Bakkt's volumes are soaring as bitcoin sinks, and it could signal impending 'hockey stick growth'

Cryptocurrency markets have faced a rout over the last month, but two firms are benefiting from the bearish price action. 

Bitcoin has tumbled over 11% over the past five days, falling below $6,500 for the first time in recent months on Sunday. Still, U.S.-regulated bitcoin futures markets have seen their volumes explode over the last week, according to data compiled by The Block.

At Bakkt, the cryptocurrency venture backed by Intercontinental Exchange, volumes for its monthly product hit a record 2,735 contracts on Friday, a ~130% increase over the week before. Open interest increased 150% over the same period. At rival CME Group, 11,537 bitcoin futures contracts traded hands on Friday, an 160% increase over the prior Friday.

At CME, large open interest holders has increased to 46, a 6% increase from October. 

Blame the shorts?

The spike in activity on CME and Bakkt should come as no surprise, as derivative trading volumes often increase when prices for an underlying asset oscillate rapidly. It's possible that volume growth has been fueled by hedge funds looking to take on larger short positions. As per data from the Commodities Futures Trading Commission, hedge funds were overwhelmingly short during the week of Nov. 12 compared to the sell-side, asset managers, and other groups.

Specifically, net short positioning (Short OI - Long OI) among hedge funds that trade the CME bitcoin product was at an all-time high over the last two weeks of COT report prints. 

Bobby Iaccino, founder of Path Trading Partners, told The Block he believes hedging is fueling the build-up of those shorts, rather than speculators betting against the market. Traders, to recap, can short via futures to either express a negative view on an asset or hedge a long position. 

"I couldn't speculate on the ratio of hedging to speculating but we believe large holders and miners see the short-term regulatory risk, but also the long-term value both as a vehicle for transactions and an uncorrelated store of value," he wrote. "Our belief is, large players DO NOT want to sell, since supply is finite."

Still, Max Boonen, founder of B2C2, a UK-based trading firm, said his clients' net position in bitcoin moved "noticeably more short/less long" on Monday. He said his firm saw quant funds go short in the days leading up to the drop. 

"If there was any buying it was tether buying (mostly from Asia) when it shortly fell below parity," he said. 

Bakkt 

As for Bakkt, the volumes growth could continue, according to Dave Weisberger, a market structure specialist who built out Citigroup's electronic trading infrastructure in the early 2000s. Weisberger, founder of CoinRoutes, said new markets typically build out slowly, but in some cases hockey stick patterns play out. 

"There's an old expression: liquidity begets liquidity," he told The Block. 

"That is why new venues and new contracts build slowly, but those that succeed eventually show a 'hockey stick' growth pattern before leveling off," he said.