Going After Institutional Investment: The Case of Bakkt and Coinbase

Coinbase and Bakkt have both released promissory statements that are effectively come-get-me’s for institutional investors. Published within hours of each other on August 20, 2018, both statements share a lot in common – wording, framing and a shared belief in institutional investment as the future of crypto trading. What is the endgame?

Gearing up for the Big Fish

For years, crypto was seen as an outlying asset – volatile and exciting, but mostly the preserve of tech nerds, libertarians, and low-level money launderers. From mid-2017, that all changed with bitcoin’s unprecedented bull run that took it within reach of $20,000 as bigger market players started to take notice.

One by one, previously crypto-shy institutions began dipping their toes in the market looking for a suitable entry point. A few like JPMorgan Chase went the bold way and established crypto trading divisions, but most remained on the sidelines, spooked by the industry’s plethora of risk factors and perceived lack of structure.

The news that Bakkt and Coinbase have published plans for welcoming institutional investment in the crypto market is potentially huge because this means that two of the most significant crypto exchange platforms in the market are effectively betting on a crypto market future that is dominated by legacy investors.

Coinbase is the largest crypto exchange by volume in the US, which understandably makes it a market mover. Bakkt, on the other hand, is pretty much the newest exchange in existence, but the list of organizations backing it is a Who’s Who of corporate America including Boston Consulting Group (BCG), Microsoft, Fortress Investment Group and Starbucks amongst others.

Formed by NYSE owner InterContinental Exchange (ICE), Bakkt has been very clear about its desire to help the crypto market evolve into a version of itself that will be more attractive specifically to institutional investors.

In the blog post titled “An Evolving Market’, Bakkt details its strategy for attracting and retaining institutional investors.

An excerpt from the post reads:

“…We’re starting with a proven framework that underpins exchanges, including a consistent regulatory construct, transparent, efficient price discovery, and an institutional quality pre- and post-trade infrastructure.”

Bakkt CEO Kelly Loeffler describes the company’s plan for transparent price discovery as “a fundamental part of advancing the promise of digital currencies.” In essence, the message is that the big fish will only come into the market when they have the assurance that the processes and mechanics supporting asset pricing is reliable and adheres to the standards they are familiar with.

Loeffler also states that Bakkt will offer institutional investors additional assurance compared to existing exchanges using a fully funded or collateralized buying and selling process.

This way, investors have the peace of mind that their bitcoin contracts are not margin trading. Such a system according to Loeffler allows for increased market integrity in conjunction with a secure and regulated physical settlement warehouse it offers to clients.

Coinbase Makes Eyes at Investors

On its part, Coinbase has announced the creation of 5 guiding principles targeted explicitly at its institutional investment business. These guiding principles it says will become the “North Star” of its business practices for legacy investment clients.

Coinbase Vice President and General Manager Adam White recently published a blog post detailing these principles which he says, will ensure fairness on the platform through a Market Operations team that will actively monitor markets and carry out the same surveillance practices as tier one global exchanges.

According to him, the platform will use active monitoring to catch suspicious trading behavior and ensure fair market conditions for all investors. 

It will also avail investors of “institutional grade infrastructure and processes” to assist them with cybersecurity, compliance, onboarding and operating standards concerns.

In addition to fairness, security, and access to information for all clients, Coinbase also states that it will ensure total transparency in the process of listing new tokens, which is an issue that raised a stink for the platform in 2017. 

BTCManager reported in December 2017 that accusations of insider trading came up after the surprise listing of Bitcoin Cash.

To avoid this and the reputational risk that comes with such issues, Coinbase recently issued its Assets Listing Framework, but the latest information goes even further to spell out to investors the measures that will be taken to protect their investments and ensure that the Bitcoin Cash saga does not repeat itself.

Whether the long-awaited entry of institutional investors to crypto markets will finally happen because of these two statements of intent, remain to be seen. 

What is known for sure is that Bakkt and Coinbase are betting heavily on this move which seems to answer all the queries previously raised by the big fish.