The launch of the first spot Bitcoin (BTC) exchange-traded funds (ETFs) in the U.S. was the biggest development to happen to King Crypto in years. Among the benefits, they brought a new level of legitimacy to the digital asset class and have led to a dwindling supply of BTC on the open market as firms gobble up tokens ten times faster than they are mined. 

 

To gain a better understanding of how the supply crunch is affecting market makers in the industry, Kitco Crypto spoke with Laurent Benayoun, CEO of digital asset market-making firm Acheron Trading and mentor for the Harvard Blockchain Incubator. 

 

Acheron Trading serves a variety of roles, operating as a principal market maker via the loan and collection model, a designated market maker using a retainer-based model, and they also offer a SaaS product that allows them to license their algorithms and trading infrastructure to other institutional players in the digital asset market. 

 

When asked how things have changed at Acheron amid the bull market over the past 3 months, Benayoun said “We are seeing interesting stuff coming into the treasury to be totally transparent.”

 

“There has been an uptick in activity, primary listings are going parabolic, and the initial listing multiples on price discovery are three times higher than where they were a year ago,” he said. “Volumes are up more than 150% from last year. Price discovery used to last for a day and a half – now it’s six days long. So the metrics are green.” 

 

As a market maker, Acheron primarily serves token issuers, helps recapitalize exchanges, and also serves some other market makers through their SaaS solution, he noted. 

 

Jumping into the topic of flows into the spot BTC ETFs, he noted the ongoing dynamic of funds shifting from futures ETFs into spot ETFs, as well as outflows from GBTC into the other spot ETFs. 

 

“This is just as a result of the expense ratio, or how much the issuer is going to charge based on the size that they manage,” he said. “Firms like BlackRock and Fidelity are super competitive when it comes to fees, and a lot more asset managers are starting to offer access to the ETFs. Recently, there was a news story circulating that mentioned Arizona was considering allowing Bitcoin to be purchased by retirement accounts, which just goes to show that there is a massive influx of institutional TradFi money going into Bitcoin.” 

 

He said this has had a “trickle-down” effect that has also helped boost the prices of altcoins, and which shows no signs of slowing. 

 

“We’ve seen some forecasts that say Bitcoin could go as high as $200,000 this cycle, just by virtue of having this massive influx of buying power and demand,” Benayoun said. 

 

When asked if he personally thinks BTC could go that high, or possibly higher, Benayoun referenced the total money supply to explain his reasoning. 

 

“There’s a shortcut to assess this by looking at the total money supply in the world – the total issuance of money by governments – and to compare them to the 21 million Bitcoins,” he said. “Taking into account that Bitcoin is fractionalized by ten to the power of eight in terms of decimals, it seems like being a millionaire in the Bitcoin world requires holding just one Bitcoin. That would be the equivalent of holding $1 million, given the currency money supply right now. So who knows, $200,000 is possible.”   

 

This is especially true when considering that there aren’t enough Bitcoins for every millionaire on the planet to own one Bitcoin, he noted. 

 

“So going by those back-of-the-envelope calculations, I guess it’s not unreasonable to think that Bitcoin is going to rise overall, especially when also accounting for things like inflation and an increase in money supply, etc.,” he said. 

 

Altseason

 

Addressing the chatter among some crypto enthusiasts that altcoins will die as institutions focus on Bitcoin, Benayoun pushed back against those concerns, saying the market has already seen a healthy level of rotation into alts. 

 

“More than just altcoins, we’ve seen meme coins going parabolic, and it seems like retail is very much present because I don’t think a lot of institutional players are trading those,” he said. “We heard a lot of things about retail being burned after the ICO boom of 2017 or the NFT and DeFi craze in 2020-2021, but despite that, it seems like retail is always present.” 

 

He also noted that despite the focus on institutional investors, the majority of institutions and registered investment advisors have not yet started recommending exposure to Bitcoin via ETFs to their clients. 

 

“These large institutions are very slow-moving vehicles,” he said. “When you think banks, mutual funds, and pension funds, those are like huge animals that are super slow to move. And it takes time to train their teams internally to offer those products to their clients and for clients to become accustomed to those products. So we haven’t seen all the potential that ETFs hold yet.” 

 

Benayoun also noted the “interesting imbalance between inflows and outflows,” and highlighted that ETF trading volumes “are in the billions every single day,” with every day surpassing the record set the day before.

 

Bitcoin liquidity

 

Multiple analysts have been drawing attention to a potential supply crisis as the amount of Bitcoin available on exchanges and over-the-counter desks dries up, which could send Bitcoin’s price roaring higher. 

 

“After FTX collapsed, we saw a pullback in terms of how much was held on centralized platforms, and by having fewer holdings on centralized exchanges, you’re trading into a thinner order book,” he said. “As a result, there is more of an impact on price, so more volatility. We expected to see, given the demand, more volatility, which has been the case as we reached an all-time high and then immediately dropped $10,000 back to $59,000.”

 

“Some people were predicting the influx of institutional money would narrow the volatility band, but it seems like the opposite is actually happening,” he noted. “And the interesting thing about ETFs is that they pave the way for options on those ETFs as a hedging tool. If you think about it, those options are probably going to increase liquidity even more due to the Delta hedging strategy.” 

 

Delta hedging involves the recipients of options hedging the value of those options as a form of protection. “The strategy involves selling as the price goes up for a call option, and buying as the price goes down. If you think about this from a liquidity standpoint, it’s going to further increase the volatility,” he said. 

 

When asked if the higher level of demand would make Bitcoin’s history of 50-80 percent pullbacks better or worse, Benayoun said it is hard to determine that at this point. 

 

“If we think about it from a centralization perspective, like how BlackRock holds more than 250,000 Bitcoin, it’s hard to say how reactive their clients are going to be in terms of liquidating those positions when the price starts to fall,” he said. “I don’t know how asset managers like JPMorgan and Merrill are going to respond when we see a significant retracement in crypto.”

 

“It’s possible that they could all react in the same way – because they have armies of analysts who are going to provide similar forecasts – and if they do react in the same way, we may continue to see those massive pullbacks,” he warned. “It’s real hard to predict right now. I guess we’ll have to wait and see what happens in reality as the cycle unfolds. 

 

The next downcycle

 

No market goes up forever, and past crypto bull market show that fast-rising prices can come down twice as fast, so it’s safe to assume that this bull market cycle will eventually come to an end. 

 

When asked what could be the source of the next downfall, Benayoun said there are two kinds of mindsets when it comes to crypto, and Bitcoin more specifically. 

 

“You have maximalists, which are people who are trying to maximize the number of Bitcoins they hold. Not necessarily the USD value of their holdings, but the actual number that they hold because they believe that at some point, government money is going to be very inefficient and inflation is going to skyrocket,” he said. “As a result, they are better off holding Bitcoin than they are holding any form of fiat currency. I think that is the case for people like Michael Saylor, who said he would never sell, even though he is billions of dollars in profit.” 

 

“Then you have another mindset, one that I see among some of my friends, where people are just in for the ride. They just want to see some gains in USD or fiat terms, and then they are happy to find an exit,” he said. “This is why you see those big retracements. You have hedge funds and retail traders who are calculating their profits in USD terms, which explains some of the regular pullbacks.” 

 

He said individuals in the first group, like Saylor, see retracements as a way to accumulate more Bitcoin at a discount, so they are likely to continue to occur to some degree moving forward. 

 

Strange cycle

 

When asked about Bitcoin’s historic climb to a new all-time high more than 45 days before its halving, Benayoun acknowledged that “This cycle is kind of weird.” 

 

“Two cycles ago the ATH didn’t get hit for several months out, and last cycle it took six months after the halving to hit a new high,” he said. “Now, we’ve hit a new high ahead of the halving, which is unprecedented.” 

 

“I think that there’s an interesting thing happening with the halving. Historically, it’s led to price appreciation for Bitcoin, then there’s a short lag, and then all coins appreciate,” he noted. “What is interesting to note relates to ordinals and the new BRC-20 standard which enabled NFTs to be issued on the Bitcoin network. On the market-making side of things, when we talk to issuers, a lot of their projects are actually based on this new standard, and they are trying to bring DeFi to Bitcoin.” 

 

“If you think about it, you have competing things happening,” he said. “You have a halving of the mining rewards coming, but on the other hand, you have an increase in network fees because the network is getting massively congested by the ordinals transactions. These two mechanisms are helping to compensate one another, decreasing the overall blow miners will feel from the halving.” 

 

“On top of this, you can add in the fact that the price of Bitcoin is rising,” he noted. “All of this is to highlight that I think miners aren’t necessarily going to be worse off following the halving. It used to be the case in the past where the reduction in block rewards made mining operations less efficient, leading many miners to go out of business.” 

 

“Having these competing mechanisms is something that we’ve never seen before, so it’s interesting to see what’s going to happen here,” Benayoun said. “Overall, I think the halving is very positive news for Bitcoin and for the rest of the industry.” 

 

“I don’t think we are in the actual bull run yet, although we reached a new all-time high,” he said. “I think that there’s way more momentum to come.” 

 

New project launches

 

Delving deeper into the types of projects seeking the market-making services of Acheron, Benayoun noted interest in launching on a variety of chains, including Bitcoin, Ethereum, Solana, Near, and even some who are interested in launching their own blockchains. 

 

“It’s very diversified and there are all kinds of standards now when it comes to new issuances,” he said. “I was telling my team the other day that it’s always pretty exciting to be involved in crypto, but it’s even more exciting when the entire world is talking about it and looking at us.” 

 

Bitcoin price prediction

 

As far as a personal Bitcoin price prediction goes, Benayoun said he “tends to stay away from those as much as possible because it’s like a coin toss a lot of the time.” 

 

“Based on the previous cycles, it’s my personal belief that the multiple of the next all-time high is going to be lower this time, maybe two to three times max, so something like $120,000 to $180,000 is reasonable,” he said.   

 

Future goals

 

As for what Benayoun sees as necessary developments to help bring greater legitimacy to digital assets, he said Acheron’s focus is on making a push for transparency when it comes to market making. 

 

“This is a segment of the market that has been vastly misunderstood by the industry, especially prior to 2017,” he said. “There was a lot of manipulation going on by so-called market makers, and there were a lot of predatory practices. There were some pretty big named market makers out there that had established certain predatory models, and that got the community concerned.” 

 

“We are trying to push for more transparency overall, and that’s why we are trying to be more vocal,” he said. “We’re partnering with research institutions, with incubators, with as many people as we can to spread the word that market makers should be transparent.” 

 

“Hopefully, as the industry matures, as regulations are put in place, and as more institutional players join on, we will be able to provide more transparency for everyone – for issuers, for their investors, and for the community,” he said. 

 

When asked if he’s seen the field of competition for similar businesses grow in recent months, Benayoun said yes, but noted, “That’s the case for every single cycle.” 

 

“The only difference compared to previous cycles is the regulatory angle,” he said. “Europe has been pushing hard for MiCA, and Singapore and Hong Kong are also pushing for their own framework. The U.S. was very much on the more cautious side of things, but it seems like some changes are going to happen in the coming months.”

 

“I’m sure that with the price action we’ve been seeing, we’re going to see a lot more stuff going to happen in this regard,” he said. “It’s a great time to start a business in crypto, but the main challenge is the regulatory angle at this point.” 

 

Additional crypto ETFs

 

When asked about the likelihood of an Ether ETF being approved, and the possibility of other altcoins getting an ETF in the future, Benayoun said it’s “reasonable to expect that future applications are going to be met with challenges.” 

 

“Bitcoin faced immense challenges, and it was already considered to be a commodity,” he said. “It’s not clear that ETH is seen as a commodity, despite what some people say, which is the first concern. Second, the challenge with an ETH ETF is centralization, which is a huge problem for proof-of-stake (POS). If you have a large issuer like BlackRock coming in and gathering up a lot of the supply of Ether, that essentially centralizes it, which will become a huge problem for its POS model.”  

 

And there is the matter of how an ETF will deal with staking, he added. “First of all, is staking going to happen? If so, what is going to happen with all those ETH that go to an issuer or authorized participant? Are staking rewards going to be redistributed?”

 

“This is in the case that staking happens on the issuer side,” he noted. “What’s going to happen with the risk management side of things? Staking is not a risk-free endeavor. So there are definitely some big question marks for an ETH ETF. Based on that, I’d also have to say that we are even further away from an ETF for another token like Litecoin or Dogecoin.” 

 

Even with those concerns taken into consideration, Benayoun said he sees a greater than 50% chance that an ETH ETF will get approved in 2024. 

 

ETFs and Institutions have changed the game

 

As the conversation came to a close, Benayoun noted several advantages to the arrival of institutional investors and TradFi on the crypto scene. 

 

“First of all, it introduces a convenient and regulated means to access the underlying assets,” he said. “It’s improving the perception of the industry, and is also improving the credibility of the industry as a whole in the eyes of regulators.” 

 

“It is also helping provide greater liquidity though an influx of buying pressure,” he added. “As I said previously, they could lead to the creation of things like options on the ETFs, which will further entice engagement from institutional players.” 

 

As for the downsides, he pointed to issues like “the drift down because of the expense ratio and the fact that you don’t actually hold the underlying asset.”

 

“There’s no self-custody, which could be a pro and a con, depending on who you speak to,” he said. “But overall, there are a number of advantages to the large-scale arrival of institutional players in crypto.” 

 

“With investors around the world expecting interest rate cuts, if that happens, risk assets are going to perform very well,” he concluded. “It’s already the case, but they could do even better if that happens. So I think, with all factors combined, we’re poised for a very good cycle.”