Will institutions fuel a new crypto bull run? Bitstamp U.S. CEO weighs in

The launch of the first spot Bitcoin (BTC) ETFs on the U.S. market was billed as one of the most significant developments for the burgeoning digital asset class, as it opens an avenue for large-scale investment flows from institutional investors.

To get an on-the-ground perspective on the level of interest from investors following the launches, Kitco Crypto spoke with Bobby Zagotta, the U.S. CEO of Bitstamp, the world’s longest-running cryptocurrency exchange.

“It’s a huge milestone and brings with it some real validation for our marketplace and the sector in general,” he said. “And most importantly, it enables different segments of the marketplace to get involved in a way that they’re very used to and very comfortable with.”

Zagotta noted that the inflows seen in the days after the launch have helped support Bitcoin’s price at higher levels aside from the expected correction, and said the products “create volume on various venues which eventually trickle down to trusted liquidity providers like Bitstamp.” 

While some would argue that a 20% pullback from the recent high contradicts his position that BTC is supported at higher levels, Zagotta said, “I think that there was a bit of an unrealistic expectation that it in and of itself would be a huge event from a marketplace perspective in terms of pricing and volume. I thought there would be some expectation built into the price, and it’s more likely to have a profound effect over a couple of quarters as more people and more companies make purchases.” 

“I think perhaps some very significant pension funds and others will eventually choose this avenue – the ETF avenue – to get involved,” he said. “It’s just going to grow the pie, as we say. It’s going to create a bigger, more robust marketplace. So, I think the price reaction we are seeing now is a little bit of a hangover based on perhaps unrealistic expectations for day one and day two.”

“It’s still positive in so many ways,” he added. “I certainly still feel momentum. Looking at pricing, we’re a little bit down, but we are also pretty dramatically up from even just a couple of months ago, and there are regulatory and other factors still in play that I think are weighing on the price.” 

He said the Bitcoin trading volumes on Bitstamp have been good overall, “particularly the first half of January, which has been very good.” The exchange also saw increased participation and onboarding on both the retail and institutional sides between November and January, he added. 

Despite expectations that many would forgo registering for a crypto exchange and just purchase the ETFs through their brokerage, Zagotta said they have been closely monitoring the process of new registrations, how many users verify their accounts, and who then makes a trade, and has seen “real positive movement in the last part of Q4 and early 2024.” 

“We also track app downloads and various leading indicators such as volume and revenue,” he said. “Our apps are getting more uptake now in this environment than during the crypto winter.” 

As for what will be the next major development to drive price action and engagement higher, Zagotta highlighted the Bitcoin halving, expected in April, and the potential launch of an Ethereum (ETH) spot ETF. 

“These are both super positive,” he said. “The ETH ETF is undeniably positive in the same way that I think the Bitcoin ETF has been. It’s not as big a marketplace, and probably not as big of an ETF marketplace, but it would be further validation for the asset class. There are some real passionate communities and segments that are more focused on ETH and related ecosystems versus Bitcoin, so making sure that those true believers have different opportunities to participate in the marketplace is fantastic.”

“On the halving side, that is also well-known to be a catalyst, at least as far as Bitcoin history suggests,” he said. “But it’s not 100 percent clear to me why the price doesn’t react on day one after the halving. It’s usually about six months later when the price builds some momentum, and then perhaps a different market structure presents itself, like a bull run.”

“I’d say it’s not a slam dunk that history will repeat itself,” he warned. “But it’s a pretty compelling case when you look at history. My personal view is it has a nice combination of bringing more attention to the crypto opportunity and helping to accelerate the ecosystem.” 

He noted that the reduction in new Bitcoin supply caused by the halving “changes the equation for miners, and in anticipation of that, and coming out of that, they have to change their models in terms of how they hedge and how/when they convert. I think that what miners do also has a pretty strong ripple effect through the ecosystem.” 

“So I think that’s what happens over the next six months, combined with some additional attention in the public eye, which will conspire to lift the price. Then lots of volume happens, and lots more people get to access this important technology,” he said. “So I’m hopeful about that.” 

Bitcoin mining

Delving deeper into the topic of Bitcoin mining and the halving, Zagotta agreed that the price of Bitcoin needs to rise after the halving because miners have fixed costs, and the only way to offset the reduction in the amount of BTC mined is for its price to increase. 

For this and other reasons, the field of Bitcoin mining gravitates towards consolidation and centralization, he suggested. For example, prior to 2020, more than 75% of the Bitcoin hashrate came from China, and recently, a cold snap in Texas resulted in the hashrate falling by 25% as the large number of mining farms located in Texas had to shut down to conserve energy. 

“From my vantage point, it’s a scale business, so and so that always lends itself to consolidation,” he said. “That’s what’s happened over the past five years. So instead of having a large number of mom-and-pop outfits, boutiques, experimenters, and universities mining, it has now become a space for a relatively few amount of very large and scaled operations.”  

“That’s how you achieve economies of scale,” Zagotta said. “So it’s not surprising that it has become that way, but it is a little counterintuitive, given that crypto is all about decentralization.” 

Ethereum ETF

When asked if Ethereum’s transition to proof-of-stake could affect its chances of approval for a spot Ether ETF, Zagotta said that is unlikely, because even if it is classified as a security due to that transition and the ability to earn a reward, the fact that the Securities and Exchange Commission (SEC) – key word being Securities – is the regulatory authority in charge of approving ETF applications “allows for all possibilities.” 

“But it’s very hard to say. I’ve tried to guess the SEC’s perspective before, and I’ve been wrong a lot,” he said. “They’ve got a tough job, it’s a very new concept and it’s a very fast-moving environment.”

“I’ve tried to connect the dots in terms of what their objectives are, what their beliefs are, and it’s a little challenging,” he added. “I remain hopeful that the SEC and all regulators can be more framework-driven. Communicate a framework to allow people to adapt and adopt the framework.”

Zagotta said part of the issue is the technology of blockchain and how unfamiliar it is to regulators. 

“We’ve felt that with regulators and lawmakers, there’s sometimes a gap in understanding of the core technology and the implications,” he said. “One of the things I realized early on in my crypto journey over the last five years has been that even finding great legal advice where there’s enough of an appreciation and understanding for the underlying technology to really be able to opine on questions of securities law and blockchain is a challenge.”

“There are tons of great securities lawyers, and there’s a lot of good technology lawyers. But you need both to keep up in this field,” he said. “It’s the same for regulators. It’s a tough skill set and capability to manage. And when they do find good talent, it is hard to retain them, because their skill set is so in demand that they get offered higher-paying positions.” 

Predictions for 2024 and beyond

When asked about his outlook for Bitcoin and the crypto market in 2024 and beyond, Zagotta said he “thinks the second half is going to be good, and an all-time high for Bitcoin is possible.” 

“Even if it’s not consistently at an all-time high level, it’s going to move around and it’s going to appreciate in general,” he added. “It’s based on all the factors we’ve been talking about. I also think some of the macro factors are going to improve, which will help it.”

As the Bitcoin ETFs start to gain traction, “We’re going to have more money coming into the ecosystem,” he said. “That’s always good.”

Zagotta also mentioned the increasing global debt level and the U.S. election cycle as factors that could affect the market. 

“I believe that in the months before the election, things are going to be pretty uncertain, which could lead to low volatility,” he said. “Immediately before and coming out of it, I think it could be a real change of regime and a change of outlook.”

He said he is hopeful that 2024 will bring greater regulatory clarity, “whether it’s decided by the courts or the regulators.” 

“Prior to FTX, not enough institutions and retail players were aware of, understood, or cared about the regulatory and compliance posture of who they were working with,” he said. “After FTX, let’s say 50 percent of them did, and going into 2024, when there are more traditional players in the market, it’s going to be 80%.”

“The big question for me is: As more traditional financial services players come in, are they going to try to push the ecosystem into traditional market structures, or are they going to take advantage of innovations that have happened in the existing crypto market structures?” he said. 

“Crypto markets are 24 by 7 by 365. Traditional markets are not. As more traditional players get involved, are they going to try to force crypto back to five-day-a-week trading and holidays off schedule?” he questioned. “Or are they going to recognize the value to people in different time zones and different geographies in having live markets?”

“There are a lot of things that are different about the way the crypto markets operate, which I think are more efficient than the traditional side,” he said. “So I’m hopeful that the traditional players don’t force 1940s market structure beliefs on what is a very dynamic and fast-moving marketplace.”