
Reality: Bakkt futures 37% backed by dollars or treasuries. pic.twitter.com/m9Gww7SP8v
— Alex Krüger (@krugermacro) December 2, 2019
The document covers the Bakkt Bitcoin Daily Futures (BTC) and Bakkt Bitcoin Monthly Futures (BTM) contracts. The alleged points are the second and third of the document.
In the second point, the brochure addresses the question about the leverage of Bakkt futures contracts on bitcoin. The answer reads:
“Yes. Both contracts will be leveraged futures and will be margined by ICE Clear US (ICUS), including the collection of initial margin collateral and variation margin to manage risk. ICUS initial margin for the Bakkt Bitcoin Daily and Monthly Futures is expected to be approximately 37% for outright contracts”.
The third point responds to the explicit question regarding the possibility of using BTC as collateral at the clearinghouse. The answer is:
“No. Initial margin must be met in USD cash or US Treasuries. Variation margin must be paid in USD cash”.
In the fourth point, on the question of whether the clearing member holds or delivers bitcoins, the answer reads:
“No, the delivery accounts in the Bakkt Warehouse will be in the client/end user’s name. Although the clearing member will have visibility into the bitcoin that it’s clients hold at the Bakkt Warehouse, clearing members will not need to have an account at the Bakkt Warehouse and will not need to interact with bitcoin. The Bakkt Warehouse operations team will interact directly with trading participants to facilitate bitcoin deposits and withdrawals”.
All this has led Krüger to claim that Bakkt’s bitcoin futures contracts are actually backed by 37% US dollars or US Treasuries.
Federico Izzi, an independent analyst and trader, and a contributor at The Cryptonomist, commented:
“Kruger simply points out what happens in traditional finance, for example with the collateralisation of commodity futures. Contrary to the narrative, a futures contract is not always fixed 1:1 with the underlying physical. In this case the Bitcoin Futures issued by Bakkt corresponds to about two-thirds physical bitcoin, while for 37% is covered by dollars and treasuries. This is not new in the financial sector, but it is a good observation to avoid falling into the error of believing in the myth of 100% bitcoin backing. Kruger’s initiative is a positive one for promoting the spread of financial education. All this, however, does not affect the BTC market, especially in the long term, since the use of a financial instrument, even if only partially collateralised in bitcoin, still leads to greater adoption of the instrument itself”.