The Winklevoss twins Ask Me Anything (AMA) session on Reddit grabbed the headlines throughout this week, primarily because of the ambitious long-term belief of Tyler Winklevoss that the market cap of Bitcoin will surpass that of gold at $7 trillion.
The twins, who operate Gemini, a strictly regulated cryptocurrency exchange in the U.S., has long been enthusiastic about Bitcoin and the possibility of the dominant cryptocurrency competing against major traditional assets in the years to come.
Although the Winklevoss twins have plenty of incentives to portray optimism toward Bitcoin given their holdings of 91,666 BTC they acquired in 2013 when the price of the asset was hovering at $120, the recent correction of crypto assets and a year-long bear market may have led the twins to develop increasing positivity toward Bitcoin.
Why Bitcoin is King, the OG Cryptocurrency
Bitcoin is what Cameron Winklevoss describes as the “OG” cryptocurrency, the earliest digital asset that laid the foundation for all other crypto assets that exist in the global market today.
Yet, as Jeff Sprecher, chairman of the New York Stock Exchange, said on Nov 28, 2018, Bitcoin seems to be able to survive every bear market cycle better than any other cryptocurrency in the market, despite being the oldest and perhaps the simplest blockchain network out of most.
“Somehow bitcoin has lived in a swamp and survived. There are thousands of other tokens that you could argue are better but yet bitcoin continues to survive, thrive and attract attention,” Sprecher said.
Bitcoin has something that new blockchain networks simply cannot replicate or manufacture. New cryptocurrencies may be able to implement new solutions and sophisticated innovations at a faster rate due to the smaller size of their blockchain networks and communities. But, it is not possible for new cryptocurrencies to obtain the network effect Bitcoin has maintained since its launch in 2009.
Cameron Winklevoss said in the AMA session:
“Bitcoin is certainly the OG crypto! It’s hard to defeat network effects — so in terms of ‘hard money’ (i.e., store of value) Bitcoin is most likely the winner in the long term.”
Even in the long run, Bitcoin could continue to be in a viable position to sustain relatively high dominance over the global market.
Large-scale financial institutions in the likes of Fidelity, Nasdaq, ICE, and NYSE have started to build an infrastructure on top of Bitcoin, mostly because of its network effect and partially due to the U.S. Securities and Exchange Commission (SEC)’s clarification on the regulatory state of Bitcoin and its clearance of Bitcoin as a non-security.
As leading financial institutions begin to build futures products, exchange-traded products (ETPs), exchange-traded funds (ETFs), investment vehicles, and custodial solutions on top of Bitcoin, the dominant cryptocurrency will be the first digital asset to see an inflow of institutional money in the foreseeable future.
Many regulatory hurdles need to be resolved and institutional investors would require more clarity from the government before committing to cryptocurrencies which still remains a newly emerging asset class.
But, if institutional investors begin to invest in the cryptocurrency market, the first digital asset to experience a substantial increase in volume, value, and demand is likely going to be Bitcoin.
Tyler Winklevoss, who serves as the CEO of Gemini, said:
“Our thesis around bitcoin’s upside remains unchanged. We believe bitcoin is better at being gold than gold. If we’re right, then over time the market cap of bitcoin will surpass the $7 trillion dollar market cap of gold.”
In 2017, Bitcoin experienced a bubble of retail traders or individual investors. There was no infrastructure in place to handle institutional money and the space was still in the grey area of international financial regulations to attract major institutions.
If the infrastructure supporting the asset strengthens over time, Winklevoss believes that it could surpass the market cap of traditional safe haven assets, considering the overall decline in the price of gold and the demand for the precious metal.
Bitcoin Doesn’t Have to be a Good Both Store of Value or Medium of Exchange
Tyler Winklevoss noted that Bitcoin does not need to be a perfect store of value or a medium of exchange simultaneously.
It certainly could achieve efficiency and scalability in both areas in the long run through the adoption of second-layer scaling solutions such as the LIghtning Network, but he explained that it is difficult for a cryptocurrency to excel in being both forms of money at the same time.
“I believe bitcoin is a store of value (given its current properties) and I agree that being a really good store of value is in conflict with being a good medium of exchange. It’s hard for money to be good at both at the same time. However, I think decentralization (e.g., block size and remaining censorship-resistant) is the heart of the matter w/r/t the scalability debate, not whether or not bitcoin is a store of value,” he said.
Currently, the Bitcoin blockchain network is better than any other financial system in the world at processing large payments.
In November, Binance, the largest cryptocurrency exchange in the global market based on daily trading volume, sent a transaction worth $600 million with a mere $7 fee. If sent through a bank and the SWIFT network, the transaction fee could easily amount to hundreds of thousands of dollars and it would require significant paperwork to begin the process of initiating the payment.
In 2015, Asset Protection Planners estimated the offshore banking sector to be valued at $32 trillion. That is, more than four times larger than the market cap of gold. If Bitcoin could attract institutions and investors in the offshore banking market in the long-term, it may see an inflow of capital that is unmatched.
Fundamentals of Bitcoin
Recently, the Ethereum Classic blockchain network suffered a 51 percent attack and at least $1 million have reportedly been stolen by double spending transactions in over 100 blocks.
The cryptocurrency community was taken aback by the 51 percent attack on Ethereum Classic given that it is the 18th most valuable digital asset in the market. The attack on ETC was the first case of a successful 51 percent attack carried out on a top 20 cryptocurrency.
Fundamentals are crucial in sustaining the security of a blockchain protocol. The hash rate of Bitcoin is simply too high to be 51 percent attacked and even if it gets attacked, the attackers cannot profit off of it because not many blocks can be reorganized for extended periods of time and thus, hackers do not have the incentive to 51 percent attack Bitcoin.
In a bull market, many investors ignore Bitcoin as small market cap cryptocurrencies and tokens surge substantially in value, often outperforming Bitcoin by large margins. In a bear market, investors cannot ignore Bitcoin because of its fundamentals and its strength as the most dominant cryptocurrency in the market.
In consideration of the solid fundamentals of the Bitcoin network, throughout the past several months, Gemini has improved its infrastructure supporting the asset, integrating Segregated Witness (SegWit) for scaling and transaction batching to reduce the size of blocks on the network.
“Our Bitcoin hot wallet was made before Segwit was but a twinkle in Pieter Wuille’s eye. It would be very tricky to retrofit Segwit into there. So we built a new hot wallet, from the ground up, with support for Segwit, transaction batching, Bech32 addresses, and all sorts of other goodies. We used that new system for Zcash, Litecoin, and Bitcoin Cash, which is why we’re already using both native and P2SH wrapped Segwit for Litecoin. We’re working on migrating Bitcoin to the new system, and it should be done in Q1.”
Gemini intends to provide more support toward Bitcoin throughout the long run while also focusing on working with regulators to provide a better trading ecosystem for investors.
Why Gemini is Vocal About Working With Regulators
Since its launch, Gemini has worked with financial authorities and government agencies in the U.S. to implement various systems that are in full compliance with local financial laws.
With the establishment of the Virtual Commodity Association (VCA), Cameron Winklevoss said that Gemini will lead discussions with the government to ensure that cryptocurrency markets are transparent and well-monitored to be viable for public investment vehicles like the ETF.
The Winklevoss twins said that they will continue to lead the space as regulation-first “thought leaders,” eventually opening the market to a new group of investors through strictly regulated custodians and exchanges.
“For 2019, VCA is looking to establish pillar leads, comprised of subject matter experts across various industries, for each of the Sound Practices (e.g. market surveillance, custody, market based rules). The VCA’s Sound Practices pillar candidates include experts from finance, former regulators, consulting firms and law firms. Pillar leads will lend their expertise in forming sensible rules, as applicable, to crypto exchanges and custodians. These rules will form the basis of how crypto exchange and custodians should conduct business, fostering customer protections and transparency,” Cameron Winklevoss added.
Gemini and the Winklevoss twins received criticism for their advertisements posted in New York subways, taxis, and buildings, which emphasized the necessity of rules in the crypto space.
Today, we ran a full-page ad in the @nytimes outlining what we think the cryptocurrency revolution needs to succeed. Revolutions that build sets of rules to ensure a better future, are the ones that last. https://t.co/RrMH5vgSbM pic.twitter.com/oa83xgd26u
— Gemini (@Gemini) January 7, 2019
ShapeShift founder and CEO Erik Voorhees, for instance, said that cryptocurrencies do not need more rules because blockchain protocol in itself represent rules integrated by an open-source community of developers, miners, and node operators.
Cameron Winklevoss said that the exchange is not alone in that regard and many exchanges, custodians, and businesses are willing to cooperate with the authorities to improve the infrastructure supporting the asset class.