Institutions & Crypto: Repo Market & Bakkt
How the Fed's Repo Market activity affects Bitcoin and the Opening of the Bakkt Futures Contract
Bitcoin’s price is down almost 20% in the last week from $10,200 to just over $8,000 today.
It’s no surprise that many of the headlines are about this quick decline. It’s great fodder for the one zillionth time hearing that ‘Bitcoin is Dead’.
Price is only one indicator of activity and health in Bitcoin. The institutional markets had a busy week.
Federal Reserve Has to Inject Billions in Liquidity into the US Banking system
One of the big events of the week is the liquidity crunch in the Federal Reserve Repo (Bank Repurchase) market.
The Repo market is where banks lend overnight to other banks that need liquidity to maintain their reserve requirements. As a fractional reserve system, a bank is required to keep only a small part of its assets in reserves for liquidity or needs like customer withdrawals. The collateral is US Government Securities, Treasuries, which people have called a risk-free asset in finance for decades.
Often they lend each other funds overnight at low-interest rates since the banks have the ‘risk-free’ assets, just not the liquid cash. But this week, the repo lending rate jumped up from an average of 2.2% to nearly 6% in one day. The Federal Reserve had to add $75 billion of daily liquidity into the banking system for the last week.
Some good quality initial reporting of this comes from:
The Business Insider piece describes that this kind of intervention is the first time in 10 years that the Fed has had to inject money into the repo market. BI says the Fed has it in their schedule to continue the daily cash injections until October 10.
The NYT piece says this is ‘not a catastrophe in the offing’. It does a good job explaining how critical the repo market is in maintaining interest rate policy. They go on to say that this time is less risky because bonds are seen as low risk based on the low rates bonds are currently paying to fixed income investors.
These 3 articles do some pretty good straight reporting on it with some opinion (NYT) mixed in. Let’s see where Bitcoin and cryptocurrency fit into this.
Some Deeper Analysis & Affect on Crypto
One of my favorite people to follow in crypto, Caitlin Long, wrote a great piece for Forbes on why this is such a big problem.
She describes how this helps us see that US Treasuries are not really the risk-free asset people think it is. Caitlin goes on to say that for every US Treasury in the market, 3 different people think they own it, while only 1 does.
Curious how that happens? Read the article. It describes hypothecation and how GAAP accounting standards don’t account for this. The article also describes how shockingly fragile the US monetary system is and how Bitcoin is anti-fragile in comparison. It’s a real wakeup call to those that should pay attention to our financial system but don’t.
Bakkt Contract for Physical Bitcoin Opens
The big story for institutions in Bitcoin is the opening of the Bakkt Bitcoin Futures contract.
Here’s CNN’s coverage of the launch
The Chicago Merc (CME) already has a futures contract that gets good volume. The difference is the CME futures contract settles for US Dollars. This structure is a convenience to institutions, an understandable policy to generate interest. Bakkt’s futures contract settles in Bitcoin. Those who hold the contract to its monthly expiration will have to buy or sell Bitcoin to settle the contract. This is a big deal to get institutions to adopt Bitcoin.
Bakkt calls it a milestone for the industry since now regulated markets can accept Bitcoin for purchase and sale. Check out their tweet and Medium post about it.
This article calls their futures contract a ‘fully regulated infrastructure for Bitcoin’. I wouldn’t go that far but it is definitely a big advancement. It’s good for Bitcoiners and for institutions interested in Bitcoin as an asset class for investment.
Here’s the first-day volume
Kruger is quick to say in this thread that this low volume doesn’t make Bakkt a failure, just something to watch to see how adoption goes or doesn’t, for this contract.
One of the optimists on Bakkt
CoinTelegraph describes why this is a big deal (I think it is too)
And since next year we have a halving of the block reward, this take is interesting
We believe this is only good for Bitcoin. Either the market adopts this futures contract or it doesn’t and a better one comes along soon after.
What do you think about this new way to acquire Bitcoin through a futures contract?