December 2017.

It was the peak of the Bitcoin market rush. Everyone and their dog was buying Bitcoin in a rabid pursuit of instant wealth.

The news of institutional interest was finally coming to fruition with the launch of Bitcoin futures on the CBOE as well as the CME. It seemed that Bitcoin had finally arrived, accepted by the investing establishment.

The honeymoon ended abruptly.

Immediately following the CBOE futures launch, a flurry of short contracts on the exchange rose as the price of Bitcoin subsequently plummeted. The price fell from $20,000 quickly to $12,000, then $8,000, and eventually to a low of just above $3,000; a price that, many argue, is the bare minimum threshold for minimal mining profitability of most Bitcoin miners.

It bears mentioning that the futures contracts being peddled on the CBOE and CME are what are referred to as derivatives. Essentially, a “paper” certificate of sorts promises the trader payment in cash upon completion of a contract. No Bitcoin was ever held in custody by the CBOE or CME as part of this trading process. Instead, exchange users were playing with cash side-bets predicting the price movement of Bitcoin. By shorting Bitcoin, a savvy trader could both bet on its demise on the CBOE and accumulate the actual Bitcoin on OTC exchanges — where no price discovery would take place — at ever-deepening discounts.

In the meantime, the development of a physically-backed Bitcoin futures exchange was underway. Coming to you from ICE, the owners of the New York Stock Exchange and many other traditional exchanges around the world, the Bakkt exchange was readying itself for its own launch.

Bakkt is different from the CBOE and CME “paper” derivative exchanges in one crucial way. Rather than settling contracts with cash, the exchange promises to settle all futures contracts with Bitcoin. This, of course, means that for every Bitcoin that is tied up in contracts on the exchange, Bakkt must hold Bitcoin — not just a cash equivalent, but actual Bitcoin — in its custody — hence, the name “Bakkt”.

This would have required the company to accumulate Bitcoin over a long period of time, say, a couple years. It would be best if the company could accumulate the Bitcoin at low prices, over OTC, for example. In fact, if these entities could suppress the price of Bitcoin, by shorting it, for example, and simultaneously accumulate it in order to have a vast inventory of Bitcoin ready to go at launch, that would be ideal, really.

Seems like a good plan.

Of course, the SEC is keeping a close eye on all of this activity. It wouldn’t be acceptable to have just a single physically-backed Bitcoin futures exchange monopolizing the market. To prevent issues with what is referred to as “antitrust” law, the SEC must ensure that competition exists for the health of the economy. A Bitcoin ETF, for example, can’t be approved by the SEC if there isn’t sufficient price-discovery through open and competitive markets. It’s just too easy for prices to be manipulated and controlled by a single powerful entity unless there is some form of competition.

As Bakkt gets ready to launch some time in the near future, more exchanges will jump aboard the physically-backed futures boat. ErisX, for example, just happens to be partnered with Fidelity and, you guessed it, the CBOE; the very same CBOE that just announced it’s finished with Bitcoin derivatives trading.

What will this do to the price of Bitcoin? Prediction of such market factors is a fool’s errand, but if supply is outstripped by demand, as could be the case with an upsurge in accumulation, it seems logical that the price would be driven upward.

It is reasonable to expect, after all, that large entities like ICE, Fidelity, and the CBOE are in the Bitcoin game for the purpose of making serious money.