Last month, Bakkt was still firmly in the shadow of cryptocurrency ETF proposals. Come September everything changed and the current Bitcoin community agenda regarding Bakkt seems to be one hundred percent neon pristine positive.

It is always worth being careful about new projects, particularly ones with this overwhelmingly consistent response in a space like bitcoin markets and technology.

There should be some polarization in the community, it only shows there is development potential happening from bottom up.

Without disagreements, how can the blockchain space claim it is decentralized, and how different would the community be from a scripted TV debate or personalized Facebook agenda pushing?

The thirsty traders

As it appears now, the dire market conditions messed with the appetite for decentralized governance significantly.

In August 2018, freshmen cryptocurrency investors from late 2017 and early 2018 were getting exhausted by the prolonged downtrend in the fiat value of all cryptoassets.

While there is always a lot of silent people doing their thing as the bitcoin OTC volume estimates suggest, the public community voice was clear: There was a bubble after all, the correction has been long and exhausting, we need some fundamental positive news to justify a turning point.

In other words, We need someone who actually has money to invest, unlike us at this point, to start buying. Perhaps the ETF will do that?

Fuck the ETF, sure it can help price but why isn’t the Bakkt Project by ICE (the guys who own the fkn New York Stock Exchange) being hyped? It’s way more bullish. Physically backed futures contracts. That means they must buy the actual BTC, not like the BS futures we have now that don’t require the underlying asset to trade. ICE will have to buy up a ton of BTC and store it. Increase in price and reduced circulating supply. Win-Win. / Reddit, August 2018

This is not the place for Satoshi visions and other memes, rather it is that the community response prompts a simple appeal to common sense:

• Are you really participating in a capital market and relying with your decision making judgement on the conventional public opinions?
• With this mindset, would you have ever bought a cryptocurrency at any point in time before the bulk of 2017’s gains became publicly acknowledged?

Who criticizes Bakkt

With the majority of the community being stoked about potential relief from the bear market, there is not a lot of criticism based on ideology this time. When someone already brings up a point against Bakkt, it tends to be very factual.

And there is every opportunity to do so, for anyone who is interested: Bakkt project has a landing page and a blog but as of end September 2018, the content of both is marketing speak exclusively. Facts or responses to questions are sparse and vague.

At this stage, even an airdrop that distributes for a mailing list sign up gets questioned harder.

Not your keys, not your Bitcoin

“An ETF is a multibillion-dollar ‘not-your-keys-not-your-Bitcoin’ vehicle. That is why I am against it,” Andreas Antonopoulos said to the Bitcoin ETF obsession - an argument that applies the same to the Bakkt’s cryptoasset custody offering.

According to Antonopoulos, the implication of this big a market for “second-tier investors” is the power over consensus gained by actors who are not personally interested in the state of the network because they do not hold their own private keys.

Recalling the 2017 Bitcoin Cash fork and many other Bitcoin forks that followed, the pivotal point for most of them was the decision of major cryptocurrency exchanges to either support or disregard the forked coin. With bigger institutional investors coming to the market, should the fork pattern repeat, they will be the majority.

Nick Szabo similarly argues at this point the legacy products “might cause more problems than it’s worth”, as quoted by Bitcoinist.

The correlation of price with Bitcoin network activity

The symbiont.io president and Wall Street veteran Caitlin Long was similarly concerned about how forks will be handled by Bakkt, a question that was raised but left without an answer from Bakkt.

Long also criticized the fact that client collateral will not be held segregated for each client but in a single account (“commingled”) and that it will employ fractional reserve backing practices (“rehypothecation”).

• Read full commentary in “What Will Bakkt Do For Crypto?” on CryptoIsComing

While Bakkt futures will not offer explicit leverage, the two practices mentioned will effectively enable clients to trade with more Bitcoin than there is.

That weakens Bakkt’s contribution to price discovery and removes a degree of transparency from Bitcoin trading.

At the current state of Bitcoin markets, price action is still very much correlated with network activity and cryptocurrency exchange positions data, both of which are easily accessible in real time. Due to the hidden leverage, Bakkt trading could potentially cause events that will be divorced from metrics observable by the retail trader.

The fresh opportunity

Right now though, it appears that the business of capital management needs cryptoassets one way or another.

Elon Musk recently tweeted that he is considering taking Tesla private at 420 USD. Whether it was meant seriously or not, it has drawn the attention to a bigger problem: Due to increasingly strict regulations, the number of publicly listed companies in the US has fallen steadily since 1997.

In fact, more companies have delisted than gone public in every year of the past 20 years except the single year of 2013.

One of the implications of this situation is the damaging effect it has on portfolio management. It simply becomes more difficult to build a diversified portfolio when you don’t have a diversity of stocks to choose from, to quote the US Global Investors report written by Frank Holmes on 10th August 2018.

The report identifies cryptocurrencies and blockchain technology as a potential opportunity for investors who look to diversify.

The long-enough timeline?

It seems all of the critics of Bakkt point to a single issue: While it is laudable to pioneer a crypto custody service and to set the compliance standard for others, Bakkt’s own biggest edge seems to be in creating a silo of information about a market that, given the public trading conditions in the US, may later become crucial.

Even so, there are people who believe that ultimately Bakkt’s model will fail:

“A regulated exchange with a custodian may be popular for a short period of time, but it’s not the future. The future will be the original idea of a peer-to-peer network,” says Abhishek Punia, a cryptocurrency analyst at Draper Associates, one of the VC firms that are most active in the blockchain technology industry.

After all, silos are prone to conflicts of interest and the difference from legacy finance is rampant here: Nobody is a prisoner of the only available system; unless the Earth’s electricity gets completely shut down, anyone will always have a possibility to interact with blockchains in a non-custodial or even fully decentralized manner.

If the Bakkt hype is to be taken seriously though, no flight to decentralization is likely to happen before an impactful damaging incident.

Contact the author · Chris Appell
BIO:

Chris belongs to the crypto trader class of 2013 and he’s mostly writing on the topic of crypto trading and security. Located in the Americas most of the time, but you’re most likely to meet him on Reddit as u/KarlVonBahnhof.

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