Transcript: Baron Koch: The Switch That Flips Institutional Bitcoin

Marty Bent [0:36] Aaron Koch, welcome to the show, sir.

Baron Koch [0:39] Thanks for having me, man. Longtime listener, first-time caller.

Marty Bent [0:43] Well, I appreciate you joining me. And not only that, but you're lighting mogging me on my own show right now. The setup you have there in that studio is incredible.

Baron Koch [0:54] Brains got to do things right.

Marty Bent [0:56] 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 an 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. And so I think with that in mind, maybe just an introduction of yourself, what you did before Brains, what compelled you to join as CFO and some of the things that you're working on personally within Brains.

Baron Koch [1:53] Yeah. No, I think it sounds great. And so the last 20 years nearly, I've spent managing institutional portfolios. So endowments, pensions, corporate balance sheets, really like in the low single-digit billions, $3 to $4 billion kind of range. And I do think there's a lot of there's a lot to be said about the process that portfolios like that go through and how they think about allocating to something new. And there's a lot— it seems like it's a brand new thing, but there's a lot of precedent there. But yeah, that's what I've spent my career doing. And I mean, a lot of times people ask, like, how do you go from that to Bitcoin?

Baron Koch ⋮ 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. 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.

Baron Koch ⋮ And I think that kind of planted a seed. And then I graduated in December '07, 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. I'm like, this is not what I was taught this is not how it was supposed to work. And that, I think, really was kind of like the origin story. 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.

Baron Koch ⋮ So, I mean, they have these surgical machines, and 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 machines so this guy doesn't die. I mean, that's kind of like how this started and it was more like a practical exercise. I mean, the analysis was really more of just like cursory, I guess. And then I really got compelled to do a lot more work on it when one of my favorite hedge fund managers, shut down his shop.

Baron Koch ⋮ Like, he 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? 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.

Baron Koch ⋮ 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 not— I didn't go deep enough, basically. So then that's what spun 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 to land. So yeah, that's really, that's really kind of my, my story.

Baron Koch ⋮ 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 like 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 my goal. I mean, I think Bitcoin is coming to allocation, allocation's coming to Bitcoin, and I think there's a lot of really interesting things about allocating on a Bitcoin standard that I just want to be ahead of.

Marty Bent [6:32] Yeah. I mean, before we dive into the Bitcoin stuff, because I love nerding out about this, particularly the post-2008 sort of fund space, because like I told you before we hit record, I'm sure we'll touch on what you guys are doing, in terms of innovation within Brains by the acquisition of this managed futures fund. Because I started my career in managed futures, but I remember I was probably 4 years behind you, but I started my career at a fund during Operation Twist. This is like 2012, 2013 when they were selling the bad assets and buying, switching the durations or switching the mortgage-backed securities with treasuries in that operation.

Marty Bent ⋮ Then QE2 came, and then Bernanke handed over the helm to Yellen. And I remember having similar conversations with CIOs who were the managers that we were indexing in our funds, and they were saying similar things. It's just the Fed has completely manipulated the market, and I don't feel like I can do this. What was the strategy of the head fund manager that you had that conversation

Baron Koch [7:47] with? I mean, he was a technical guy, so I mean, 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 by calling the dot-com bubble, and then he called the mortgage crisis, and he had some really interesting plays with Saudi Arabia, actually. So I mean, it was It was the kind of portfolio where he would swing 50%, 60% of it. I mean, it was— 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.

Baron Koch ⋮ So, I mean, it was really like a macro strategy. And yeah, that was basically his, his take was like, I can get these calls right, but the market's not going to adjust to the future that I see. And it's like one of the most honest things I've ever seen in the industry where it's just, 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 a wake-up call for me. You walk into the office and you could just feel the weight of the decision from the receptionist to the people giving you coffee when you sit down.

Baron Koch ⋮ I mean, they were taking art off the wall and things like this. I mean, 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 just one of those things that sticks with you and changes the way you think about things. But much respect to the guy. And from my understanding, his tree and people that worked with him at the time have gone on to do other things in Bitcoin. So good on him.

Marty Bent [9:29] Yeah. No, 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 balls to say, you know what? I'm not doing this anymore. But many just 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, have been lulled into a sense of complacency, into a sense of like, this is the way things work now.

Marty Bent ⋮ And to your point earlier, the chickens always come home to roost, the hen always comes home to roost. You can paper over this stuff 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. But I think turning this focus to Bitcoin, and I think we both believe that Bitcoin is a way out of this, a 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.

Marty Bent ⋮ And you were tweeting last week and reference to Elon Musk talking about the future of money will be based on energy, and he won't name Bitcoin as that. I think he's thinking it'll be compute tokens or something like that, but he made an interesting point that Bitcoin still trades on technicals, overwhelmingly on technicals as opposed to fundamentals. 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?

Baron Koch [11:28] Yeah. I mean, I think there's a couple different ways to look at it. I mean, when you go through the academic process of learning how to invest, they split it into those 2 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 an asset matures, there's this— it's really like a seesaw. There's a balance between the two because if one gets overweight, the other one has an opportunity to make money. So, you know, I think that's really where Bitcoin is headed.

Baron Koch ⋮ 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've predicted the price to be 5, 10x what it is right now.

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

Baron Koch ⋮ And I think there's these like, I don't know, like Schelling points or these, 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. And I think it's the same thing with yields and a lot of the headlines saying like, okay, the 10-year's back to where it was in '07.

Baron Koch ⋮ 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. And 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, oh, 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 we would've ever predicted at that time.

Baron Koch ⋮ So, I mean, I expect Bitcoin to get to a point where we're not really just looking at, did it cross the 50-day moving average? Did it cross the 200-day moving average? And really thinking more about the fundamental role of what Bitcoin is and what it could be in the financial system. And even with, I mean, the current environment with the hacks and the vulnerabilities, I mean, I think this has the potential to cause people to really rethink what safety means. And we were talking a bit before we recorded about in prior crises like '07 and similar crises since and before, they've all been credit events, and people flock to safety.

Baron Koch ⋮ And 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 the credit stack, 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.

Baron Koch ⋮ And if it does and if it continues to escalate, I think that credit stack becomes a different stack, which is where are you safe from technical vulnerabilities? And I think Bitcoin comes out really well in that analysis.

Marty Bent [16:27] Yeah. And a couple of comments here because I have a vivid— I've told this story on the podcast multiple times as it pertains to the debt. I have a vivid memory And it's because it was my first ever BitDevs in New York. I think it was January or February of 2015. This is 11 years ago, almost 12 years ago now at this point. But I was 23 at the time, 22, and we were in Union Square Park in New York. We're in Union Square Ventures office overlooking Union Square Park. they have a National Debt Clock across the way. And I'd just moved to New York a month before.

Marty Bent ⋮ I'd never been in Union Square. I'd seldomly 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. 3 trillion. 3. I was like, oh, this must be an atomic clock. It's like telling us, like 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 prescient. We're at this Bitcoin meetup and the— oh wait, no, I'm telling this story. It wasn't atomic clock. 3 trillion. I thought it was the debt. It wasn't atomic clock. He's like, that's a time clock, not a debt clock.

Marty Bent ⋮ 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 to your point about acceleration, there's no going back from a debt perspective. And then on top of that, the acceleration of AI is certainly here. 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. 3 billion whatever it is now, like crypto or any industry that's ever existed. I think from a dollar term, this is the biggest heist ever. Everybody's looking at it like, oh my gosh, there's something wrong.

Marty Bent ⋮ With Bitcoin, and like we were saying before we hit record, I think one of the sort of checkboxes that institutional investors are going to need, particularly if you're interacting with players in the industry, is like, what are your control processes? And becoming clear that Binance had a single point of failure with this DevOps engineer. 3 billion. That cannot happen. 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.

Baron Koch [19:36] Yeah. Yeah. I mean, it's centralized custody, right? And I think it's— 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— thought about it really from like a, you know, a control standpoint, like permissionless. You want to have control 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 model is, is really presenting risks that we didn't know there were before. And I mean, like, when— if so, for retail and institutional, maybe it's 2 kind of different things.

Baron Koch ⋮ 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, you know, how do you flock to safety? I mean, like, 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.

Baron Koch ⋮ I mean, if all of a sudden there's lines around every JPMorgan, Bank of America, Wells Fargo, whatever, that money's not all there. So I worry about that a little bit. And I think if you think about it from an institutional standpoint, 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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Marty Bent ⋮ com/bitcoin. com/bitcoin. Check it out. So what do you think are 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 equities, 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. And so what in your view would drive the true 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 is trading in tandem with each other.

Baron Koch [24:29] Yeah, I think it's helpful, especially 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 we all have talked about a lot with power law and kind of these cycles and waves of adoption. It's very different on the institutional side. And 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.

Baron Koch ⋮ It's not exponential. The way these portfolios adopt new ideas is more of like a switch. a switch that turns on. And 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— I think this is the most fundamentally different one, but, you know, there's other waves, whether it's private credit, whether it's risk parity. I mean, hedge funds have kind of gone through switches on and off. And the thing, in my view, that drives that that process, because there's multiple layers of governance, right? It's not like individuals making a choice. There's a lot of different people involved.

Baron Koch ⋮ 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, 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?

Baron Koch ⋮ To, why haven't you 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 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.

Baron Koch ⋮ And I think as more and more young people get involved and get in more senior positions, it becomes much easier to get this stuff through. So to me, it's, you know, once, 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 it's time to buckle up because it can move very, very quickly. And I think the other point I would make, say, like big picture numbers, again, comparing retail to institutional, I mean, maybe there's $150 trillion of retail investment in markets and the number's roughly the same in institutional.

Baron Koch ⋮ So I mean, it's a little bit different from that, but just big picture, 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 billions 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, and I think As the common knowledge around the macro environment, I mean, I think gravity just does its thing eventually.

Baron Koch ⋮ 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 that Stephen Moran wrote a couple years ago. Mm-hmm. 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 looking up. The paper's called A User's Guide to Restructuring the Financial System, 41 pages.

Baron Koch ⋮ 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 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, this, it's crazy that somebody in this, at this level is talking about Triffin's dilemma.

Baron Koch ⋮ But he, he wasn't just talking about it conceptually. He was saying, we're here, we're in this Triffin's world. And, you know, 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. Mm-hmm. 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 basically one chink in the armor, and that's if people start dumping treasuries. And that's what we saw earlier this year. So I mean, he has like all these fallback plans to mitigate the risk of doing the plan.

Baron Koch ⋮ 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 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. 0, essentially. Like 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. And I think if you go read that letter, it's kind of shocking.

Baron Koch ⋮ Some of the stuff that he mentions could be at play here. And it's some of the stuff you read about in like the history of the fall of other currencies, I think, are like capital controls, mandated investments in treasuries, 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 that's not a fact that if you're 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 answer to your question is that it's at some point this just has to be addressed.

Baron Koch ⋮ And once it's addressed, it's addressed very, very quickly.

Marty Bent [32:06] Yeah, I remember that paper. I need to go reread it, to your point, because I do remember— I forget the exact contents of it from memory, but I do remember reading it, writing about it, being like, this is pretty big when you consider like Mirren certainly has influence, what Vicente's doing. You got Warsh, you got Druckenmiller. That's what like John Arnold and I've been covering this on the 1031. time sense, your point about the chink in the armor being treasuries being dumped by foreign 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.

Marty Bent ⋮ And I mean, the fact that the Genius Act was one of the first things that got signed, at least in as it pertains to legislation around Bitcoin and crypto, I think was a very strong sign. And now the rules are getting implemented and the banks are talking about it. Silicon Valley is pushing for it. And you have the air cover of the agentic economy emerging, and they're going to need stablecoins to do that. And so you can see them trying to plug that hole with stablecoins driving demand for the front end of the curve. I mean, I completely agree. 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 Bajcic is putting forward, has actually some pretty strong momentum.

Marty Bent ⋮ And as an American citizen, 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 US being the sort of policeman of the world. And I think the Donrow Doctrine in 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 the sort of mental light switch can go off in allocators over the course of quarters.

Marty Bent ⋮ Do you think we're in the middle of that process? Because 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. I'm sure you saw, 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. So sort of expanding the optionality that investors have to get Bitcoin exposure?

Marty Bent ⋮ Could we be in that multi-quarter time period where the switch gets flipped and it becomes a must-have in the portfolio?

Baron Koch [35:24] I think it's possible. I mean, I do think that the— I mean, JP Morgan putting Bitcoin at the top of the long-term capital market assumptions is— I mean, it got some play online, but I think it's worth underscoring just how big of a document that is because, I mean, it's Every consultant, every financial advisor, every big allocator, like that's the gold standard, no pun intended, but that's what everybody looks at. And each year, 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. And I think it's probably I think some people were probably surprised to see that at the top of the list.

Baron Koch ⋮ 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. 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 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.

Baron Koch ⋮ I mean, some of them have kind of started to dabble. And I think 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, from an allocator looking to put Bitcoin in a portfolio, there's a, you know, I think the biggest, 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? I mean, it's not like an individual where, you know, you're just kind of freewheeling and can make these decisions.

Baron Koch ⋮ 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, 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 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. But it was introduced as something that you should have as a portfolio tool.

Baron Koch ⋮ Like at the portfolio level, you should have this risk parity allocation. And when people started, I mean, this was 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. 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.

Baron Koch ⋮ And I think it's, it's a similar thing for Bitcoin where even if you get people to say like, okay, let's look at this, the next big hurdle to get over is how do you treat it? Like, 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, it seemed to me like the first place to look was venture, counterintuitively. I mean, because the committee's already conditioned to know that this is a more volatile bucket, you can kind of hide the Bitcoin exposure in there. So I think that's one place to look.

Baron Koch ⋮ 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 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 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?

Baron Koch ⋮ And view this as a digital gold. And so, I mean, I think that's really the thought process that these allocators go through. And the volatility, the liquidity, those things are all important, but honestly, the biggest hurdle is just deciding where to put it. And I mean, as these new vehicles have kind of come on, you see people allocate to the ETF just because there's precedent for it. The MicroStrategies of the world, like, okay, I've already got a a pref bucket, just put it in the prefs, or I've already got— you can slot it in as a stock exposure. It's a dividend-paying stock. I mean, I think the vehicle matters, but more importantly, talking about the long-term capital market assumptions, I mean, I think the fact that this most recent trough, touch wood, if this was the end of the bear market, I mean, having a shorter trough is actually a really big deal.

Baron Koch ⋮ And the To say like, okay, the volatility seems to be reining in. It's much easier to allocate to something with a 50% drawdown versus a 90% drawdown. So I mean, some of this just takes time to work its way through, but I think these are big signals and I don't know that we're right at the beginning of it. It's hard to predict the timeframe, but I do think it's really possible as some of these macro conditions kind of deteriorate that I think we're getting much closer.

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Marty Bent ⋮ Bitcoiners, you found sovereign money. Now find sovereign health and sovereign healthcare. What's up, freaks? This episode is brought to you by Simple Mining. I'm sure many of you listening to this right now own Bitcoin and own it the same way. You go on an exchange, you buy it, sweep it to the cold storage, maybe you keep it on the exchange and you pay full price. But there's a smaller group of business owners, family offices, and investors with sharp CPAs that are quietly getting theirs a different way. They own the machines that make it. Here's how it works. You buy the miners at Simple Mining. Simple Mining hosts them, runs them at their facilities in Iowa on industrial power rates you could never get on your own.

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Marty Bent ⋮ And Binance, whether we like it or not, largest exchange in the world. and Bitcoin only took a 5% hit. We're above the lows that were hit at 10:00 PM last night, and it's holding pretty steady. And we've been holding in this range for the last month. 3 billion and Bitcoin would be down less than 5% less than 18 hours later, I would've told you you're crazy. Yeah. And it feels very reminiscent of 2022 FTX blowup, midterms. It's like weird how everything rhymes.

Baron Koch [44:58] Yeah,

Marty Bent [44:59] this time around too.

Baron Koch [44:59] 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 is at risk. And it's like, no, it's not Bitcoin, it's the centralization of Bitcoin, and that's the attack vector. And so, I mean, I think what the selling— I mean, we're likely to have this sell-off. It makes sense. But to 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 Binance or maybe even Coinbase or the like. But it's not, it's not sort of this 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'll happen from here, but— Yeah. I mean, I think the resilience certainly makes it more attractive.

Marty Bent [45:50] Yeah. And I'm just looking at the historic price chart here on my other screen, and obviously we're not out of the woods yet of this Binance hack. It's yet to be determined whether or not we go lower or stay here or even go higher. But just comparing it to FTX in 2022, in October, late October of 2022, we were trading at $21,000. When FTX happened, we fell to $15,000. So the market fell 20%. after that hack, or that wasn't even a hack, that fraud. 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.

Marty Bent ⋮ So I was like, what could drive this lower? What 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 has it reached that point where they're looking for a dip to buy?

Baron Koch [46:53] Yeah. And I think one of the other things that we've been talking a lot about is like, so not just Bitcoin itself, but you mentioned your managed futures background. And I think having real sophisticated risk management on Bitcoin could be another driver for adoption. 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. So, I mean, for most retail people, the strategy should just be just buy it and hold it. But some of these 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.

Baron Koch ⋮ And this is something we've been talking a lot about, you know, looking at Bitcoin as a commodity 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? And I think the way that I would frame it is that they all go through very similar stages of development.

Baron Koch ⋮ 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. 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 5 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.

Baron Koch ⋮ I mean, every commodity goes through this, this phase. And then the second phase is really like where true price discovery happens. I mean, exchanges, market makers come in and then really kind of allow true price discovery. And then the third stage is where derivatives are introduced and kind of built on top of the asset. The fourth stage, which I think is where we are with Bitcoin, is 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.

Baron Koch ⋮ And where we are now is with these strategies of covered calls, 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 these. Like if you just buy puts on Bitcoin, you're just erode your wealth over time. And these covered call strategies, I think, are very similar to like what gold was in the '70s, what 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 past and jump to the 5th stage, which is more active active risk management and using, you know, strategies that you're likely very familiar with that CTAs use.

Baron Koch ⋮ You know, it's sophisticated in its execution, but fairly simple in its, in the concepts. I mean, it's just, it's, it's managing the tail risk and then benefiting on, you know, it's, it's trying to make money on both the tails, basically. So trend following, mean reversion, these kind of things over several different tenors. And you can apply these same exact systematic strategies to Bitcoin, and the results are, are pretty overwhelming. I mean, pretty shockingly good. So, I mean, just naively taking the systematic strategies that some of the shops that, you know, you were mentioning, like the Vitals, the Lou Dreyfus of the world, this is what they do for, you know, wheat, cotton, soybeans.

Baron Koch ⋮ It doesn't matter.

Marty Bent [51:23] Soybeans, coffee.

Baron Koch [51:24] coffee, everything.

Marty Bent [51:25] Yeah.

Baron Koch [51:25] They're not doing covered calls. They're not buying puts to protect their exposure. They're doing these more active management 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, especially larger corporate holders of Bitcoin, I think this is where the market's heading. And 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.

Marty Bent [52:19] What type of scale do you need, do you think, to implement these strategies? But not only implement these strategies, but do it in a way that it materially advances the market structure of Bitcoin. Does that make sense?

Baron Koch [52:35] Yeah. So in terms of the size that you need to execute it on your own portfolio, it all has to do with the number of strategies you run and the liquidity, the depth of the liquidity of the futures market. So Where things stand now, 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 really execute the strategies well. I think that's kind of the cutoff. is around that, I'd say, $3 million mark.

Marty Bent [53:21] 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 just throughout my time in Bitcoin, particularly Bitcoin mining specifically, because I wrote all the commentaries for the funds, and so I had to explain why commodities markets were moving in certain ways. So I was doing research on Boko Haram in Nigeria and how it was affecting the sweet crude markets there. if there was a fungus outbreak in 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, one of the things you follow for commodities is weather.

Marty Bent ⋮ If you have a rainy season in Kansas, the red wheat, if it floods, you're going to have less red wheat, so the price is going to go up. It's funny, observing it with Bitcoin mining now, with demand response particularly, it's like, oh, it's like I'm seeing patterns that I recognized from earlier in my career around weather and how it's affecting the Bitcoin hash rate markets. And it's just fascinating how you wouldn't assume that weather could affect Bitcoin, but it does.

Baron Koch [54:37] Yeah, it's crazy. And there's a book, I don't know if you've read it, but it's The World for Sale, I think is what it's called. And some of the stories, 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. And some of the stories that come up with it about like, you know, people flying to meet with the, the leader of this country and, um, 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 a, it's like reading a, an action thriller basically.

Baron Koch ⋮ 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 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.

Marty Bent [55:41] Yeah. Outside of these, getting to the 5th level of the maturation of the market structure, what are— and obviously the institutions stepping in, but what other kind of— because let's focus on hash rate. You're at Brains, and I've talked to Jan and Christian and others at Brains about this, but I think I've always strongly believed, again, when we're talking about broader Bitcoin market structure, one of the fundamental base layer markets that needs to be figured out is hash rate futures. And obviously there's been a ton of development there, but I still think the futures market around hash rate is still nascent. Can you give me an update on what you're seeing there?

Marty Bent ⋮ And do you agree that before we even— yes, you can figure out the price, but I think 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? Do you agree that those strategies need to manifest in mining first and then go up to the actual spot Bitcoin level?

Baron Koch [56:53] Yeah, 100%. I agree. And I think it's— I mean, there's been people that have really pushed that market forward. I mean, I know Luxor launched their hash rate derivatives marketplace, and there's startups out there that are doing different kind of markets 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 it liquid enough to really work. And it's one of those things that you can't really push. It just has to kind of emerge. And we're certainly not trying to compete 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. So yeah, I mean, I think it's going to happen at some point. It's just a question of enough people really participating to make it function well.

Marty Bent [57:51] Yeah, because there's so much execution risk. I always thought there was a need for a forwards contract at scale, like Bitcoin miners and exchanges going together, and the exchanges being like, we'll give you X amount, we'll give you X amount of cash upfront for a 5% discount to spot in the future when you produce the Bitcoin, something like that. Yeah. I still feel like those types of structures need to come to market, and then it's great to see people like yourself and the team that you're putting together at Braiins and the acquisitions that you're doing to bring that type of mindset to this market.

Baron Koch [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 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 fuck off, basically. Like, look, I'm in this for Bitcoin's upside. I'm not interested in any puts or any downside. Like, I'm in it. It's either going to work or it's not. I think there's like this resistance to it just because of the type of person it takes to run a Bitcoin mine.

Baron Koch ⋮ Like, the amount of conviction that you have in Bitcoin, the amount of— it's just against their ethos to hedge. It's 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 that's part of it is just, you know, countering, countering that dynamic and getting, getting people comfortable with like, look, it might make sense to kind of smooth the ride a little bit.

Marty Bent [59:36] Yeah. No, I wonder, like, Bitcoin mining finds its place in demand response. And obviously you have companies like Bathhouse in New York using the heat from the miners to mine their jacuzzis. Like, is there some sort of— when Bitcoin mining just becomes a positive EV sort of tangential process in a larger business with bigger plans? Is that when the— are those the type of actors that are necessary to engage in that type of hedging strategy, not just be Texas hedge long the whole time?

Baron Koch [1:00:15] Yeah, I hope so. I mean, you saw the thing with the water heater that came out last week. That's kind of interesting. Yeah, really cool. And we actually, when I was at the Bitcoin Park here in Austin, I forget if it was— I forget what the event was, but they— BitAx had this thing set up where they were, they were cooking steaks with the excess heat. They were like sous vide cooking steaks during the conference. It's pretty cool. I hope so. I hope that's the way it goes.

Marty Bent [1:00:43] So what, what's the plan moving forward? I want to talk about the fund that you guys acquired, if you're comfortable. What's the plan there?

Baron Koch [1:00:54] For sure. I mean, I think the plan is to really find product-market fit. So, I mean, 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 Bitcoin holders. And I mean, they spun out of a commodity merchant, have done this in-house and really, really know what they do, what they're doing. And 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 approach and then really start to, start to size up and prove it at scale.

Baron Koch ⋮ I mean, you can— like right now, it's, it's really a matter of figuring out the infrastructure, which we've, we've largely done. and talking to people about, about the benefits of it and trying to, you know, really, really scale it up 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.

Baron Koch ⋮ And I mean, I think it's very applicable for miners. 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 5%. 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 Bitcoin up as collateral. And then we run a futures program where you get exposure not just to these managed futures strategies on Bitcoin, but also adjacent assets like copper, natural gas, whatever, and kind of make a basket that diversifies people a little bit.

Baron Koch ⋮ So there's a lot of applications and I think that's really what's next for us is scale, scaling.

Marty Bent [1:03:15] Yeah. And is the pitch for your managed futures strategy, because when I was working at the fund, it was basically just portfolio insurance. That's what we were fighting for. It was like, hey, we're not fighting for 20% of your portfolio, we're fighting for 5%. And when shit hits the fan, we'll be here to outperform to make sure you're you're diversified in these assets that will perform well when the market's going to shit.

Baron Koch [1:03:43] Yeah, exactly that. I mean, it's not something that makes sense at 30% or 40%. It's really like you said. I mean, I think the max it could make sense for somebody is 10% or 15% to have. And I think it's exactly that. It's there for when things go 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 makes sense to pair it with something that can complement it and really come in when, when those struggle.

Marty Bent [1:04:31] What are your thoughts on the yielding strategies? Do you have your thoughts about that?

Baron Koch [1:04:37] I mean, I kind of alluded to it earlier. I mean, I think bankers are more than happy to come in and sell these strategies to people and charge large spreads. And I think that's kind of where we're at is just these bankers or former bankers know that this is the highest margin thing that they can offer. And that's what's happening right now. And I mean, You don't get the yield for free. You take a risk there, and I think the risk is misunderstood. How much do you get burned? I mean, I think we got to get burned to really realize how bad it can get.

Baron Koch ⋮ 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 and other commodities. And it, you know, it gets— 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 that Bitcoin's up 30%, these things, it just— there's a lot of blood. 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.

Baron Koch ⋮ And I think these yielding strategies have done exactly that where it's like, okay, maybe if you're getting 4 or 5% for taking that kind of risk, it makes sense. But now that it's compressed to 1%, it's like, I think people are probably looking for something new.

Marty Bent [1:06:05] 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?

Baron Koch [1:06:18] I think, I think we hit it all. I guess we'll, we'll find out if, if the internet's going to eat itself, if agentic swarms will just like take us all over and we'll go back to the, back to the Stone Age. But if that doesn't happen—

Marty Bent [1:06:31] Nothing ever happens, Baron. Nothing ever happens.

Baron Koch [1:06:34] Yeah, no, I think I saw your, your post last night of Don Draper just sitting zen with the fire in the background. I think that's, that sums up my My current view. You

Marty Bent [1:06:45] 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, and it's much easier to find peace when the chaos is expected. And I think the chaos should be expected, 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.

Baron Koch [1:07:13] Yeah, 100%. Yeah. I mean, it feels good to be on this side of the fence, honestly. I mean, I think it's much more honest and much more real. And I mean, when you— I mean, we're on a Bitcoin standard. I mean, when you live on a Bitcoin standard, you're living an honest life and it's tougher, it's more volatile, but it's real. And I think 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 you're on a Bitcoin standard in some form or another, whether it's you personally or your company or your portfolio, I think it injects a level of honesty that's less comfortable but more real. And I think that gives me hope for the future.

Marty Bent [1:08:00] Likewise. It's been a pleasure, sir. Where, where should we point people? Where can they find out more about you, what you guys are up to at Brains?

Baron Koch [1:08:09] Yeah, anything Brains on X, BaronCoch21 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 Brains. Should be a fun '27.

Marty Bent [1:08:28] Here's to a fun '27, freaks. Peace and love. Okay. Thank you for listening to this episode of TFTC. If you've made it this far, I imagine you got some value out of the episode. If so, please share it far and wide with your friends and family. We're looking to get the word out there. Also, wherever you're listening, whether that's YouTube, Apple, Spotify, make sure you like and subscribe to the show. And if you can leave a rating on the podcasting platforms, that goes a long way. Last but not least, if you want to get these episodes a day early and ad-free, make sure you download the Fountain podcasting app. You can go to fountain.fm to find that. $5 a month gets you every episode a day early, ad-free. Helps the show, gives you incredible value. So please consider subscribing via Fountain as well. Thank you for your time, and until next time. Okay.