#806: The Switch That Unlocks Institutional Bitcoin with Baron Koch

0:00 You've had a dynamic where money has become freer than free. We talk about a Fed just gone nuts. All the central banks going nuts. So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor.

0:28 I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be. Aaron Koch, welcome to the show, sir. Thanks for having me, man. Long time listener, first time caller. Well, I appreciate you joining me. And not only that, but you're like lighting, lighting mogging me on my own show right now.

0:50 The setup you have there in that studio is incredible. You know, we got to do things right. Well, I'm really excited for this conversation. I've been talking to yourself and Christian behind the scenes about what you guys are doing at Brains and evolving on the go. I'm sure we'll touch on that, but more important, we're also excited for this conversation, considering your background, managing endowments and pensions and getting a sort of ingrained view of TradFi and how that world works and how Bitcoin is looked at by TradFi and institutional investors and how it may become the asset that these types of investors feel comfortable dealing with.

1:39 And so I think with that in mind, maybe just an introduction of yourself, what you did before Brains, what compelled you to join a CFO and some of the things that that you're working on personally within Brains. yeah no i think it sounds great and i um so the last 20 years nearly um i've spent managing institutional portfolios so endowments pensions corporate balance sheets um really like in the low single digit billions three to four billion kind of range and i do think there's you know a lot of um there's a lot to be said about the process that that portfolios like that goes go through and how they think about allocating to something new. And there's a lot, it seems like it's brand new thing, but there's a lot of precedent there. But yeah, that's what I've spent my,

2:28 my career doing. And I mean, how a lot of, a lot of times people ask like, how do you go from that to Bitcoin? And I think my sort of villain arc, if you will, started in college, just I fell in love with finance, just the concepts of finance. It was a hobby just as much as a career path for me. And I had a lot of questions at the time that I even would ask like professors and peers in the class and just things that didn't quite feel right to me.

2:59 And, you know, things like the aggregate demand form, like the formula for GDP, how CPI is measured and things like that. And I would bring it up and it was kind of like, just memorize the formula and pass the test, bro, is basically the message. And I think that kind of planted a seed. And then I graduated in December of seven.

3:19 So my first full year of work was 2008. So I think deep within my sort of like investment psyche is just this. This understanding that things can and do break at a large scale. And I think also just watching what the Treasury and the Fed did during that time period, having just gone through my education, just didn't didn't sit right.

3:43 I'm like, this is not what I was taught. this is not how it was supposed to work. And that, that I think really was kind of like the origin story. My first, the first time Bitcoin came across my desk was I was at the hospital system managing their portfolios. And we had a surgical machine held up. So I mean, they have these, these surgical machines and it, someone froze it and said, give us Bitcoin and we'll unfreeze it while a guy's sitting there on the operating table. And no one knew what it was. So that was, that was really my first introduction was just like go research how do we pay these people to unfreeze the machine so this guy doesn't die i mean that's kind of like how this started and it was more like a practical um exercise i mean the analysis was really more just like

4:29 cursory i guess and then i really got um compelled to do a lot more work on it when one of my favorite hedge fund managers um shut down his his shop like he closed closed his doors And so I flew out to San Francisco. I mean, his performance was good. No investors weren't asking for their money back or anything. And just said, why, why, like, why are you shutting down?

4:55 And I think his answer like really changed the trajectory of my career. So he told me a couple of things that I'll probably never forget. The first one was that his ability to predict the future, his ability to make the right call hadn't diminished at all. but because of the amount of monetary easing and the printing distortions in the market he wasn't comfortable that he was able to deliver actual returns for his investors and that hit me pretty hard and then the second thing he said it was like i've seen this technology that i can't unsee and that technology is bitcoin and having just done that exercise about the surgical machines i was like okay that's that's not i didn't go deep enough basically so then that's that's what spun

5:40 me off on just this really secondary education about finance and just read and read and read and it just grabbed me and wouldn't let go. And I knew I had to take my career here in that direction. And brains was a natural spot for me, for me to land. So yeah, that's really, that's really kind of my, my story. And I mean, I think there's a lot of interesting things with how Bitcoin is, Bitcoin and finance kind of collide. And some of it's on the mining side where we focus in terms of getting financing to the miners and how you think about that. And then really just also with institutional adoption of the asset. And that's my goal. I mean, I think Bitcoin is coming to allocation, allocation is coming to Bitcoin. And I think there's a lot of

6:28 really interesting things about allocating on a Bitcoin standard that I just want to be ahead of. yeah i mean before we dive into the bitcoin stuff because i love learning out about this particularly the post 2008 sort of fun space because like i told you before we hit record i'm sure we'll touch on what you guys are doing um in terms of innovation within brains by the the acquisition of uh this managed futures fund because i started my career in managed futures but i remember i was a i was probably four years behind you but i started my career at a fund during operation twist. This is like 2012, 2013, when they were, um, were, uh, selling the bad assets and buying, like switching the durations or switching to mortgage-backed

7:15 securities with treasuries in that operation. Then QE2 came and then Bernanke held, uh, handed over the helm to Yellen. And I remember having similar conversations with CIOs who, um, the managers that we were indexing in our funds and they were saying similar things. Like it's just, the, the fed has completely manipulated the market. I don't feel like I can do this.

7:42 What was the strategy of the head fund manager that you had that conversation with? He was a, I mean, he was a technical guy. So, I mean, he, he did a lot of different things. But really what he did was make large calls. So, I mean, he first came on the scene and by calling the dot-com bubble, and then he called the mortgage crisis.

8:01 and he had some really interesting plays with Saudi Arabia, actually. So, I mean, it was the kind of portfolio where he would swing 50%, 60% of it. I mean, it's rare. I mean, a lot of hedge funds will make their calls on the margins and this guy just kind of balls out. Like whatever his call was, he would move his entire portfolio into it.

8:22 So, I mean, it was really like a macro strategy. and um yeah that that was basically his his take was like i can get these calls right but the market's not going to adjust to to the future that i see and it you know it's like one of the most honest things i've ever seen in the industry where it's just um you guys aren't asking for your money back i could easily just collect management fees for the next 10 years but this isn't what i want to do this isn't how i view the world and it was i mean it it was a wake-up call for me like you walk into the office and you could just feel the weight of, of the decision from the receptionist to the people giving you coffee when you sit down. I mean, they were taking art off the wall

9:00 and things like this. So, I mean, it, it just sat really, really deep with me and kind of confirmed some of the things that I had already been thinking. But yeah, I mean, I think it's, it's just one of those things that, that sticks with you, you know, and changes the way you, you think about things but much respect to the guy and and um from my understanding he's his his tree and people that worked with him at the time have gone on to do other things in bitcoin so good on him yeah you know it is and it is interesting too because i mean this is probably over a decade ago at this point you had a ton of managers feeling this way the one that you're describing actually had the the balls to say you know what i'm not doing this anymore but many just

9:47 went along with it and i don't think many people realize the extent of the manipulation of markets i mean if you're listening to this podcast yes you do but i think most people particularly participating in markets um have been lulled into a sense of complacency into a into a sense of like this is the way things work now and to your point earlier like the chickens always come home to roost that always comes home to roost like you can paper over this stuff for for quite some time but at some point it collapses under the weight of the complexity and the nonsense that is wrought throughout the system.

10:23 But I think turning this focus to Bitcoin, and I think we both believe that Bitcoin is a way out of this way to sort of reintroduce some sanity to the system, some structure, a rule set that can't be corrupted and manipulated. One of the things that you've been tweeting about recently is about where Bitcoin is in its maturation process.

10:49 And you were tweeting last week in reference to Elon Musk talking about the future money will be based on energy. And he won't name Bitcoin as that. I think he's thinking it will be compute tokens or something like that. But you made an interesting point that Bitcoin still trades on technicals, overwhelmingly on technicals as opposed to fundamentals.

11:10 And so just diving into that comment and getting a better understanding of your view of how where Bitcoin is on its maturation phase and the order of operations you envision Bitcoin going through to get to an institutional asset. that yeah I mean I think there's a couple different ways to look at it I mean like when you go through the academic process of learning how to invest they split it into those two buckets right fundamental analysis technical analysis and almost all of what you see is Bitcoin trading on technicals so I mean looking at moving averages or fund flows and things along these lines and really once a an asset matures there's this it's really like a seesaw there's a balance between the

11:55 because if one gets if one gets overweight the other one has an opportunity to make money so um i think that's really where bitcoin is headed and i mean like if you look at the fundamental picture behind bitcoin i mean i like so going back to that time period that we're talking about you know the mid-2010s if you were to go to you know people like us who saw this um as as a way out like you said and you said okay here's what's going to happen in the next decade fundamentally like here's here's the picture and how it's all going to unfold i think i so i mean maybe the price back then was whatever 5 000 8 000 depending on which point in time you choose i think we would have predicted the price to be 5 10x what it is right now i mean just with the with how the the macro

12:45 economic picture is coming together and the setup just from a fundamental standpoint is i think probably a lot better than what we would have predicted it would have been in that amount of time And I mean even things like the a lot of times the fundamental uh analysis of investments really comes down to what like not what one investor thinks but what the common knowledge is like what everybody can kind of agree on like what the consensus is and the common knowledge around the role of the dollar in the in the global marketplace i think has moved more than we ever would have predicted i mean you see on just like mainstream news shows people talking about the petrodollar and what the role of the dollar really is, what the future of the dollar is going to be.

13:30 And I think there's these like shelling points or these big round numbers that are very clear to people. And we've just crossed a couple that I think are really key. So, I mean, $40 trillion in debt is something that, you know, like you and I follow the debt and can probably tell you at any point in time what our debt is. But now we're at a point where you can ask your neighbor and he knows the number 40 trillion. You can ask your grandma and they know the number 40 trillion.

13:56 And I think it's the same thing with yields and a lot of the headlines saying like, okay, the 10 years back to where it was in 07, and we all know what happened in that time period. And these large numbers that are really deeply ingrained in people's thought process. And I think it makes it undeniable because now everybody knows that everybody knows that these lines have been crossed.

14:19 and you know even more than that just as far as like i mean when i first started talking to people about bitcoin the number one answer was the government's just going to ban it and then now we've got people in real positions of authority who are supportive and pushing it i mean we've had like the number of people that have spoken at bitcoin conferences with real authority is i think much much further than than we will we would have ever predicted at that time so i mean i expect bitcoin to get to a point where we're not really just looking at did it cross the the 50-day moving average did it cross the 200-day moving average and really thinking more about the fundamental role of of what bitcoin is and what it could be in in the financial system

15:01 and even with um i mean the the current environment with the the hacks and the vulnerabilities. I mean, I think this is, this has the potential to, to cause people to really rethink what, what safety means. And we were talking a bit before we recorded about, um, you know, in prior crises, like 07 and similar crisis since and before they've all been credit events, you know, and people, people flock to safety. Um, and that's a, that's just a human nature thing. That's what investors do. But I think this has the potential to redefine what safety is and reorder that stack. So, I mean, everybody's familiar with like the credit stack.

15:45 And basically what happens is when these credit events happen, people go further and further down and ultimately end up at treasuries and gold or something like that. I think what is likely to happen in my view, if this continues to escalate, which I don't see any other, I mean, I'm curious to know your thoughts but for me it's like this feels like the early days of covid where most people are not really aware of what's going on but you're like man i don't see how this doesn't become a real issue and um if it does and this if it continues to escalate i think that credit stack becomes a different stack which is where are you safe from from you know technical vulnerabilities and i think bitcoin comes out really well in in that analysis yeah and a couple comments here

16:31 because I have like a vivid I've told the story on the podcast multiple times as it pertains to the debt I have like a vivid memory and it's because it was my first ever bit devs in New York I think it was like January or February of 2015 it was 11 years ago almost 12 years ago now at this point but I was I was like I was 23 at the time 22 and uh and we were in unit square park in new york we're in union square ventures office overlooking union square park uh and they have a national debt clock across across the way and i just moved to new york like a month before i'd never been in union square i'd suddenly gone to new york in my life before then and they had the national debt clock and i thought it was an atomic time clock and it does it was like

17:21 7.30 at night on a Tuesday or Wednesday. And the national debt at that point was 19.3 trillion. So I was looking over 7.30 at night. I see 19.3. I was like, oh, this must be like an atomic clock. It's like telling us running on army time, like all the way down to the 13th decimal or whatever. And I look at Peter Todd. I'm like, oh, how precious we're at this Bitcoin meetup and the, uh, the, uh, wait, no, I'm telling this story. It wasn't atomic clock. I was like the national debt clock is over there. Cause the debt was like 19.3 trillion. I thought it was the debt.

17:59 It wasn't atomic clock. He's like, that's a time clock, not a debt clock. But the point being is like 12 years ago, the debt was half of what it is now. And it took hundreds of years to get to that point. And like, to your point about acceleration, like there's no going back from a debt perspective. And then on top of that, the acceleration of AI is certainly here.

18:20 And I think that's something we're going to have to wade through on the education side with these AI hacks, particularly as it pertains to Binance. Binance yesterday, last night, biggest, I think biggest heist ever at $6.3 billion, whatever it is now, like crypto or any industry that's ever existed, I think, from a dollar term.

18:44 This is the biggest size ever. Everybody's looking at it like, oh my gosh, there's something wrong. With Bitcoin, and like we were saying before we hit record, one of the check boxes that institutional investors are going to need, particularly if you're interacting with players in the industry, is what your control process is.

19:03 And it's becoming clear that Binance had a single point of failure with this DevOps engineer. somebody was able to get control of his laptop and boom one devops engineer laptop gets gets borked and you lose 6.3 billion dollars like that cannot happen um however that does not mean that bitcoin does not have the fundamental properties that can create a very secure environment in the digital age with all these ai hacks going off i think ai is just discovering and highlighting where the pain points exist. Yeah. Yeah. I mean, it's centralized custody, right? And I think it's, um, there's centralized custody with traditional assets as well. And I think that for the first time, this has really kind of come into play. So it's not, you know, we've always talked to

19:48 thought about it really from like, uh, uh, you know, a control standpoint, like you permissionless, you want to have control over your, over your assets. You don't want to outsource it to somebody else but i think now we're we're finding out that it's you know that centralized uh model is is really presenting risks that we didn't know there were before and i mean i like when if so for retail and institutional maybe it's two kind of different things but i mean i think maybe this sounds extreme but i mean if if you're the everyday joe sitting there watching football you know on sunday night And then now it's people are talking about the risk of websites being overrun by agentic swarms.

20:31 You know, how do you fly to fly to safety? I mean, if if if you then have the choice to either hold your money in your hand or keep it on the website on the bank, I think there's a real potential for people to say, I want this money in my hand. And this, you know, presents, you know, something that we're all very familiar with this fractional reserve model.

20:52 I mean, if all of a sudden there's lines around every JP Morgan, Bank of America, Wells Fargo, whatever, you know, that money's not all there. So, you know, I worry about that a little bit. And I think if you think about it from an institutional standpoint, you know, if you run a billion dollar portfolio, you can't go to Bank of New York and say, give me a billion dollars because I don't trust it on this website. You have to think differently about that. And I think it causes some real fundamental questions, which in my view, it's hard to imagine that being bad for Bitcoin.

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23:39 So what do you think of the near-term drivers of people really appreciating the fundamentals? Because that's one thing we've always heard. The meme of Bitcoin's dislocating from equity, it's dislocating from the NASDAQ, it's dislocating from pick your benchmark. And it seems like a lot of those calls throughout history, and I've been guilty of them myself, have been a bit premature.

24:03 Sure. And so like what what in your view would drive the true just dislocation moment where Bitcoin doesn't trade in tandem with AI stocks or tech stocks or M2 liquidity flows, whatever it may be. And it's just recognized as its own beast that has very unique properties that are separate from everything else that that is trading trading in tandem with each other.

24:29 Yeah, I think it's I mean, I think it's helpful. I mean, especially with with what I've done in my career to kind of think, again, separate retail from institutional. So, I mean, I think in terms of the retail adoption, it's a lot of things that that we all have talked about a lot with power law and kind of these cycles and waves of adoption.

24:49 It's very different on the institutional side. And I think it's I think it's commonplace to say, like, hey, the institutions are coming. But maybe given my background, I can offer the perspective of someone who was trying to get Bitcoin into a multibillion dollar portfolio. I think so. The way to think about this is it's really not linear.

25:10 It's not exponential. The way these portfolios adopt new ideas is more of like a switch, a switch that turns on. and um like i was saying earlier this isn't the first time that large portfolio managers have had to confront a new idea i mean they're they're i think this is the most fundamentally different one but you know there's other waves whether it's um private credit whether it's risk parity i mean hedge funds have kind of gone through switches on and off and the the the thing in my view that drives that um that process because there's multiple layers of governance right like it's not like individuals making a choice.

25:49 There's a lot of different people involved. And the thing that drives this more than anything, in my view, is career risk. And a lot of these individuals involved while the objective of the portfolio may be to maintain your purchasing power in real terms and I think that ultimately is what drives things the individuals involved, it's really a survivability thing. And they're wanting to keep their job. This is what puts food on their family's table. And you're not really rewarded for taking a huge risk. So in prior things like this, where it's a fundamentally new idea to a portfolio, it's at some point, the question in the investment committee has to change. And with these other things, they did change from why would you put this into the portfolio to why haven't you

26:35 put this in the portfolio? And once that question changes, the career risk flips on its head. And that can happen really, really quickly. And by really quickly, I mean, like a matter of quarters. So I think that's, that's really, I mean, part of it is, you know, and when I started talking to people in the industry about Bitcoin, like the response varied quite a bit. And I think the number one thing that determines what the response is, is really the seniority of the person you're talking to. There might be kind of like an age component there. But it's also just this principle of don't bite the hand that feeds. And I think as more and more young people who get involved and get in more senior positions, it becomes much easier to get this stuff through.

27:22 So to me, it's, you know, once the question in these investment committees switches from why would you put Bitcoin in this portfolio to why haven't you put Bitcoin in this portfolio, that's where, you know, it's time to buckle up because it can move very, very quickly. And I think the other point I would make, you know, say like big picture numbers, again, comparing retail to institutional i mean maybe there's 150 trillion of retail investment in in markets and the numbers roughly the same in institutional so i mean it's a little bit different from that but just big picture about about the same size buckets but if you look at the number of people that have to make a decision to change that capital whereas the retail is you know billions

28:10 of people making decisions with their own money, the number of people that have to make a decision in the institutional world to move trillions of dollars is shockingly small. I mean, some of these portfolios are just absolutely enormous. And it's a couple people that can make that switch. So, I mean, ultimately, of course, it's an education gap that has to be closed.

28:30 And I think as the common knowledge around the macro environment, I mean, I think gravity just does its thing eventually. I mean, as the role of the dollar is questioned, as the macro environment deteriorates, as we approach this, I mean, I think like if you look at just the macro environment, the way I would, my framework for viewing this is this paper that Stephen Moran wrote a couple of years ago.

29:03 he wrote this he was at Hudson Bay and he wrote this paper that in my view was basically his application for the Trump administration and he was appointed to that position a couple weeks later and he outlines I think it's worth worth looking up the paper is called a user's guide to restructuring the financial system 41 pages and it's very very detailed about hey if you put me in this role here's what I would do and all those things have happened mostly around tariff policy and things like this but he i think it's one of the most underappreciated papers that are out there in terms of just defining the macro landscape because he spells out exactly what his plan was and he says this has never been tried at scale it's risky but his fundamental view is that

29:52 and he's he talks about triffin's dilemma specifically which um you know as someone who was into Bitcoin at the time, I'm like, it's crazy that somebody at this level is talking about Triffin's Dilemma. But he wasn't just talking about it conceptually. He was saying, we're here. We're in this Triffin's world. And when you're the reserve currency, it comes with a lot of benefits, but it also comes with a drawback. And that's Triffin's Dilemma.

30:18 And his point is, we're here now, and it's time to throw a Hail Mary. And I think basically, if you look at the paper and the plan that he outlines, which they followed, he says there's there's basically one chink in the armor and that's if people start dumping treasuries um and that's what we saw earlier this year so i mean he has like all these fallback plans to mitigate the risk of of doing the plan but ultimately if people start dumping treasuries you've got no more ammo to work with so in my view it's you know what's the next step after after Triffin is Keynesian endpoint. I mean, I think that's kind of, I don't know the timeline, but I think that's kind of where we find ourselves. And the paper specifically calls for

31:05 like Bretton Woods 3.0, essentially, he calls it a Mar-a-Lago accord. Like, I think that's kind of the next step is we try to get everybody in a room and just rewrite the rules. So, I mean, it's interesting, just all the things that are kind of on the table now that didn't used to be. i think if you go read that letter it's kind of shocking some of the stuff that he mentions could be at play here and it's some of the stuff you read about and like the history of the fall of other currencies i think are like capital controls mandated investments in treasuries um fees or penalties against other countries for not holding treasury i mean a lot of this kind of thing is i think for the first time really in play and um that's that's not a fact that if you're if you're

31:52 allocating a couple billion dollars or more you can't just ignore that fact at some point so i mean that's what i think that's kind of my my answer to your question is that it's at some point this just has to be addressed and once it's addressed it's addressed very very quickly yeah i remember that paper i need to go reread it to your point because i i do remember i forget the exact contents of it from remembering but i do remember reading it writing about i mean like this is this is pretty big when you consider like mirin certainly has influence what the sense doing you got wars you got drucken miller that's what like john arnold and i've been covering this on the 1031 time sends your point about like chicken armor being treasuries being dumped by by foreign

32:38 buyers it does seem like they're trying to plug that hole at least as much as possible with the stablecoin push and pushing demand for shorter term treasuries, notes and bills. The fact that the Genius Act was one of the first things that got signed, at least as it pertains to legislation around Bitcoin and crypto, I think was a very strong sign.

33:03 Now the rules are getting implemented and the banks are talking about it in Silicon Valley. is pushing for it and you have the air cover of agent, the agentic economy emerging, and they're gonna need stable coin to do that. And so you can see, you can see them trying to plug that hole with, with stable coins driving demand for the front end of the curves.

33:26 I mean, I completely agree. Like we're at this point where we need to throw a Hail Mary and there's rumblings on Capitol Hill that ARMA, the Bitcoin strategic reserve act that representative Bejic, is putting forward has actually some pretty strong momentum. And as an American citizen, like, yeah, I completely agree. I think Triffin's dilemma has run its course. I think it's going to be hard to find foreign buyers of our treasuries considering where we are from a debt perspective. And then on top of that, I think a lot of people are pissed off with the U.S.

33:57 being the sort of policeman of the world. And I think the Don Rowe doctrine, the national security strategy from last year was the Trump administration coming out and saying, hey, we recognize this. We're going to pack it in and focus on the Western hemisphere, which I'm all for. But going back to one thing you said earlier in the beginning of that, that elaboration that you just gave is like the sort of mental light switch can go off in allocators over the course of quarters.

34:27 Do you think we're like in the middle of that process? You had JP Morgan come out despite Jamie Dimon's over a decade long of shitting on Bitcoin and crypto coming out with a portfolio allocation and writing a report that Bitcoin will likely be the best performing asset between now and the rest of this decade.

34:46 I'm sure you saw I was distracted. There was another large institutional allocator that came out this morning and recommended an allocation. You have Franklin Templeton launching new Bitcoin ETFs that are catering to different types of investors. I think the one they launched yesterday is 95% stocks, 5% Bitcoin with dividends included.

35:09 So sort of expanding the optionality that investors have to get Bitcoin exposure. Could we be in that multi-quarter time period where the switch gets flipped and it becomes a must-have in the portfolio? I think it's possible. I mean, I do think that the, I mean, the JP Morgan putting Bitcoin at the top of the long-term capital market assumptions is, I mean, it got some play online, but it's, I think it's worth underscoring just how big of a document that is.

35:40 Because, I mean, it's every consultant, every financial advisor, every big allocator, like that's the gold gold standard, no pun intended. But that that's that's what everybody looks at. And each year, especially, you know, like especially around this time. I mean, I think people really look at that document as a way to look at their portfolio positioning and do their risk optimization for their portfolio.

36:06 And I think it's probably I think some people were probably surprised to see that at the top of the list. I mean, I think it's just worth highlighting how many people put eyes on that document and then take it, take those numbers and put it into their own models. I think that was a really big, a really big sign, a really big signal.

36:26 And I think there there's a number of. Of things that I think have to have to happen to really get there. But yeah, to your point, I mean, the big guys moving in saying we're making these changes or making these recommendations, I think is huge. And once you start to see, I mean, we've seen a couple of the large pension plans kind of dabble, like the Wisconsin, Harvard.

36:50 I mean, some of them have kind of started to dabble. And I think those are, that's one of the things where that starts to add the question to boardrooms where it's like, okay, these guys are doing this. Should we consider doing it as well? And I mean, I think it's, you know, from an allocator looking to put Bitcoin in a portfolio, there's a, you know, I think the biggest obstacle you have to come, and it sounds simple, but it's actually a really fundamental issue in terms of managing a portfolio is what bucket do you put it in?

37:22 I mean, it's not like an individual where, you know, you're just kind of freewheeling and can make these decisions. You have a well-defined investment policy statement that you have to act within. You have guidelines that are very descriptive about where you can put different assets. And so like I mentioned risk parity earlier.

37:42 So when risk parity was this new thing and risk parity basically is just like a systematic allocation between factors or like large investment exposures that are that's that automatically moves the exposure depending on the implied volatility of that asset class, basically. And before it was really introduced to people, it was kind of I mean, it was always there, not always, but for a long time had been a technique that individual managers would use.

38:10 But it was introduced as something that you should have as a portfolio tool. Like at the portfolio level, you should have this risk parity allocation. And when people started, I mean, this is maybe like 2014, 2015. This is like the Bridgewater kind of strategies. The biggest question that people had to confront was where do I put it? So, I mean, it's like, it's systematic.

38:31 Does it go into the hedge fund bucket? It's kind of there as like an inflation protection thing. Do I put it next to tips and commodities or do I create a new bucket for it? And I mean, that those things take a while to kind of sort out and to get consensus with the people making decisions about where you put it.

38:48 And I think it's it's a similar thing for Bitcoin, where even if you get people to say like, OK, let's look at this. The next big hurdle to get over is how do you treat it Where do you where do you put it Where do you bucket it and i know when i was there trying to get bitcoin into our portfolio um it it seemed to me like the the first place to look was was venture counterintuitively i mean like if you because the committee's already um conditioned to know that this is a more volatile um bucket you can kind of hide the bitcoin exposure in there i think that's one place to look and then you start to look at hedge funds and say like okay can we can we slide this in here next to the hedge funds i mean it's not really an honest

39:32 positioning of it but if you can find hedge funds that have that exposure that's an easy it's an easier sell for the committee and um the problem is that most of the hedge funds like really it's more like trading strategies as opposed to just bitcoin price exposure so then you know you try to say like is it a commodity like we already have this commodity bucket can we slot it in here next to commodities and view this as a digital gold and so i mean i think that's that's really like the thought process that that these allocators go through and and you know the the volatility the liquidity those things are all important but but honestly the biggest hurdle is just like deciding where to put it and i mean as these new vehicles have kind of come on you see people allocate to

40:13 the utf just because there's precedent for it um the micro strategies of the world like okay i've already got a a breath bucket just put it in the press or i've already got you know you can slot it in as a stock exposure to dividend paying stocks i mean i think the vehicle matters but more importantly you know talking about the the long-term capital market assumptions i mean i think the fact that this most recent trough touchwood if this was the end of the bear market i mean having a shorter trough is actually a really big deal and and the you know to say like okay the volatility seems to be reigning in it's much easier to allocate to something with a 50 drawdown versus 90 drawdown so i mean some of this just takes time to work its way through but um i i think it's

41:00 you know these are big signals and and i i don't know that we're right at the beginning of it you know it's hard to predict the time frame but i do think it's it's really possible as some of these macro conditions kind of deteriorate that i think we're getting much closer freaks look at me i'm glowing i've got like an angel's halo going around me you know why that is is i feel good i feel taken care of. I feel blessed, healthy, happy. And that is because I'm a CrowdHealth member.

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43:51 It covers the five mistakes investors make when allocating to mining and how to avoid them before deploying capital. You can access it for free at simplemining.io slash tftc. That's simplemining.io slash tftc. Yeah, I mean, you consider the largest hack and I mean, there was 18,000 Bitcoin. I mean, it's nothing.

44:11 It was not everything that was stolen from Binance yesterday was Bitcoin, but 18,000 Bitcoin material amounts and Binance, whether we like it or not, largest exchange in the world. And Bitcoin only took a 5% hit where we're above the lows that were hit at 10 p.m. last night. And it's holding pretty steady.

44:33 and we've been holding in this range for for the last month we're probably below the range of the last month but still i mean if you were to tell me that finance would be hacked for 6.3 billion dollars and bitcoin would be down less than five percent um less than 18 hours later i would have told you you're crazy um yeah and it feels very reminiscent of 2022 ftx blowout midterms it's like weird how everything rhymes um yeah this time around too yeah exactly and i mean it seems like it's kind of learning the lessons of the past i mean when you look at 2022 it's like you talk to your neighbor and they're like okay bitcoin uh is at risk and it's like no it's not bitcoin it's the the centralization of bitcoin and that's the attack vector and so i mean i think what the

45:18 selling i mean we're likely to have this the sell-off it makes sense but your point it was pretty shallow and i think it's probably a lot of like you know just collateral damage people trying to take their coins off finance or maybe even coinbase or the like um but it's not uh it's not sort of this excess existential threat to bitcoin that you would think could be could be possible so i think it's a positive sign i mean who knows what will happen from here but um yeah i mean i think it's the resilience is is certainly makes it more attractive yeah and i mean i'm just looking at the the historic price chart here my other screen and obviously we're not out of the woods yet of this finance act yet to be determined whether or not we go lower or stay here or even go higher but

46:03 just comparing it to ftx in 2022 in october late october of 2022 we're trading at 21 000 when ftx happened we fell to 15 so the market fell 20 after that that hack and or that that wasn't even hacked that's fraud um and this is on a bigger magnitude in terms of just amount of coins amount of money stolen from the exchange and we're holding in there pretty tight right now um so it's like yeah what uh what could drive this lower could drive it higher and i think to your point about pattern recognition how many times does bitcoin need to have something bad happen and recover for one of these allocators to say hey this thing's not going anywhere it's not dying yeah and have we reached that point where they're they're looking for a deck to buy yeah yeah and i think one of the

46:57 one of the other things that we've we've been talking a lot about is like um so not just bitcoin itself but you mentioned your managed futures background and you know i think that i think having a real sophisticated risk management on bitcoin could be another driver for adoption i I mean, I think that when you look at how these decisions are made, a lot of times it has to do with managing the risk around it.

47:23 So, I mean, for most retail people, the strategy should just be just buy it and hold it. But some of the institutions don't really have that choice. I mean, they have to understand what the tail risk looks like and what the strategies are to mitigate it. And this is something we've been talking a lot about, you know, looking at looking at Bitcoin as a commodity.

47:44 and then trying to learn some of the lessons of the commodities of the past. And I think what some of the research that we've done, you look back even hundreds of years, starting with like rice futures in the 1600s kind of thing, and mapping out the trajectory of these commodities over time and how they evolve and say, is there anything from that history that we can learn and apply to Bitcoin?

48:07 And I think the way that I would frame it is that they all go through very similar stages of development. And that, I mean, you know, the adoption curve of different technologies where it's like it maps it up to the top and you've got the Internet and Uber and whatever. And then you see Bitcoin's the steepest curve.

48:29 it's it's like that but on commodities it's a very similar thing where with each new iteration of a commodity kind of financializing it uh happens quicker so the question that we're asking is like okay how do we just jump to the end state because um all these commodities go through i mean i would bucket into five buckets there's you can cut it up a number of different ways but the first stage is really just like peer-to-peer trading i mean every commodity goes through this this phase and then the second phase is really um like where true price discovery happens i mean exchanges market makers come in and then really kind of um allow true price discovery and then the the third stage is where derivatives are introduced and kind of built on top of the asset

49:16 the fourth stage which i think is where we are with bitcoin is um where there's these like static strategies and again not for like individual holders of bitcoin but for institutions like miners who are perpetually long exposure to bitcoin price and have fiat expenses you kind of have to think around these tail events and manage it in a smart way and the where we are now is with these strategies of covered calls you know selling away the upside buying puts on the downside and bitcoin is in contango always i mean has a positive carry so it's very expensive to implement the like if you just buy puts on bitcoin you're going to just erode your wealth over time and these covered call strategies i think are um very similar to like what gold was in the 70s what

50:09 oil was in the 90s and it feels good for a while like you get to pay yourself a yield but inevitably it blows up and i think what we're trying to say is especially something like bitcoin that can move very very quickly rather than wait to get burned let's just learn lessons of the of the past and jump to the fifth stage which is more active active risk management and using you know strategies that you're likely very familiar with that ctas use of the you know it's sophisticated in its execution but fairly simple and it's in the concepts i mean it's just um it's it's managing the tail risk and then benefiting on you know it's it's trying to uh make money on both the tails basically so trend following mean reversion these kind of things over several different tenors

50:56 and you can apply these same exact systematic strategies to bitcoin and the results are are pretty overwhelmed i mean pretty shockingly good so i mean just naively taking the systematic strategies that some the shops that you know you were mentioning like the vitals the louis dreyfus of the world this is what they do for you know wheat cotton um soybeans it doesn't matter beans coffee coffee everything yeah they're not doing covered calls they're not buying puts to protect their exposure they're doing these more active management um strategies and i think why not just instead of waiting to get burned, why not just jump to that stage and start to implement these sort of approaches on Bitcoin? And again, it's not for everybody, but for certain,

51:44 especially like larger corporate holders of Bitcoin, I think this is where the market's heading. And I've been talking to a lot of people about that and getting really great feedback in terms of like other people thinking along similar lines. And you see certain large Bitcoin holders starting to hire traders from the commodities world and thinking about things this way. And, you know, it's a, it's a novel idea, but I think it's something that is logical and makes sense. And however it unfolds, I think something along these lines is what's going to be sort of next for Bitcoin. What type of scale do you need? Do you think to implement these strategies, not only implement these strategies, but do it in a way that it

52:28 it materially or it materially advances the the market structure of bitcoin that makes sense so yeah so the in terms of the size that you need to execute it on your own portfolio it it all has to do with the number of strategies you run and the the liquidity of the depth of the liquidity of the futures market so where things stand now it's um it's hard to run a really robust set of strategies for under $2 million of notional exposure, but using futures, it doesn't take that much. It's very cash efficient. So, I mean, you can put up 20, 30% of the notional amount, but anything below $2 or $3 million, you get all kinds of rounding errors. And it's hard to, it's hard to really execute the strategy as well. I think that's kind of the cutoff

53:18 is around that, I'd say, $3 million mark. Okay. Yeah, it is fascinating too, because it's been a while since I sat in the analyst chair at the Managed Futures Fund, but I just threw out my time in Bitcoin, particularly Bitcoin mining specifically, because I wrote all the commentaries to the funds. And so I had to explain why commodities markets were moving in certain ways.

53:41 So I was doing research on the Boko Haram in Nigeria and how it was affecting the sweet crude markets there. and if there was a fungus outbreak and coffee beans in Brazil, being able to write about how it was negatively or positively affecting coffee prices. And it's funny now as the Bitcoin mining industry has matured too.

54:05 One of the things you follow for commodities is weather. If you have a rainy season in Kansas, like the red wheat, if it floods, you're going to have less red wheat, so the price is going to go up. And it's funny, I like observing it with Bitcoin mining now with like demand response, particularly. It's like, oh, it's like I'm seeing patterns that I recognize from earlier in my career around weather and how it's affecting the Bitcoin hash rate markets.

54:32 And it's just fascinating how you wouldn't assume that weather could affect Bitcoin, but it does. Yeah, it's crazy. And there's a there's a book. I don't know if you've if you've read it, but it's the world for sale, I think is what it's called. And some of the story, I mean, it's exactly what you're talking about, just the actual like the movement of physical commodities across the world is a is like a real logistical problem.

54:54 And some of the stories that come up with it about like, you know, people flying to meet with the leader of this country and like one conversation moving just like massive amounts of commodities and running ships while there's missiles flying over overhead and things like that. The book is it's like it's like reading an action thriller, basically.

55:16 So, yeah, some of the things that happen on the commodity side are just mind blowing. So it's a crazy it's a crazy industry. But yeah, I mean, it's I think that's I mean, Bitcoin serves several different purposes. But if you allow it to be a commodity, you kind of start to see these parallels. And, you know, I think that's that's the overall point is that I think once you see the parallels, you might as well try to learn the lessons that these other guys have learned on on these other commodities.

55:40 yeah outside of these like getting to the fifth the fifth level of the maturation of the market structure what are and obviously the institution stepping in but like what other kind of like because let's focus on hash rate your brains and i've talked to jan and um christian and others and at brains about this but like i think i i've always strongly believed like again when we're talking about like broader Bitcoin market structure when like the fundamental like base layer markets that needs to be figured out is like hash rates futures and obviously there's been a ton of development there but I still think the the sort of the futures market around hash rate is still nascent can you give me an update on what you seeing there and do you agree that like before we even like yes you can figure out the

56:33 price but i think like hash rate and giving miners considering how ruthlessly competitive the mining landscape is and the amount of capex necessary to actually effectuate a bitcoin mining strategy like do you do you agree that those strategies need to manifest in mining first and then go up to the actual spot bitcoin level yeah 100 i agree and i think it's um i mean there's been people that have really pushed that market forward i mean i know um luxor launched their hashrate derivatives marketplace and there's there's like startups out there that are doing um different kind of markets on on difficulty and things like that where it's like i think the problem or the difficulty from my perspective is really getting enough market participants to make

57:19 liquid enough to to really work and it's one of those things you can't really push it just has to kind of emerge and um we're certainly not trying to compete in in that marketplace necessarily but i think it's inevitable it's just a matter of having enough liquidity and enough market participants to where you go from that zero to one moment and get the network effects to have it be fully efficient um so yeah i mean i think it's um gonna happen at some point it's just a question of enough people like really participating to make it function well yeah there's so much execution risk like i always thought there was like a need for a forwards contract like at scale like bitcoin miners and exchanges going together like in the exchanges being like we'll

58:03 give you x amount we'll give you uh x amount of cash up front for a five percent discount to spot in the future when you produce the bitcoin something like that that uh I still feel like those types of structures need to come to market. And it's great to see people like yourself and the team that you're putting together at Brains and the acquisitions that you're doing to bring that type of mindset to this market.

58:32 Yeah, I think one comment there is, I mean, when we talk to miners, it's, you know, in the traditional finance world, you bring a hedging idea. You say, look, we've got this exposure. Let's hedge it. there's zero resistance i think one thing to note is in in the bitcoin space like if you approach a miner and say look i've got this hedging strategy there's a larger percentage than you would think just tell you to f off basically like look i'm in this to for bitcoin's upside i'm not interested in any puts or any downside like i'm i'm in it it's either going to work or it's not i think there's like this um this resistance to it just because of the type of person it takes to run a Bitcoin mine, like the amount of conviction that you have in Bitcoin,

59:15 the amount of, it's just against their ethos to hedge. Like, I'm not here to hedge. I'm here for the upside only. You asked me to sell away some of the upside? No. So, I mean, I think that's part of it is just, you know, countering that dynamic and getting people comfortable with, like, look, it might make sense to kind of smooth the ride a little bit. Yeah. No, I wonder, like, Bitcoin mining finds its place in demand response.

59:43 And obviously you have companies like Bathhouse in New York using the heat from the miners to mine their jacuzzis. When Bitcoin mining just becomes a positive EV tangential process in a larger business with bigger plans, like is that when the the are those the type of actors that are necessary to engage in that type of hedging strategy not just be texas hedged long um the whole time yeah i hope so i mean you saw the thing with the um the water cooler the water heater that came out last week that's kind of interesting yeah it's really cool and we uh actually when i was at the um bitcoin park here in Austin I forget if it was I forget what the event was but they bid acts had those things set up where they were they were cooking steaks with the excess

1:00:37 heat they were like sous vide cooking steaks during the conference is pretty cool I hope so I hope that the way it goes so what um what the plan moving forward I want to talk about the fund that you guys acquired if you comfortable What the plan there Yeah, for sure. I mean, I think the plan is to really find product market fit.

1:00:59 So we picked up this team of guys from the traditional commodities world who are super tenured, super senior, have done this for 30 years and have all of the processes and infrastructure in place to really offer something legitimate to to Bitcoin holders and I mean they spun out of a commodity merchant have done this in-house and um really really know what they do what they're doing and uh so I mean it's education first I mean we're trying to put out white papers and have discussions with people just to kind of explain the concepts and the the approach and um then really start to start to size up and improve it at scale i mean you can like right now it's it's really a matter of um figuring out the infrastructure which we've we've largely done

1:01:50 and um talking to people about uh about the benefits of it and and trying to you know really really scale it up and and offer these services to large bitcoin holders and like i said the conversation is going really really well i mean i think it's it's been very well received just conceptually. And now it's time to turn the backtest into actual performance and really start to start to roll it out. So that's, that's what's next for us is turning this from a concept, which it has been into a real product. And I mean, I think it's very applicable for miners.

1:02:23 I think it's very applicable for treasury companies. I think it's really applicable for family offices who hold a lot of Bitcoin. I mean, we've even had a good amount of interest from people who have low basis bitcoin that you know they were comfortable at five percent now it's 20 or more of their portfolio and they're like how can we use this to kind of diversify and because of the commodity expertise we can say okay let's put your put your bitcoin up as collateral and then we run a futures program where you get exposure not just to this these manage future strategies on bitcoin but also adjacent um assets like copper natural gas whatever you know and kind of make a basket that diversifies people a little bit so there's a lot of applications and um

1:03:11 i think that's that's really what's next for us is uh is scale scaling yeah it is the pitch for your manager future strategy because when i was um working at the fund it was basically like just portfolio insurance that's what we were fighting for like hey we're not fighting for 20 percent your portfolio we're fighting for five and like when hits the fan we'll be here to help perform and make sure you're you're diversified and these assets that will that will perform well when the market's going to ship yeah exactly that i mean it's not something that makes sense at 30 or 40 percent it's really like you said i mean i think the the max it could make sense for somebody is 10 or 15 um to have and i think it's um exactly that it's there it's there for when things go

1:04:00 wrong it's there as insurance and it actually pairs really well with a lot of the you know kind of yielding strategies that people are doing because it's positive gamma positive convexity so it's like when those strategies fail this really does well so i mean if you're if you're if you're somebody who does these yielding strategies which you know i have my opinions on but a lot of people do them and i mean i think if you do them like it helps it makes sense to to pair it with something that can complement it and really come in when those struggle.

1:04:33 What are your thoughts on the yielding strategies? You have your thoughts about that. I mean, I kind of alluded to it earlier. I mean, I think it's just I think that these I think bankers are more than happy to come in and sell these strategies to people and charge large spreads. I think that's kind of where we're at is just, you know, these bankers or former bankers know that this is the highest margin thing that they can offer.

1:04:54 and that's that's what's happening right now and I mean it's you know you don't get you don't get the yield for free you you take a risk there and I think the risk is misunderstood and I mean I will I think we got to get burned to really realize how bad it can get. I mean, I think that some of these, I'm trying to remember the examples from other commodities, but we've got some examples of when they blew up in other commodities and it can get ugly really fast. I mean, I think basically it's like if you've got a month where Bitcoin is up 30% And then another month of Bitcoin's up 30%, these things, it just, there's a lot of blood.

1:05:38 And, you know, for, I think it made sense initially, just like these other kind of trades, like the basis trades, the cross exchange arbitrage, things like this are attractive at first, but it compresses over time. And I think these yielding strategies have done exactly that, where it's like, okay, maybe if you're getting four or 5% for taking that kind of risk, it makes sense.

1:06:00 but now that it's compressed to 1%, it's like, I think people are probably looking for something new. Yeah, that makes sense. This has been fascinating. What haven't we covered that you think we should touch on before we wrap up here? I mean, I think we hit it all. I guess we'll find out if the internet's going to eat itself, if agente swarms will just take us all over and we'll go back to the Stone Age.

1:06:29 But if that doesn't happen, I think Bitcoin... Nothing ever happens, Baron. Nothing ever happens. Yeah. No, I think I saw your post last night of Don Draper just sitting Zen with the fire in the background. I think that sums up my current view. Just have to ride the wave. It's going to be chaotic. You have to go in with the expectations that we live in an age of chaos.

1:06:52 And it's much easier to find peace when the chaos is expected. uh and i think the chaos should be expected this definitely in the short term and i think even in the medium to long term as we transition into the digital age at an accelerating rate i think we're firmly in the acceleration phase right now yeah 100 yeah i mean it feels good to be on on this side of the fence honestly i mean i think it's much more honest and much more real and um And I mean, when you I mean, we're on a Bitcoin standard.

1:07:26 I mean, when you live on a Bitcoin standard, it's you're living an honest life and it's tougher. It's more volatile, but it's real. And I think that that gives me hope. I mean, it gives me hope for the future. I think it gives me hope for capital allocation, gives me hope for culture. I mean, I think even just like the impact on the way people interact with each other when when you're on a Bitcoin standard in some form or another, whether it's your personally or your company or your portfolio i think it it injects a level of honesty that's less comfortable but more real and i think um that gives me hope for the future likewise it's been a pleasure sir where um where should we point people we're gonna talk more about you what you guys are up to brains yeah anything brains on on x baron

1:08:13 Baron Koch 21 is the handle. I mean, we'll keep you updated with the progress on the hedge fund, the managed futures strategy, and might have a couple other tricks up our sleeve at Brainsville. Should be a fun 27. Here's to a fun 27, freaks. Peace and love. Thank you for listening to this episode of TFTC.

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