We asked Tyler Winklevoss, co-founder (along with brother Cameron) of Winklevoss Capital who together are building the Bitcoin exchange Gemini, if 2016 will be the make or break year for Bitcoin. Serial entrepreneurs, the brothers, alumni of Harvard University and Oxford’s Said Business School, founded HarvardConnection.The Winklevoss brothers have established themselves as thought leaders in the digital currency space.
In this interview, Tyler outlines his expectations for Bitcoin heading into 2016, the importance of regulatory oversight in this young market and where opportunities exist for investors.
Modern Trader: What has frustrated you in regard to misconceptions about Bitcoin?
Tyler Winklevoss: People tend to ask themselves, “How is this created out of thin air?” They don’t really recognize that money is an idea and that all money is created out of thin air. We shouldn’t be any less open to money being digitally created today than we are to money that was created 40 years ago or 500 years ago.
Second, a lot of the early volatility was due to the growing pains of a really young market. I don’t think bitcoin has behaved much differently than what you’d reasonably expect of any new market. If you think of how a young tech stock might behave, one that’s not clearly regulated in certain jurisdictions, it’s very clear that bitcoin is OK.
Now, that’s not to say a lot of price movements haven’t been news driven, and there’s certainly been a lot of news. The market is very thin, so a large hedge fund could come and really move the price one way or the other without a lot of capital. All these things can conspire to create a pretty volatile market. And of course, depending on whom you talk to, some people like volatility and some hate it.
At the same time, there’s been good press lately that has generated good educational momentum, so even people who are maybe confused about all the use cases, whether it’s truly anonymous, the volatility, etc., are also starting to understand this is something very significant. It’s world changing, and it’s the future. They just don’t know all the pieces. It takes a long time to figure out all the corners of Bitcoin.
MT: Some have argued that Bitcoin is a solution in search of a problem. Do you agree?
TW: I haven’t heard it quite phrased that way, but I patently disagree. Bitcoin solves a very real, easily definable problem. Look at the way money moves around in the world today. It does not look modern. It does not look digital. It does not behave like other pieces of information and data when they move around the world. Bitcoin is money built for the Internet by engineers, the same people who built the Internet itself. It’s not built by bankers or payment processing networks that were built before the Internet even existed.
Money should work the same way we send emails. You should be able to send value to someone as easily as you send a text or email. It should be as frictionless, and it shouldn’t be costly. The way money moves around today is not borderless, it’s not really global, and it doesn’t permit micropayments. Advances like the Internet of Things is not possible under the current systems, and will never be possible if we are still sitting in a world with PayPal, Visa, MasterCard, ACH and wires. To me, that’s the problem, and the only thing I’ve come across so far that has a chance of solving it is Bitcoin.
MT: We’ve seen more institutional interest in Bitcoin as volatility has declined, but it is in a different area than what many expected a year ago. Why?
TW: The shift in institutional attention has been to the ledger applications of the technology and away from the asset class. These things take time. We started building Gemini about a year and a half ago, and we didn’t expect we’d take this long to become licensed. The same thing has happened with derivatives, where I expected more development. It just takes time to navigate all the regulatory hurdles, to do this right. That’s fundamentally why a lot of the hedge funds still aren’t in this game.
Ultimately, professional traders expect derivatives, and in some cases are required to use them for their strategies. So I’m pretty confident we’ll get there. From an asset class and trading perspective, we’ve just got to keep building out the important infrastructure.
MT: With the big banks all exploring blockchain applications, does it defeat the purpose of Bitcoin if JPMorgan, Goldman, etc. all develop their own versions?
TW: There is quite a difference between something like Bitcoin, which is a purely open system where ownership is a cryptographic concept, and something created by a bank where ownership is controlled by the bank and remains a legal concept. It creates a lot of interesting questions: Would private bank coins be privately mined? Would they rely on a central token? If so, how would it be valued? It would be very interesting to see what, for instance, a JPMorgan Chase coin was worth. From our perch at Gemini, we’re not just interested in Bitcoin—we’re happy to trade other digital currencies or assets. In fact, we are completely agnostic to how bitcoin does or whether some other currency is traded side by side with it.
MT: Can you separate bitcoin from the blockchain? Can one become successful without the other?
TW: If you believe in the blockchain solving a lot of problems, the token involved in making it work (i.e., the bitcoin) is very much attached to it. It’s hard to imagine one without the other. The miners are the validators, and they get paid for their service in bitcoin.
Going a step further, it’s hard to imagine a scenario where a company does well in Bitcoin or in utilizing blockchain technology and bitcoin the actual asset doesn’t do well. The way I see it, it’s a play on the future of a very exciting technology. If you own bitcoins, you own a piece of the entire ecosystem, so instead of having to pick this firm or that firm, you’re basically just indexing the market.
And you can buy bitcoin pretty easily. You don’t have to be an accredited investor. You don’t have to go through a fund. It’s much more liquid than a private offering or a venture fund on Sand Hill Road. The fact that it looks a lot like gold appeals is to a certain crowd, and its accessibility seems very democratic and very fair. Maybe it’s a binary bet, but it’s still a bet on perhaps the most exciting space in technology today, where some of the smartest minds in the world are building products and services.
MT: There have been comparisons that owning bitcoin as part of the blockchain is akin to buying a call option on TCP/IP (Transmission Control Protocol/Internet Protocol) as part of the Internet back in 1995. Is that fair?
TW: Yes. Bitcoin is the fuel that makes this whole thing work, just like without TCP/IP, there is no Internet. Without bitcoin, no one’s mining, and without mining, transaction blocks stop being added to the blockchain. It’s definitely an interesting comparison.
MT: What about the consumer side? Does it pivot from, “Are we going to buy coffee at Starbucks using bitcoin in X years?” to “Can we use this technology to digitally record asset transfers and settle trades?”
TW: I think so. Frankly, using credit and debit cards is just not that painful. They actually work pretty well. It will take time before Bitcoin really encroaches on the consumer-facing retail segment of payments. It will trickle down and create more momentum in different ways, behind the scenes, but Bitcoin got ahead of itself in the consumer respect. I’m glad that people are widening the conversation to the blockchain. Maybe we get to the point where individuals are buying coffee with bitcoin, but there are a lot of steps that have to occur before that happens.
Scale is one reason. There are a lot of hurdles to deal with if we want to get the coffee-at-Starbucks level, and a lot of different proposals out there about how to get there. The basic Bitcoin 1.0 infrastructure, building the bridges and the gateways into Bitcoin, barely exists today. People are really excited about the clearing and settlement aspects of the blockchain, and it is perfectly fine to talk about Bitcoin 2.0 and all these great possibilities, but it seems even the basic things, like not having a Nasdaq or an NYSE equivalent for bitcoin capital markets in America, still have to be more fully established. That’s where we are with Bitcoin right now.
MT: So In the overall lifecycle, would you say that we’re still in the first inning?
TW: I think that’s right.
MT: Tell us a bit about Gemini.
TW: We describe Gemini as an E-Trade, because we’ll have a web interface, like Nasdaq, we have a matching engine and order book, and like DTC because we are also a clearing and settlement house. We are basically all three functions collapsed into one.
When we discuss what we’re doing with the institutional crowd, they get really excited about the clearing and settlement aspects of what we’re doing, and the reduction in costs. Bringing that friction down is a massive opportunity. It’s very different than buying a cup of coffee with bitcoin. Areas where friction in the legacy system is large, or the system doesn’t work quickly, or well, or is unpopular, are where Bitcoin will absolutely belong.
MT: Do you feel that that block size debate has resulted in a delay in trading or adoption or is it ring fenced within the developer community?
TW: The average person who’s heard about Bitcoin, and maybe even has a decent understanding of it, may not be paying close attention to what’s going on with block size debate. A lot of technologists at tech startups may not even be aware of it. But that’s OK. Bitcoin‘s gone through a lot just to get here. I see this as just another new challenge that’s not insurmountable.
MT: What is your outlook for Bitcoin going into next year?
TW: I don’t know if 2016 is a make-or-break year, but it will be meaningful for us as entrepreneurs with Gemini. We have plenty of work cut out for us in terms of actually getting launched. Our days are focused on building what we consider a pure-play Bitcoin exchange. We need to make sure it’s an active, healthy market with the right participants, so that when people show up, there’s liquidity, a full order book and everything works as expected and advertised. We’re trying to do this one thing really right, in a way that the community hasn’t seen yet. But it takes a while. We’re going to stay really focused on building our product out.
It may not have been the most popular position in Bitcoin a year and a half ago, but we wanted this to look and feel like any other financial institution. We went through the front door with the regulators, which was definitely not how everyone thought a Bitcoin company should look like as a startup. But our view was—and still is—that in order to bring the rest of the world into Bitcoin, you’ll need the legitimacy that comes with regulatory blessings. Otherwise, Bitcoin is an island. It’s maybe a pristine island, but it’s still an island way out in the middle of the ocean. You’ve got to build these legitimate, familiar bridges and tunnels to get there, so that’s been a real focus. We want this to feel like any other mature financial company. That’s been our strategy the whole time.