On The Brink with Castle Island - Tim Kelly (BitOoda) on Bitcoin hashrate derivatives (EP.81)

Episode Date: May 18, 2020

Tim Kelly, founder and CEO of BitOoda joins the show. BitOoda is a financial services firm that is innovating in the field of structured products based on Bitcoin hashrate and difficulty. In this show we discuss: Tim's career background and the similarities he sees with cryptoassets vs. other asset classes he has traded The mining ecosystem and how derivative contracts solve real business needs The evolving market structure for cryptoasset derivatives and Tim's view on the regulatory landscape   To learn more about BitOoda visit: http://bitooda.io/

Hey everyone. This week's episode is brought to you by CASA, one of our portfolio companies. Let's be honest, how confident are you feeling right now about the security of your Bitcoin? Every quarter we hear a new horror story, exchange hacks, exit scams, a friend losing their pin, or someone passing away and having their family come up empty-handed. The best way to keep your Bitcoin safe is to hold it for yourself. And CASA is the easiest and the safest place to do that. They have one of the most well-respected teams in the industry, amazing design, and 24-7 support that will help you every step of the way. Premium memberships also include the Bitcoin Inheritance Planning Product, White Glove Support for Large Bitcoin Purchases, and services that were previously only available to ultra-high-net-worth customers. If you're ready for security upgrade, you can get started with a membership for as little as $10 a month.

and as a special offer, use the coupon code Castle to get 10% off. Head over to keys.casa to get peace of mind that your Bitcoin is safe. This week's episode is with Tim Kelly, the founder and CEO of Bit Uda, a digital asset financial services platform that specializes in structured products, risk management, and market analysis. Tim and BitUDA are at the cutting edge of financial derivative products based on Bitcoin hash rate. These products help mining companies head.

their exposure and locked in fixed rates for their hash rate. I wanted to have Tim on the podcast because he has a rich history at the intersection of asset classes as they are maturing. And I think that Bitcoin is certainly in this category. He is a several-time successful entrepreneur who began his career as a pit trader and he later started two businesses in the commodity and energy trading space. I learned a lot in this one. I think it's a really interesting field and I hope you enjoy it. So without further ado, here's our conversation with Tim Kelly of Biduda. by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion.

This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of Concentive Easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin. Tim, thanks so much for joining the podcast today.

Oh, great. Thank you for having me, Matt. You're calling in from Thalmouth, Massachusetts. I'm a little bit jealous that you're down the Cape so early. But I guess you've been down there for a while, extended quarantine. How's your lockdown going? Oh, it's fine. We've been here a few months.

I mean, we were in Jersey City, and we shut that off down on March 4th. So we're in a much better position, I think, that unfortunately, most people in New York has just really been impacted. so severely, unfortunately. Well, I'm really excited to have you on the podcast today. I think your career history and the asset classes that you've been involved with really lend themselves well to kind of a discussion around crypto, particularly around some of the derivative instruments that are coming onto the scene. And you're someone that's seen asset classes institutionalized over time.

So maybe before we dive into the crypto stuff, could you just give the listeners your introduction a little bit about your career story and how you came to start Biduta? So let me use a little background. So it was basically 25 years in derivatives, both trading and brokering. I started my career in Chicago in the 30-year bond option pit, and this was back in 1996. Things were very different, and I actually, it's got a funny story. I working for a very large group, trading for a very large group in the pit. And one night we all went out to the river roads in Chicago, and I had a ton of money playing

blackjack, just got lucky. And so I told my bosses, I'm going to go off and. back myself and started trading my own money. And they were fine with it. I mean, it was totally different times back then. But they would totally respect the decision. And then I really did know anything about trading. And I literally blew out three weeks later. The Asian contagion hit. And I was the first offer on the first straddle that Soros came in about 10,000 straddles. And that was ending me. So, yeah, it was three weeks. I mean, I think I had the shortest executive careers that Pope was poisoned. But actually, that's when the firm did, you know,

The FCM backing me actually kept me in a pit. I don't really tell you how much I lost, but it was probably the best thing that ever happened to me. And then I really got mindful about risk management. And I think that event, while incredibly painful, I really became an ardent believer in risk management. And we really referred to it as really just in case and not just in time. And that experience, I think is very helpful as we talk to people about risk management.

It's really hard to try where it's management, unless you've actually been through it. I did that. I think they say in poker, like, if you don't know the pool of the table, this is probably you. That was me. But, yeah, I blew out in front of 800 fellow people in the pit. And I can tell you, loneliness is a crowded room. It was a devastating day. So I made it back.

And then after about five years of pit, a number of my friends and buddies and colleagues that traded in the pit were being recruited. This is the height of the Enron cycle. And a number of the guys that I knew were getting recruited to trade for energy. merchants. I didn't even know what an energy merchant was at the time, but this is when Enron was flying and all the other energy merchants were. So I actually left trading and became a broker because these are guys I knew really well. And there were three of the largest energy natural gas derivative traders in the market. So I got a job. They got me a job in New York. I went to work for and covered them and built a pretty healthy business. And I got to work at a big interdealer broker at the

time. And then six months after that, Enron blows up, I got a really great understanding of how quickly a situation can deteriorate and how important credit is. And it was a credit crisis. We lived it. I saw, I mean, it really cedes the markets for a year. And another invaluable lesson of how important credit is. We never wanted to swap price risk or credit risk. And I really learned it. I mean, from Enron, it was incredible. That entire market seized up overnight. So I went on just two highlights. Just my background. I don't want to spend too much time, but I was very fortunate to start two firms on my own.

One, I sold to ICE, the Intercontinental Exchange in 2007. And that was a wonderful experience, great people. And it was also a fantastic experience working at a regulated exchange. And really, we were cast with trying to migrate business from the CME to ICE. ICE's position was we had better technology, but nobody's using it. We built it and nobody's coming, and our responsibility was trying to move business over. So we worked across many different teams at ICE, but gained a real, very good understanding of how the power of adoption and gaining critical mass and network effects and all that really worked. And just for perspective and context, when we started, we joined ICE, I think, seven lots of commodity options, derivatives and traded.

And then by the time I left four years later, it was like four to five hundred a thousand. So it was not just my teams. It was a number of internal groups at ICE that deserved a lot of credit for that. But I was really thrilled with my experience at ICE and just working at a regular exchange, how important it is to have a regulated exchange in a very strong, robust jurisdiction. So that was ICE. And then I left that for four years. I started another firm, Ford inside commodities, which was really execution and research

focused. And I really felt that research was key that kind of distinguishing ourselves from our competitors. And ultimately, we sold that firm to FC Stone. which was a large FCM futures commission merchant for those who might I use a lot of abbreviation so please slow me down but the FC Stone experience was wonderful because then I really got more insight into how powerful it is to have a credit intermediary and how the system when it does not if when shocks happen 100 year events happen every other year to see how the system can handle those

shocks and then I thought I retired in 2016 and I've been following Bitcoin since 2011, because one of our clients, one of our largest market makers had been buying a ton of Bitcoin early, early on and mining and everything and very sizable positions. And they're telling me about it and just say, you've got to take X and buy a bunch of this,

and this is going to be the future. And, of course, I never pulled the trigger. Then Mount Gawks happened, and I said, oh, wow, I got scared. And so basically the first time I really started paying attention to Bitcoin and blockchain, was in 2016 after I retired. I was living in Nantucketka,

and I got invited to the Boston Fintech sandbox. So I literally left the beach. They left the beach. I went to the sandbox in Boston, and I listened to this project that was this blockchain project. Brilliant, brilliant MIT, computer science, PhDs, et cetera. And it was fascinating to listen to them. It was a wonderful two-hour conversation.

It was wide-ranging. It was really fascinating. And I learned a ton. And then I was walking out. They were trying to disrupt the crude market and leveraging blockchain and revisiting how crude trades physically and financially. I asked them what grade, what index you're going to start with, WTI, Bren, you're going to be in Europe, you're going to be domestic here in the U.S.

And they looked at me and said, what are you talking about? What is that? What do you mean? And I said, well, WG, you don't know what WDI are. And I didn't mean to in any way a little. I mean, these guys were absolutely brilliant, but they had no domain expertise. and I left that meeting saying, wow, there is an opportunity here. And I went back to my house in Nducket and spent the next six months writing

of a business plan, doing as much research as I could, trying to understand the market where it was. And if there was an opportunity, and I really felt that after about six months, I had a business plan put together. I reached out to anybody I respected in so many different fields and kind of bounce ideas. It was a really collaborative effort to put that business plan together. And then there was one exchange that doesn't need to be named, but in June of 17, there was a crash on ETH.

There was a $12,000, I believe, notion of order. Somebody hit market and drove Eath down from $300 a penny, and then right back to a penny. I back to $300. And I was kind of shocked by that, that there were no circuit breakers, et cetera. And then the exchange's response was even more disturbing, but also it commits me that there's a real opportunity, and I got to go for it. And it's clear that this exchange didn't understand that with cascating effects and what happens in a market sell up, when you can go for $300 to a penny in the right back and then say that all these, you know, our matching management worked, et cetera. So that's when I went for it. And I just said, I'm going to start a company.

I moved back to New York, got myself a hotel a year and started just hybrid in. It literally has been non-subs since. And that's when I formed Beduda. And now we're up to eight people. That's kind of how I really started the firm. And it was shocking how little I knew. but I just said I've got to get in here. If I'm going to do this, I just got to jump in and just go for it. That's great. I want to get into kind of what Biduda does and what you're doing now, what your

broader vision is. But a couple of things that you said really piqued my interest. So obviously, you're in the market infrastructure space. You saw this asset class and you saw that there needed to be a tremendous amount of infrastructure that didn't exist to build around it. One of the things that we kind of don't talk about a lot necessarily is just that infrastructure kind of needs an investment thesis sitting on top of it around why you'd want to hold some of these assets. And it's pretty clear with Bitcoin that this is a non-sovereign store of value or at least an option bet on the emergence of one. But there are kind of a broad range of other crypto assets that are trying to do different things. I'm curious if you have an orientation towards which parts of this industry

are the most exciting just from an asset perspective around why you'd want to hold some of these things. And maybe as a follow up to that, how do you explain what this is to someone that might be familiar with capital markets, but is less familiar with the intricacies of a Bitcoin versus an ETH versus any number of other coins. My experience is somewhat narrow but deep. Just because of time and resources, we have just really died deeply into Bitcoin and really our focus is in the financialization of mining. That's really our focus. That doesn't mean I just haven't put the time into the other projects. I'm actually scheduled later in the week to really start working on a research piece for DPI. One of our clients, super sharp.

guy, one of the big funds on the West Coast, who wants to work on something DFI. And I said, I'd love to get educated. I've just got to find the dude at the time time. So we're going to go to co-author piece on D5, but I've got to get myself in speed. But really, our focus has been Bitcoin and really, as my team is largely commodity in orientation and also we really come from a non-linear derivative background. So we gravitated to miners, just as we would think of miners or we really like to think of minors, we think that doesn't really capture who they are. We really think of them as data sentence. And they're very akin to be referred to just like an oil producer. And a lot of how we cover and we approach markets and products is just like we would

do in the commodity markets. One, we identify who the natural long is, who the natural short is, and then we try to identify the risk and then mitigate those risk. And I think that's really what Bidu is known for is really the risk management, if you will, regarding minors. And we're really proud about the work we've done there, whether it's our hash contract or difficulty swaps or some of the other swaps and products that we're looking to build. But really, that's our focus. And certainly you could go deep, deep, deep on Bitcoin. There's so much infrastructure that's just not built out. So that makes a ton of sense. So why don't you set the stage for us a little bit and just tell us about Biduda. What was your vision when you started the firm? What's the firm doing now? What's the

broader vision around what you're building? Certainly, we made some pivots, but I think most importantly, we looked at the space, and the thesis really, yes, we are an agency firm. We place a tremendous amount of emphasis upon being regulated, being compliance. We're an institutional firm. We really never don't have an answer piece in cover retail. So we're regulated by both the CFDC and the SEC. We're hoping to get our bill license. But really, that was day one. We started applying, sending in our applications to the CFTC and the FCC. So that's number one. I mean, I think that's critical for anyone that is looking at good at it. We're really, we're not that vocal because we are an institutional firm. What I'm good at it, we're not someone that's focused on

retail. And then really, too, it's nonlinear derivative products, whether it's trade like I'm working right now for on CME Clearport or hash or difficulties. or really anything non-linear on exchange, off exchange. That's what we do. That's really our expertise. When you look at crypto and you look at some of the product potential here, you look at a lot of the products, frankly, that just don't really exist yet at scale. Does it remind you of any other asset classes? I mean, you've been around sort of the emergence of a bunch of different assets here as they have matured. Does crypto look like anything else to you? In some ways, yeah, it certainly does. One, I think it's an unrepeatable.

opportunity, literally unrepeatable. And I think it certainly reminds me of traditional markets that there's hedgers and speculators, there's structures in the middle originators. And it's really a unique space is that for our hash contract, for instance, this is kind of unique, maybe because I've come from mature markets, but in these immature nascent markets, there's a lot of, really we're so fortunate to have so much collaboration when we develop the hash contract, half the, you know, we all a dozen firms. Half were minors, half were minors, and then the other half were more expected of alpha funds. This was not a bidu to effort by ourselves.

This was probably a dozen different firms. So it's really cool that I've never seen another asset class, really firms coming together and trying to collaborate. So that's awesome. And I love to see that. I'm so passionate about the ecosystem. I don't like that tribal type of narrative that happens sometimes. The one thing that I will say that is surprising, I guess unique,

is that since we're a regulated firm and compliant, especially coming from ICE and working for regulated derivative change, it concerns me that there are unregulated derivative changes operating in wherever they're domiciled, no FCMs, no shock absorbers, run by trading firms. It's not something that I'm familiar with and not something that really I would ever want any of our clients trading on a platform like that.

So that's a little surprise to me, is that some people have this almost disregard for regulations. And when you're dealing in derivatives in the U.S., you have to, if you're facing clients, and there's a lot of firms that there might be a market maker and then they have a sales force, that sales force has got to be regulated. They've got to be licensed. And all their chats have to be recorded on compliant chats. We use ICE chats.

I have a lot of former colleagues at ICE, but it's an incredibly slick and great way to communicate. I'm trying to do a trade right in the middle of this interview, so I'm sorry. But I don't even think that firms understand their obligations. I mean, one thing, not only are we two key points is one, we're regulated by CFD slash NFA, and two, we've been successfully audited. I'm very proud of my team. It took five months, but we went through an NFA audit, and we've already been audited. So it's very hard to take a path of in the U.S. or G7, for that matter, to take a path of not being

regulated and then trying to save harbor, et cetera. it just is not how the regulates work. So I think that is one very strong and robust strategic advantage of that it has that were regulated. We'd love to hear the news that Tudor, Paul Tudor Jones, coming in the market. I mean, that's really our DNA. That's who we cover. That's who we know.

And we hope that we're hopefully one of the few firms that can service clients properly that we can onboard these funds because we are licensed and regulated. I think the Tudor Jones news is just really important for a number of reasons. One is that you just haven't seen historically a lot of funds putting money to work in this space. It's one thing to do it on a personal account, but to do it as a fiduciary for your limited partners as a whole different story. So I think it's a huge point.

You bring up a really interesting point around kind of the offshore exchanges. And Nick and I have called these the alt-coin casinos, for lack of a better word. And it's interesting because they're not really trying to service an institutional client base. It would be almost impossible to imagine a fund like Renaissance or Paul Tudor Jones's fund coming in and annexing liquidity on those venues. But the reality is that this is still a very retail-driven market. So it seems like they've been very effective at attracting that retail flow and certainly there are trading firms that can participate there.

Do you think that it's a sustainable equilibrium in the market here to have that much liquidity kind of on these venues? or do you think that we'll find a way to get more of that onshore in the future? Absolutely not. It's binary. Leaders are going to become leaders. That's what we say. I don't know how you could possibly run an unregulated derivative change. It doesn't matter if you're based in Antigua or Panama or wherever location.

If your operations in Hong Kong, the regulators are going to come down. When we get through this in the SEC, you've seen some of the SEC take significant action. I think the regulators, there's no way. you can be running. I mean, you have to be mindful of the context where we're 10 years post-2008, 2009. I live through Dodd-Frank. I can tell you that anyone operating in unregulated revenue exchange, I don't care where they are. It's a binary risk. I would be buying puts if I could on those operations. I don't even want to name them because I don't even want to detue the justice. But I don't see how that continues. And we certainly are very mindful. You have to focus on

return of capital sometimes, than return on capital. And when these exchanges, and they will, when they have an event, they are going under, and they're going to take all the clients funds with them. And that's it. I think it's absolutely terrible for the ecosystem. 100 to one leverage, that's complete nonsense. And I agree. I really enjoy the bad that you and Nick put out.

And I think we're very lying. But it's great to see the fidelitys of the world, ICE, these type of firms, seeing me, and I think we're seeing, I could tell you that I'm on the ground. I mean, we're seeing migration too, see me. And I'm a very strong FCF's EDF man, et cetera, these type of firms. These are real players. I mean, so I just think that migration will continue. And I guess my final, what drives me a little, irks me a little is that some people say, oh, wow, what wonderful innovators. There's so many people that can develop a matching engine and run an unregulated derivative trade. But nobody will because it's illegal. So I want to sleep at night.

It's just clear. I mean, it's the US derivative law. It's not just the U.S. I tend to agree. So I want to kind of build up and talk a little bit about the product set here. And I think some of the derivative products that you're introducing here are probably unfamiliar to some of the listeners. So maybe we could do it this way.

It's just could you explain maybe what a derivative is using a non-crypto example? And then would love to get into the crypto context of who the natural long and who the natural short is and build it up from there. I think the best way to, you know, and just try to be timely too, for the people listening to this podcast. So Mexico, as a country, they're a very large oil producer. They hedge their production every year. So I think this is a famous commodity hedge, an incredibly well-known hedge. You've been doing it for over 20 years, and Mexico will come in and hedge.

And so what they do is they'll lock in certain prices, and especially with this year, thankfully, they hedged earlier, much earlier in the year. a great price, very high levels. So they really escape. So what they do is they're an oil producer. So what they'll do is buy puts, basically the most simple structure will just buy puts. And what a put does is basically you buy, it's almost buying insurance. So say we're trading $50 and WTI. If they buy the $40 put, they're basically hedge from $40. So when crude goes negative $45, they're going to be okay. They're going to be in a good position. And that's really, a very famous hedge and a very simplistic. They use very sophisticated strategies now, but that is one of the most famous hedges in the commodity world. The other side would be an airline

that might be exposed to the price of jet fuel. So what an airline will do is potentially buy calls on jet fuel because they're concerned about the rise and the price of jet fuel. And those are just two basic examples and happy to elaborate matters like me do. That sets the ground really well because I think we can translate that over to the crypto front. So let's talk about miners. So put yourself in kind of the Bitcoin miner shoes. Let's say you're a large U.S.-based industrial scale minor. What are you thinking about in terms of hedging your exposure here?

And what are you trying to solve for? So originally the first product we rolled out was we were talking to the miners, of course, about price. And a lot of miners, when we first started, the team E wasn't up and going. We were trying to inferred OTC bilaterally, but a lot of the FERPA funds in the defense are just starting out, and they were small and they weren't that well capitalized, so it was challenging to get bilateral agreements in place because of the credit issues.

So the first grade we did was about a year ago, and the timing, there is a seasonality, somewhat of the seasonality to hash. You have the onset of hydro season right about this time, May 1st or so in mainland. And so we do see a significant hash come on board. online. What happened is a minor came to us and said, guys, could you structure a difficulty swap to hedge my exposure to difficulty? So he said, sure, we went to just kind of, we have two

quants who really worked on that and we were able to develop a difficulty swamp and we're able to hedge the minor's exposure to difficulty. So he bought the swap. We had another very quantitative firm who was able to develop the model to hedge and agree with our math. And then I think hedged out three or four periods. So we call difficulty varies D plus. one plus two plus three right now we're looking at say d plus six somebody's trying to head c plus six so that was the first as we did and then we started really getting diving in deep with the miners just because it was just like an oil producer the miners the same thing to us and we started working with a number of miners about talking about debt equity debt is extremely expensive and really

restricts the operational flexibility of the miners because of the covenants they're so restrictive and then inequity is incredibly dilutive. So we said, what about if you would sell hash, your hash rate board, and we're able to get buyers? So I think the first contract we executed was about four or five months ago. And the first 10, it was 120 days. So we did a beta test. One contract is one pet of hash. And we said, okay, let's start slowly. Here, let's make sure we've got everything right, all the assumptions, and make sure, you know, it's flowing through our prime broker, and then it's into the pools directly into the private broker and then close into the individual's account. So everything was running smoothly, great, okay, good.

Then we did five contracts. And then the next thing we know, a minor, because there was a tremendous amount of positioning before they having. And then we had one contract or five contracts, and then we had a minus of guys. But I sell 100 contracts today. And we scrambled and we were able to actually get the trade done in about five minutes. So there's real appetite on both sides of the book. We call it the book. We're sellers and buyers. So we were able to trade hundreds of contracts,

and then we also had to do a secondary deal. And then there's so many derivatives that we can layer on top of that to really meet bespoke needs of the minor or the buyer. So there's callable hash swaps, there's putable hash swaps. You name it. We could structure it. But with risk management, we always like to say keep it as simple as possible, no simpler. But we really advocate to try to keep it simple, but it's really great for the miner because they can lock in price and difficulty. I mean, it's also transaction fee swaps. There's, we're looking at proof of stake and slashing swans, etc. I mean, I think we're working on three dozen, just different swaps. And really, it's just, like I said, it's just identifying the long, identify the long, identify the short,

and said we structure something that's working both parties. And it was a fascinating grade. And we We collect so much data and we're really proud of the fact that one of our miners, we saw that one of the pools was overcharging them. And we collect this data. We watched this data so closely that we notified this minor. And I think we're going to save a million dollars a year for something like that. And you give us a little shut on LinkedIn. So my team was really proud of that. This is fascinating because I think people have this picture of what the mining industry is.

And it's very far from where it originated where you could on an individual computer mine. CPU, like how Satoshi was doing. And obviously, we've graduated to GPUs, FPGAs up to ASICs. And now these are really industrial scale. And I guess what you're offering to radically oversimplify it is just a way for those miners to get US dollars in a timely fashion and pay their operating expenses and to go out and buy new equipment and to really run their business like professionals. What's your sense of that kind of level of sophistication? I think people might be surprised at how sophisticated some of these folks actually are. The folks that we're talking to are super sophisticated. I'm learning something new every day. I mean, one is a former, was one of the largest power traders in the commodity market.

The folks we're talking to are super sophisticated. And they're great guys of dealing. I mean, we're really learning, they're learning. And it's scary how little I knew about mining when I first started. But some of them are backed by private equity. But no, the folks that we're dealing with, this is not your mom and mom and Bob operation. These guys are whole. quite sophisticated and very familiar with hedging tools. Stepping back, I mean, high level, you basically articulated very well as a minor, he's looking to finance the growth in their facility. Say they sell a million dollars worth of hash.

They take the million dollars and hopefully they have good access to the manufacturers and they go buy, they take delivery of gear immediately. They turn that gear on and then sell hash and then sell more and just with strap the whole growth to their facility. These are quite sophisticated operations. And there's also, we have the concept of collateral agents to mitigate credit risk. It's definitely a sophisticated trade. In our view, very similar to some of these very niche commodity markets, it just doesn't

translate well to an exchange. But for something like us, it can be nimble. And just whatever we do, if it is a swap, we have the ability to just report it to a swap day repository. So we've got a lot of flexibility there. Do you find that miners are naturally long Bitcoin in the sense that they would hold it on the balance sheet and only hedge some of their exposure? How did they position themselves?

Is there a best practice there or is it a case-by-case basis? I'm over my skis to talk about Asia, but I can tell you in North America, they're much more mindful of stability cash flows and much more receptive to hedging solutions where from what I understand, and this is purely from what I understand, don't quote, don't hold me to it, but from what I understand, maybe the mainland miners are much more aggressive in their positioning. We don't have much coverage in Asia. We speak to a lot of minors in Asia, but we don't actually actually.

This market, we've developed and we've kind of perfected North America. Now we're looking to roll out globally. But we really wanted to just get it right first before we started really rolling this globally. But that's your passion. And then there's always, we could always get minors on exchange and then just do simple strategies where a lot of traditional hedgers like to buy a put and sell a call and do it costless.

So you do a costless caller, we call it. But that's if the miner wants to get on exchange. we do have some miners who are onboarding on the CME and ICE now. So I thought what's the cheapest hedge, whether it's selling cash, whether it's on exchange, buying goods, selling all, just buying puts, want to keep their upside. It's whatever they want to do. But we really look at it realistically, whatever is the cheapest form hedging. That makes sense.

I like the example that you gave at the outset of the Mexican hedge and the airline being on the other side. Talk a little bit maybe about who's the other side of that trade from the minor, kind of who is looking to take on that exposure. Definitely sophisticated funds in crypto. They understand the trade. We pitched you to them two minutes. They get it.

They're in. It's definitely some of the funds. We hope to roll out to more and more funds. It's family offices. It's high net worth, individuals. We actually, on the last, we traded a hundred pet of hash. And we actually, from our former life in commodity markets, we explained to some commodity traders. Hey, guys, do you want to buy an asset?

The Biden will sell it at discount to get the cash up front. So, if you want to buy it. I had asset at 10% discounted the spot. This contango in the curve. You could basically lock in. When I said contango, that means the future is trading above spot. And so we had two people, two family offices who had never created Bitcoin. They had a limited understanding what Bitcoin is or what it is.

And they said, wait a minute, I can, but these are super sophisticated traders. So the candidates, they just bought the hash from us and then just touched it using their futures. So it's really interesting, like how they, hopefully the Bitcoin, as we grow in this trade, hopefully introduces new capital and et cetera to the network. I think that's super cool. But two people never traded Bitcoin for actually bought hash and hedged in the futures market. So then you really get what we think is super cool. If you do it is, you really get an understanding both the physical and financial side of the trade. So I think that's super important.

That's really interesting. I guess one variable here that's interesting to think about and curious how you think about, the risk exposure is just that hash rate. So what would happen if 10% of the network were to drop off? And I'm obviously kind of thinking about what's going to happen here around the halving. Or conversely, what would happen if 10% more gets added on a daily basis? So how do you think about that, just that, I guess that's a reality of this asset class. How do you think about pricing and how do you think about just how these markets function with that uncertainty? Or is it uncertainty, I guess. It's definitely. So the buyer will take that uncertainty with

the margin. So he's taking on. price and difficulty risk, or he or she was taking up price and difficulty risk. And this was a really, I mean, this is in COVID-19 and just how that impacted this trade, it was really enlightening. So the buyers, of course, there was concern about performance the contract, make sure we were airtight. And if there's any portion of chores, et cetera, we're very mindful of that that's all in the contract. But what happened was is the buyers. So hash, as you probably know, it fell off. It got crushed by something out of roughly 20% at one point. And so the prices, before we dumped down on March 12, the buyers actually, you were just mining

a lot, you're able to mine a lot more Bitcoin than they anticipated. And then, however, they managed to trade. They sold the lowest, of course, but if they managed trade accordingly, a lot of the buyers have a structural long view to Bitcoin. So they're not going to be forced to sell. But it was really interesting how hard that hash came off in that work. It was really interesting. And then I think the miners were fine, too, letting it go where they did, and seeing Bitcoin

and go all the way down 4,000 or whatever level it did. So it's kind of a win-win for both people, depending on how they manage the risk. That makes sense. So maybe just stepping back and talking about crypto market infrastructure here, you're obviously well-versed in their derivatives and the spot market. So maybe talk a little bit about the relationship between those two markets. Why did you choose to focus on derivatives as opposed to spot? And how do you see these two markets coexisting?

Spot, to me, you have these massive high-frequency firms that, for me to try to even compete with these. I mean, some of these firms have spent billions of dollars on infrastructure, billions. The level of sophistication is credible. I mean, I saw this in my experience that I, some of those sophisticated hypergency firms in the world are trading crypto. There's just no way I could ever compete, nor is that of my expertise, where myself and my team's expertise is in nonlinear products. And really spot to us is, it's so competitive. It's so challenging to defend that market to make it.

It's basically a cross-market all day long. Granted, that's when we're quiet, and then when things start widen out when there's some volatility. But really, we're a nonlinear firm. That's our DNA. We don't know the spot market when I could at it. But as we look to transition from an agency firm into a principal trading operation, I mean, that's really where our focus is in nonlinear products. And we really, we do this correctly.

We shouldn't have any exposure to really the price of Bitcoin because we'll be trading swabs, options, et cetera. We're not going to think of the right bet on Bitcoin. We have no edge in that. There's a lot smart of people in this space that us who can make calls on Bitcoin, etc. So that's not where our expertise. Our expertise is really regulated for customer focus and serving our clients and providing

liquidity for non-linear products. That's great to hear you say. And I couldn't agree more just around the maturity of that spot market. And it's come such a long way just in the time that I've been in the space. So maybe talk a little bit about where we are in terms of industry maturity. You mentioned Paul Tudor Jones. coming into this market a few days ago, which I thought was huge. Where do you think we are in terms of bigger financial institutions entering?

Is this infrastructure there yet such that they can enter in size and would feel comfortable? And curious your perspective on what needs to happen in order for more capital to flow into the industry. I think this is probably the biggest news in crypto. I mean, they have Tudor basically validated and just such a well-respected person, trader, fund manager. I mean, to have him validate the asset class is, I really think some of the biggest news in the history of Bitcoin. And I think that you've got Rentech or Renaissance. I don't ever make predictions of the price, but I think you're finally going to see real institutional players come in here. And people have to realize, like when funds, when my old days and crude and monetary derivatives, when a fund puts it has a view, they're going to take, say, 50 basis points of that fund or whatever,

depending on liquidity and maybe not for Bitcoin right now, but they're going to express that view. They're not going to be buying a thousand Bitcoin from an OTC market. They're going to be in the too many futures market or option market, and they're going to be looking to buy massive size. I mean, to move the needle of a $10 billion fund, you have to have real exposure. And I mean, sometimes we would put on trades. That would be 50 basis points. We would buy 50 base points of crude premium, call options or whatever was, whatever the idea of a fund want to express. but we're talking about massive, massive amounts. The trading side is going to grow exponentially.

So that's what we see. We think it's here. We're in conversations with a number of purposes. We never thought that we would be at this stage speaking to the institutions that we're speaking to, and I could say some of those sophisticated global institutions that are looking either to make outright plays on both getting some exposure to Bitcoin

or to really invest. Everyone's trying to really, we've seen a lot of institutions trying to really play the infrastructure angle. And these are some of the largest. just global financial institutions in the world. And so it's here. I mean, I don't know.

I think we're really going to start seeing. I think one, we've gotten through the having, great. Now let's get through the COVID. And then I think what we're hoping is that Bitcoin decouples from equities. We still think it's correlated to equities. And I'd like to see that decouple. And I think that story really emerges. I think Paul to the Jones said it best.

And that's kind of our view about what the Fed is down here. I mean, we should see that point. I agree. I think we're kind of getting to the point where, it's irresponsible and it's not okay to have an opinion on this asset class, which at minimum doesn't need to necessarily be a positive opinion, but having an uninformed opinion is not okay. I kind of put myself back into some of these rooms that capital markets participants were in in 2015 and early 16 around private blockchains.

And kind of the popular narrative there was everyone wanted to do a blockchain project, but no one wanted to hear anything about Bitcoin or public blockchain crypto assets. not only was it an ignorant kind of self-serving move at that point. People just wanted to be seen as doing a proof of concept and they didn't want to hear anything about public blockchain assets, but it's financially irresponsible at this point to have that type of an opinion when you have respected allocators that are taking this seriously when you see what's actually going on in the world with this money printing and some of the implications that we're going to have there.

So it's really exciting for me to see. I think we're kind of at the point where we're still incredibly small as an industry. There's, I think, if you look at the balance sheet of Apple, current assets are still larger than the total market cap of Bitcoin, but it's getting too big to ignore at this point. And I think we're still in the early innings. Matt, you've been in the space a lot longer than I have. So, I mean, yeah, I completely agree. You cannot ignore it. And you just really, if you're an asset manager, you don't have any allocation of Bitcoin, I think it's foolish. And I'm a spread trader by hire. I mean, really, that's really a lot of spread trader. So we look at Bitcoin to gold. I just put out a piece last

week that tried to make it a catchy title, but I said, Bitcoin is bold, gold is old and cold. I mean, I really see that spread. We call it the do spread, digital versus old economy spread, but we watch that spread pretty closely, and we really see if you're going to look to hedge with Bitcoin or gold, I mean, I don't know how you can make a case to buy gold over Bitcoin if you're looking for that inflationary hedge, et cetera. I mean, it just makes so much sense to us. You also have this huge optionality, this tech optionality, your own for free, basically, that I think the trade can be explosive, but I don't want to, I got to be very careful. I've got to be very careful on Bitcoin, especially virtual.

So I guess my closing question, before we wrap it up, is just what are you the most excited about over the next few years here? What parts of the industry, obviously the one that you're in, you're pretty psyched about or else you wouldn't be doing it. But what excites you the most right now? I've never been so engaged in my entire career. I think some of these trades are just the coolest trades I've ever put up and just work with great people. just keep trying to build this ecosystem and really excited to see the institutional adoption happened pretty quickly. But, I mean, I came out of retirement to do this. I'd know what it was going to get doing. I just can't wait to get up to white. I don't know who the ludicic was that made this a 24-7

market. I mean, they could have been 24-5. I mean, you know, I'm just saying, but it just doesn't stop. But I'm just super excited to really see where this goes and really just keep learning. I mean, I'm intellectually restless by nature. I'm really glad to learn about all these other super-excited projects. And I hope that all these incredible entrepreneurs, the project founders who are putting it on the line, like all of us, have success and rewarded for their efforts. I can't wait to see some the innovation. I mean, just the people we've met and come across. And I'm really excited for them hopefully to get the capital they need to really build. And it's not just Bitcoin. I believe it. I'm not just all by any means. It's just something that's what I'm focused on right now.

But I really want to learn. I really would like to learn a lot more. So yeah, stay tuned for my DFI report. But stay with me. You'll probably take me a couple months. Nice. Well said. So Tim, where can people learn more about Beduda? Where can they follow you? Where do you want to send people?

We have a website info at beduda.io. I think that if anybody wants to reach out to us and we don't put too much on Twitter, we're pretty private. We're shy. But we do put some research on Medium. If anybody wants to get on our research, we put out three or four pieces a week. But I guess info at biduta. com is probably the best place to start.

That's great. Well, Tim, this is super exciting. Really going to be interesting to see where this derivatives market unfolds. You're certainly at the bleeding edge here. So thanks so much for sharing some of your stories on the podcast today. Matt, thanks so much for having me. Really appreciate it. I love the work that you have been making to do it. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit castle island. To listen to all of our podcast episodes, please go to On the Brink dash podcast. or just click on the tab in our website. Thanks for listening.