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It almost seems like a setup for a bad joke: “The Winklevoss twins and Bitcoins walk into a bar.” But it’s true, the Winklevoss twins have bet big on a cryptocurrency technology called Bitcoins, and they may just change the financial landscape with their new company, Gemini.
Who Are the Winklevoss Twins?
For most people, the Winklevoss twins are a forgotten memory. In case you’ve forgotten, the twins got into a rather heated legal battle several years ago with Facebook CEO Mark Zuckerberg. The Winklevosses (actual twins by the name of Tyler and Cameron) claimed that they had hired Mark Zuckerberg as a programmer to develop a new kind of social network, and Zuckerberg had taken their ideas and used them to create Facebook.
Cameron Winklevoss, Tyler Winklevoss. Courtesy AP Images
While the Winklevoss twins ultimately dropped their challenge, they did settle with Zuckerberg for a hefty sum of money. Since then, they have been involved in multiple technology related investments through their investment firm Winklevoss Capital. However, their main focus has been Bitcoins. They have been an early investor, and they’re now trying to create a legitimate market for Bitcoins.
What Are Bitcoins?
Bitcoin also feels like a forgotten memory; it’s a cryptocurrency that is based on a very, very complex algorithm. The number of Bitcoins in circulation is not fixed; it actually grows. A computer can “mine” for Bitcoins by working to solve this complex algorithm. But the currency itself is purely digital; there are no physical coins. You keep your Bitcoins in an encrypted digital wallet.
Before you go out to try to mine “free” currency, understand that the algorithm is so complex that most computers (even high-powered servers) will cost more to run in electricity than the value of the Bitcoins it produces. One user on the tech forum Stack Exchange calculated that using even the most advanced video card (video cards are optimal for solving complex algorithms), it would take about 98 years before you produced one block of Bitcoins (25 Bitcoins to a block). That was back in 2013. As more more people mine bitcoins the complexity of the algorithm increases. If you want to get really technical, you can visit Bitcoin Wisdom to calculate the return on investment of mining Bitcoins. Using the math there, it could take thousands of years before you produce the equivalent of even one Bitcoin.
Why Bitcoin?
In early 2014, Bitcoin became hot, and by hot, I mean going from being worth basically pennies each the year before to peaking out at around $1,200. Many people have become multimillionaires with Bitcoin. This didn’t last but a few months. The price per Bitcoin had crashed by the end of the year, and depending on how you read the financial charts, still has a ways to go. Currently, they are worth about $250. I said “depending on how you read the financial charts” because some people, such as the Winklevoss twins, believe there is long-term upward momentum.
Data from blockchain.info
There are other cryptocurrencies such as Litecoin and Dogecoin, but those seem to be just copycats of Bitcoin. None have gained the attention Bitcoin has. The digital money is being accepted by a few businesses, and you may be surprised to learn that retailers such as Overstock.com accept Bitcoin. You can even book a trip into outer space on Virgin Galactic with the currency.
So what is all the hype about a digital currency that seems to be only backed by an algorithm? Well, to put things in perspective, the U.S. Dollar is backed by perhaps even less. The dollar has been a floating currency since President Nixon took the U.S. off a gold standard in 1971. Since then, the value of the dollar is purely based on the faith of the market.
And speaking of the U.S. government, Bitcoin isn’t controlled by any government. In fact, it’s unknown who exactly created it. The creation of the algorithm is credited to Satoshi Nakamoto, but no one knows if this is a person or group of people. However, for those who use Bitcoin, this fact is considered a positive. Many libertarian-minded individuals like that a government does not control the currency. There is no “Central Bank of Bitcoin” or a Federal Reserve. Thus, the belief is Bitcoin is a currency that cannot be manipulated by a government for political reasons.
Another reason libertarian-minded individuals like Bitcoin is that it is basically untraceable. Everything is encrypted, and personal information isn’t attached to purchases (such as the case with credit cards). Bitcoins have been a great win for those looking for privacy on the Internet.
So What’s the Big Deal With Gemini?
Gemini is a Bitcoin exchange. It isn’t the first Bitcoin exchange by any means, but there is something different about it. Cameron Winklevoss explains in a blog post that Gemini is different in the fact that it is “…fully regulated, fully compliant, New York-based bitcoin exchange for both individuals and institutions alike.” In other words, it is a real financial institution.
The previous exchanges were not well-regulated. For example, previously a Japanese website called Mt. Gox was the center of Bitcoin exchanging. The company fell apart fast when nearly a million Bitcoins went missing. The assumption was that they were stolen, but the whole situation was a murky mess.
The Winklevoss twins approached Gemini like a real bank or financial institution. Visiting their website, you can find all kinds of regulatory information with plenty of acronyms like NYSDFS and FinCEN. The marketing material for Gemini seems to push the fact that they are U.S. based and comply with all regulatory laws for financial institutions within New York City. They have even taken a state-by-state approach to comply with all local laws. Currently, they operate in only 27 states and Washington D.C. Their long-term goal is to operate in all 50 states.
This level of regulation and transparency could create more confidence in Bitcoin. However, not knowing who created it, not being controlled by a government, and not really being backed by anything beyond an algorithm that no one knows doesn’t inspire trust in the average consumer. The volatile value of Bitcoins and the fact that the concept of cryptocurrency is only a handful of years old make it seem like a risky fad to many people. This could change with the Winklevoss’ Gemini. If Gemini is able to establish trust in Bitcoin, we may see the value of the currency stabilize, as well as an emergence of a safe and secure marketplace that is easy for average people to use.
The impact from a trusted cryptocurrency would be tremendous. From global economic policy making to retail marketing, our approach to conducting business would be forever changed. Who knows, the concept of a central bank and national currencies could be laughable in the future. It is also possible that the thought of a purely digital currency created under mysterious circumstances could become laughable. Only time will tell, but for now, it would be a mistake to write off either the Winklevoss twins or Bitcoin.
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