Bitcoin Winklevoss Twins

Cameron: We actually kind of found Bitcoin totally unexpectedly. We were on vacation two summers ago in Ibiza and ran into a guy. Of all places, right? Not really expecting to come across new investments. But we ran into a guy from New York, and we started talking about virtual currencies. And we sort of got this feeling right then as if like we had a time machine and could have been teleported back to the early days of the internet. And the promise was just enormous that it captured our excitement right away.

Kim-Mai:

I guess the question I have for the broader panel is, Bitcoin has these kind of mysterious origins. It’s founded, created by some guy, guys, woman, collective. The name Sitoshi Nakamoto, who disappeared and hasn’t appeared since. And so, when you’re looking at the space, how do you get over the fact that no one knows really who created it.

Naval:

Yeah, I don’t really think about Tim Berners Lee every time I surf the world wide web. I guess it doesn’t matter to me. Lots of people have examined the Bitcoin protocol, spec, the encryption schemes underlying it, and have come away with the realization that it’s one of the most brilliant innovations in the protocol and financial space that they’ve every seen. So the underlying thing is sound. It’s probably the case that Sitoshi or the group that purported to be Sitoshi probably holds somewhere around 10% of underlying Bitcoin, making these guys look small time. But that’s okay. It’s an incredible invention for mankind, if it works.

Kim-Mai: What made you finally comfortable with it?

Naval: What made me comfortable with it? It took me a while to warm up to it. I just read through all the different pieces. Underlying Bitcoin, there’s at least four different technologies that are combing to make it possible. And you know, as Paul Graham says, you’ve got to live in the future. If you don’t understand what’s on the cutting edge and you’re in the tech business, then you’re sort of missing out. So I sort of forced myself to learn about it. And underneath you’ve got digital signatures used in a very clever way. You’ve got a peer-to-peer network. You have a distributed block chain, which is this concept that every transaction, the history and record of every transaction is in everyone’s wallet. And then you’ve got this proof of work system to prevent double spending, the application of which is very brilliant. So you’ve four different great concepts coming together.

Balaji:

I’d elaborate on that a little bit. So one of the things about it. If you go to gethub.com\bitcoin\bitcoin, you can clone it and you can actually inspect the source. You can look at it yourself. Sitoshi wrote a paper on it. And in general, the validity of a mathematical theorem is not really a function of who did it. It can be independently checked. Moreover, Sitoshi actually has pretty good reason for remaining anonymous, or else he’d be hunted like Edward Snowden or something, right?

Kim-Mai: Right.

Naval: So there’s a lot of…It’s a very complicated topic. You cannot get educated in Bitcoin listening to this panel. It’s like, if you’re starting here, try something else. Go read Bitcoin for Dummies. But take the time. Like if you were in 1995, you didn’t understand how TCPIP worked or how the world web was going to work, you were really missing out. Take the time.

Naval: Right.

Balaji: If you think about it, HTP is actually a stateless protocol, but we’ve built all this state-full stuff on top of it like cookies, and then eventually like web apps, and whatnot. So you don’t actually think about that. You can actually go and log in and people have built all this state-full stuff on top of it. In the same way with Bitcoin, there’s a few different things that people are working on now. One of them would be one of the most technological, important developments since Bitcoin itself, which is something called Zerocoin. Zerocoin basically turns Bitcoin into a truly anonymous currency where there’s, it basically turns the entire network into a mixer. So you can teleport arbitrary amounts of money anywhere in the world. And right now, that’s not a practical patch, but eventually something like that will probably be incorporated into the block chain, and that will be sort of to what we call Bitcoin 1.0 what Bittorrent was to Napster.

Kim-Mai:

Yeah. One thing that I hear a lot from investors is that Bitcoin is going to be, it’s a binary outcome. It’s either going to be worth a lot, or it’s going to be worth nothing.

Naval:

Yeah, that’s right, because money is the ultimate network effect. So either it works and goes to infinity, or goes to zero. I don’t think the intermediate outcomes matter. So in that sense, asking someone today, “Have you made money in your Bitcoin?” They’ve only made money if they’ve sold it, if they’ve cashed out. If they’re still holding on to it, it’s like buying a hyper-volatile option on a startup stock. Not for the faint of heart.

Kim-Mai: So what are the risk factors for you, that you’re thinking about personally?

Naval: I think the biggest one is regulatory and government risk. I think there is some small decryption/encryption risk. If it turns out there’s a back door in RipenD or in one of the protocols used underneath. But I think the main one is essentially just the adoption curve. How long will it take to adopt? Because network effects need a tipping point. The established, entrenched dogma of how money is supposed to work is very, very strong. That tipping point could be two years out. It could be 20 years out. It could be 200 years out. That’s the hard part.

Kim-Mai:

Speak of regulation, that’s something I wanted to ask both of you about. You were recently subpoenaed, and New York regulators are kind of looking at how to understand Bitcoin, how to manage it. So what’s going on with that?

Cameron:

Basically it looks from our standpoint to be a fact-finding discussion. And I think, we’ve always been sort of welcoming of healthy regulation. I think that it helps erase a lot of the uncertainty out there. Especially banking relationships with startups, a lot of the banks, I think, are unclear, should we sort of bank these Bitcoin startups, and what do we need to do to be compliant. Our view has always been when you’re dealing with, whether it’s Bitcoin or money, that sort of the regulation KYC, know your customers, AML, anti-money laundering, should be really treated identical across the board, whether it’s Bitcoin or U.S. Dollars or something else. So we’re sort of all in favor of healthy regulation. I think that those discussions are happening now. And as they progress, we’ll get sort of more certainty of where things are going. And a lot of people potentially who are on the sidelines with respect to investment, or whether they want to start a company, will enter into the Bitcoin world.

Tyler: Only the FCC knows that answer to the question.

Kim-Mai: So I wanted to talk about the startup ecosystem. So when we saw that run up to that peak high price earlier this year, we started seeing a lot of funding rounds. The biggest one that I can think of right now is probably Coinbase, $5 million. Where are all these startups now, and for you as investors, what’s an attractive place to go? Is it in wallets? Is it in exchanges.