February 28, 2023 • 42 mins
The Winklevoss twins are known for walking away from Facebook with tens of millions in stock and other payments. More recently, they’re known for a new project: An asset management firm and a digital currency exchange that made them marquee players in the recent cryptocurrency boom and meltdown. There are other, more significant crypto players (think Sam Bankman-Fried) but the twins fascinate Tim O’Brien because they embody the sort of collision Crash Course lives for: between innovation and possible hucksterism, and between authenticity and possible manipulation. Crypto is one of the most revolutionary and over-hyped inventions of the 21st century and how the Winklevii intersected with that market is a tale that sheds light on finance and on financial bubbles – and on what happens when everybody thinks they can get rich quickly.
Joining Tim to discuss all of this is Lionel Laurent, a financial columnist for Bloomberg Opinion and someone who has spent a lot of time watching crypto evolve.
See omnystudio.com/listener for privacy information.
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Episode Transcript
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Speaker 1 (00:01):
Welcome to Crash Course, a podcast about business, political, and
social disruption and what we can learn from it. I'm
Tim O'Brien. Today's Crash Course Cryptocurrencies Versus Reality. One of
my favorite scenes in the Social Network Aaron Sorkin's takedown
about Facebook's founders is when the actor playing Harvard President
(00:23):
Larry Summers upbraids the actor playing the dual role of
the Winklevoss twins. Don't ask the university to intervene in
your petty dispute with Mark Zuckerberg, he tells them, and
I quote, everybody at Harvard is inventing something. I suggest
again that the two of you come up with a
new new project in the real world. The Winklevoss twins,
(00:46):
who eventually walked away with tens of millions in Facebook
stock and other payments, did, in need come up with
new projects an asset management firm and a digital currency
exchange that made them Marquie Layers in the recent cryptocurrency
boom and melt out. There are other more significant crypto
players think Sam Bankman Freed, for example, But the twins
(01:10):
fascinate me because they embody the sort of collision Crash
Course lives for between innovation and possible hucksterism, and between
authenticity and possible manipulation. Crypto is one of the most
revolutionary and overhyped inventions of the twenty first century, and
how the Winkelvy intersected with that market is a tale
(01:30):
that sheds light on finance and on financial bubbles, on
what happens when everybody thinks they can get rich quickly.
Joining me today to discuss all of this is Leonel Laurent,
a financial columnist for Bloomberg Opinion and someone who has
spent a lot of time watching crypto evolve. He's joining
us today from Paris. He Leoney, thank you for being
(01:56):
with us. Let's start by demystifying crypto for anyone who
feels mystified by it. You know, I've always thought of
crypto as essentially a digital currency in the cloud and
a replacement for Fiat dollars, paper currency that doesn't really
have a central bank behind it. It just has all
the users gearing teeing one another that the value will
(02:18):
keep going up time and time and time again. How
do you describe it? How do you think of crypto?
That's pretty accurate, and it's accurate. I guess in hindsight,
because I think the term crypto has become very broad.
It's now used to describe, as you say, any kind
of virtual currency, digital currency that is not done by
a bank. I think if you go back to when
(02:40):
bitcoin first emerged, the purists, we're really focusing on the
crypto part of the word cryptocurrency. So in other words,
it's outside the banking system. It's decentralized because it relies
on cryptography, and therefore it is pseudonymous or close tutonymous.
It's private money, but it's also privacy money, and that
has been the kind of and the Winklevosses story gets
(03:02):
into that. There's always been a tension there between the
real hard nuts who are in this for the privacy,
for the kind of libertarian aspect of it, and those
who are in it for what it became, which is money,
speculation assets, nothing to do with privacy, but also nothing
to do with currency, because as we've seen it's been
(03:22):
a decade, we're still using cash, right, We're still using
notes and coins and cards. No one's would use in
crypto as a currency, and as we discovered over time,
it had a very elastic relationship with the notion of value.
But we could get into that later too, But I
wanted to ask you what caused this boom. There is
a real innovation here. It's an attempt to ground transactions
(03:44):
in a different universe. And the blockchain I think has
a lot of uses outside of crypto that are useful.
But I was wondering, when you think about the boom,
what are its foundations? Well, I think we've had several
booms crypto. We had several boom and bust cycles. If
you go back to the kind of first one, and
(04:04):
this is where the Winkelvos story comes in. It really
was the kind of thing that was supposed to follow
a set path involving tech and venture capital, and it
happened in the wake of the financial crisis. Famously, bitcoin
was held up as a response to the banking failures.
There was the collapse of one British bank that was
literally written into one of the bitcoin transactions, right, the
(04:25):
first one. And that kind of story really explains the
first initial boom, which is it pulls in a lot
of the cypherpunks and the anarchists that we're in this
for the cryptography revolutions of before. But it also pulls
in a lot of speculative money. The venture capital story
decided a technology is going to give us a lot
of answers to the questions that we pose, and we're
(04:47):
talking like the midnots, Like what years are we talking
about it? Yeah, well it's the late notes. Bitcoin comes
out just around the same time as the financial crisis,
and so the decade of crypto really was the twenty
ten and the Winklevoss symbolized that attempt to kind of
glom onto it as a venture capital style technological bet
(05:08):
that was going to disrupt society in the way that
you put it disruption. Now we can talk about the
other booms that happened, but that's the first one. And
then it went through several cycles where retail investors got
ahold of it and began to look like a kind
of stock market bubble, and the latest boom was a
credit bubble. So I guess my point is this is
all very financial, it's not very technological. If we look
(05:30):
at the core tech, a lot of it is like
decades old. It's a lot of things coming together. And
just to really tip my hat to the crypto purists,
low interest rates, right, easy money, easy money, that kind
of fed this, and you get this bizarre symboidic relationship
between people who want to kill central banks and people
who want crypto prices to go up. And bizarrely, easy
(05:52):
money was kind of fueling the whole ride. Well, an
easy money in search of profitable returns. The low interest
rate that were engineered after the financial crisis left people
seeking alternate assets that could produce bigger returns than a
stagnant bond market and an unpredictable equity market, and crypto
(06:12):
benefited from that. It's also interesting to me that you
talk about the foundational grounding of this universe over the
last decade. And we'll talk more about this about financial
bubbles and people's emotional and psychological response to them. But
I wanted to dig in a little bit on that
before we get into the Winkle Vye because there's a
(06:34):
long history here, and you wrote one of your columns.
While financial history should have inspired caution, it instead inspired
greed and trust. So unpack that a little bit as
it pertains to the crypto boom. So, as I was
trying to say before, this is very financial. This is
a financial story. What do I mean by that? If
(06:54):
you come along with something new in the world of
money and finance, especially after the financial crisis, come along.
When you say we have something new, most people, especially
those who have the knowledge of financial history, should have
a bit of skepticism because if you're coming in with
something that doesn't fulfill and this was widely widely analyzed
when bitcoin and crypto first emerged. There are definitions of money.
(07:17):
Money works when it is and I'm sure people have
heard this before. Is it a store of value? Is
it a reliable store of value? Is it a good
medium of exchange? Is it a good unit of account?
Bitcoin did not meet the definition of these things, and
so initially there was a lot of skepticism. But the
problem is that if you keep saying that, it doesn't
really help. If people really believe that this time is different,
(07:37):
and so I think that then you have to look
at stories of bubbles, right, the Tulipmania, the south Sea bubble,
credit bubbles. The history of private money is littered with failures.
And the problem is that trying to talk about this,
all people would say back to you is, yeah, but
look at the crisis. Right. Even the Winkelboss Twins would
refer to while they we're getting into bitcoin. Everything they
read in the papers seem to confirm their bias towards
(08:00):
bitcoin again, the Eurozone crisis, the Aurozone debt crisis, that
write downs right on sovereign debt. This was the kind
of economic tale of the bitcoins where they would see
all of this system really on its knees and think,
this is it, right, this is the failure. And what
I think they didn't foresee is that this system would
actually prove quite resilient and in the same way that
(08:22):
today people like Charlie Mungun Warren Buffett are doing victory
lapse around crypto. It's because there was reason to be skeptical,
because if you look at history, somethings are too good
to be true when they're totally disconnected from the fundamentals. Right.
So that's what I mean when I said financial history
should have informed a bit of caution. And when we're
talking about the two hook bubble, you know, we're talking
about the seventeenth century and the eighteenth century, and there
(08:46):
are hundreds of years of bubbles behind this. In human
nature over that long stretch didn't really change all that much.
Greed was still a motivator and wishful thinking combined with
greed could produce some very interesting bubbles, like the one
we just went through with crypto. Nonetheless, there was an
architecture that developed beneath this industry that I want to
(09:09):
talk a little bit about with you too, because I
think that's useful for figuring out what the winkelby we're
up to. The industry essentially developed into two main arteries
more or less right, exchanges and then lenders, people who
were offering tokens and building markets around trading them. Is
that a fair, if overly simplistic description of what the
(09:31):
industry came to look like. Well, you've just perfectly described
how we've tried to use financial sected terms, financial industry
terms on an industry that is trying to create something
new and in a way almost ignoring all of the
lessons that got the financial industry to state whereds in today.
Let's take exchanges. The exchanges in the crypto world, by
calling themselves exchanges immediately conjured up images of regulated exchanges
(09:54):
like the Chicago Mercantile Exchange and others. That is not
what they were. And if we go back to the
first real bitcoin boom and bust, which was in the
It was about ten years ago Mount Gox, which was
the biggest bit coin exchange, right went belly up. It
called itself an exchange, but it really wasn't. I mean,
it wasn't the kind of trusted and trustworthy regulated exchange.
(10:16):
And even today, wait wait, wait, so what would you
call it? What would you call it if you weren't
going to call it an exchange, A sesspool, a trait.
I'm going to be polite, and I'm going to be
polite to say that even a decade on ftx, Binance,
all of these places that are called exchanges their platforms,
that's all. They are, their venues, and they do lots
(10:37):
of stuff behind the scenes that no one really knows.
They launched their own coins. FTX had its own token,
Binants has its own token. They're brokers too, they handle
your trades, they invest as well. They do everything right.
I mean the phrases the house always wins. It's easy
to slip into gambling language. Is this really an exchange
or is it a casino? Basically, my point is that
(10:59):
the exchange helps them out. It is nothing like a
regulated exchange. But that's the catual term that was used.
It gives them credibility, It gives them establishment s dial credibility,
and they also suffer serve a purpose because the whole
irony is that crypto it was supposed to be. You know,
you could be your own bank, private money, totally decentralized.
(11:21):
But humanity just finds decentralization awkward. It is an elite pursuit,
it's a niche pursuit. So that's the big irony. In
the end. People gravitating these exchanges because they are centralized
and they take a lot of power and get rich.
And that's why so many of the richest people in
crypto billionaires. They're exchange owners. They're not people who were
smart and god and early. They own the exchange, They
(11:43):
set the rules, and they make the money. And so
you're also describing another interesting phenomenon there, the development of
the exchanges or a response to the market evolving and
lots of various operators and smarties and others decent ending
on this to see what they could do with it.
Is there an emblematic moment around that, you know, that
(12:06):
second step of going from crypto being mined and crypto
being traded to crypto taking on the clothing, if not
the authenticity of financial exchanges and more sophisticated markets. We
may be getting a bit ahead on the Winklevoss story,
but I definitely think for me, the emblematic year or
(12:27):
moment is twenty thirteen twenty fourteen, because that's when you
have the collapse of Mount Gox. So you have a
narrative where an exchange got really big and very powerful
and then just went bust. You have the Silk Road
being shut down, so you have a sense of regulators
trying to clean up a wild West. And then you
have this is ten years and shut down Bray the
way Silk Road shutdown in part because they worried about
(12:50):
money laundering and crypto rather than simply being used as
a libertarian currency, also being used to fund possibly fund
crimes and money laundering and other dark deeds. Well, I mean,
we could spend all data on matther because that is
precisely what the libertarian cipherpunks were totally amenable to. That's
what they want, they said, the freedom to do what
you want, and that may involve that's known as the
(13:11):
four horsemen of the crypto apocalypse, which is to say,
money laundering, crime, pornography, gambling, all of this stuff they're
okay with. And just to add to your point, post
Silk Road came the narrative of the wild West is
over now at the time for regulated exchanges, and this
is when the Winklevos twins found their exchange, Gemini. This
is a decade ago when they're all sitting at a
(13:34):
hearing in front of the New York Department for Financial Services,
several crypto entrepreneurs, and they're saying, the wild West is over.
We've solved it and now we can get on with
doing regulated business. And they were saying, we've solved the
wild West problem by offering a quote unquote exchange. Right. Well,
the difference was that this time the phrase this time
(13:56):
is different always seems to apply. This time it was
going to be regulated on shore in New York with
a new license and it was going to be part
of the Wall Street furniture. That was the narrative, at
least for the Winkelvos twins and for Gemini. The idea was,
don't overregulate your laws currently work. Give us a path
to regulation and we will do that. And that was
(14:19):
a decade ago. All of these questions are cyclical. They
keep coming back because this is the nature of crypto.
It is not a straight line, it's a constant circle.
Here's a detail that I just love is the fact
that you met with the winkel Vye I think back
in twenty seventeen. Tell me about that, right, So that
was in late twenty seventeen. It was in New York.
(14:40):
It was really at the height of the bitcoin boom.
I mean, sadly not this bitcoin boom, the last bit.
There's been too many. It was late twenty seventeen. Nicola
was hitting a record and the Winkelvos twins were doing
a tour of Wall Street and I remember meeting with them.
They were very affable, very tall, as everyone knows, very
start by bed for a minute, describe them for me,
(15:01):
because they are very tall. I think they're each like
six foot five at least. Former Olympic crew rowers. Yeah,
and it was a bit twin peaksy. Sorry for the
terrible pun, but they were moving through the office. They
had just done a tour of Wall Street and they
were wearing suits. And later on, while reading the history
of their adventures in crypto, you see suits are a
(15:21):
recurring theme. They've always been seen as suits, but they
were wearing suits because they wanted to blend in. They
were trying to sell a product to Wall Street. They
were trying to get regulatory approval. They were trying to
really bring this into everyone's pocket through an ETF, through
regulated products. The delusion would persist, right, But this was
the kind of height of the retail mania where every
question or Thanksgiving dinner was so are you going to
(15:43):
buy bitcoin? And so we talked and yeah, this was
their moment, this was their time to shine on Wall Street.
What did you talk about? I mean, we talked about
what their aim was, right, their view of bitcoin, which
they said publicly on the TV set, which they were
selling bitcoin as the new gold. Right, Bitcoin was going
better than gold at being gold, It was going to
be in everyone's portfolio, it was going to be a
(16:04):
hedge against a lot of things, and it was going
to be an asset to store. And as a result,
it should be in the mainstream, and they were the
best vehicle to get it. And as you were having
that conversation with them back then, what was going on
in your own mind? What did you think about the
fact that two six ft five guys in suits we're
saying crypto is the new goal. I mean, I was
(16:27):
skeptical from the beginning, and I think it's been hard
to well, I've always made an effort right to at
least meet people who believe to try and I guess
shape my own arguments right or try and hear one
day the killer argument as to why this was not
just speculative. But I mean, at the time I wrote,
this was just the most incredible bubble I'd ever seen.
(16:47):
And this was in twenty seventeen. I mean, this is
when Big when at ten thousand seemed completely crazy, but
at the time it was the most incredible burst of
fomo and speculative fever that I've ever seen. The point is,
it wasn't just the retail obviously, the taxi driver and
the cliche of the shoeshine boy. It was the regulators.
I was seeing people from the CFTC. You go on
(17:08):
Bloomberg TV and say we need futures products because we're
meeting invested demank. It felt incredible. I mean, it really
just blew my mind. And at the time I was like, well,
this clearly isn't going to last, and it didn't. But
at the same time, it did, so I feel I
was half right, half wrong. I definitely didn't think that
it would survive and then bounce back and in the
way that it has done. But definitely the whole thing
(17:29):
seemed crazy. So with the images of fomo and speculative
bubbles dancing in my head, Leonel, I want to take
a slight break here to hear from our sponsors, and
then we'll come back and dig into the Winkelvy a
little bit more. We're back with Leonel, la columnist for
(17:50):
bloom Rigg Opinion. We are digging into everything crypto via
everything Twins. And the twins, of course, are the winklevost Wins,
and they named their crypto exchange Gemini, the astrological symbol
of twins. So I guess everything is self referential in
their little world. Do you know specifically how the Winkle
(18:14):
I became interested in crypto and how Gemini itself came
to be yes, because the twins were not shy about
promoting it once they'd done what they I guess considered
to be a first big investment. And that first investment
came obviously with a kind of second act right or
(18:34):
a redemption narrative, because as you pointed out in the intro,
they were best known as the guys who were screwed
over by Zuckerberg on Facebook and who kind of had
fought and fought and fought for the scraps of a
settlement and who are now trying to kind of make
a comeback. So their whole narrative was Act number two redemption.
(18:54):
And the anecdote for how they discovered it, I mean,
they were on vacation somewhere, partying models, alcohol, cocktails the lot,
and then somebody came up to them and said, hey, man,
this is the next big thing, and so they then
learned all about bitcoin and got into it. What's interesting
at that time, though, is that they were acting as
adventure capitalists. It is not the case that they were
(19:16):
sucked in and went to live on a kind of
bitcoin funded commune. These guys had come out of Facebook,
they had their own VC firm, so they really were skeptical.
They asked lots of people about it. They asked all
the questions that you and I and other journalists ask
and when they decided they were ready for it, they
went into it, not just by investing in what was
then a kind of exchange they went into it by
(19:37):
buying Bitcoin two, so they really tried to corner the
market but in both hands. Then they publicized the story
and well Winnow the rest. As for Gemini, as I
was saying earlier, that came after the MTS collapse, and
it was their new narrative, right, it was the digital
goal narrative. It was the suits and ties. It was
the wild West and the hoodies and the kind of
(19:58):
silk road stuff that's yesterday's news. The real story now
is going to be about getting institutional investors and Wall
Street into this product. And they had a partner company
in all of this, right, Genesis. Tell me a little
bit about Genesis and its relationship with Gemini. So we're
going to have trouble with the Genesis and the Gemman.
Just hate hate these names, oh these names. But that's
(20:21):
what we're here to do, shed light and clarity on
this crazy world for our listeners. So Genesis actually comes
a lot later in the story. That comes with the
last boom that we experienced, which was the credit bubble
boom in crypto, the pandemic boom that we all have
fresh in our minds. And even though, as I was saying,
the twins are next to Barry Silbert, who's the head
(20:41):
of the Digital currency group that owns Genesis. They're sat
next to him in twenty fourteen. I think at these
hearings of crypto Silbert has brought into bitcoin. I think
he got them from the Silk Road auction, and they're
both at the same table saying the same thing. This
is now a mature industry, or it's going to be
a mature industry. Anyway. The big irony of this whole
(21:02):
story is that clearly whatever bet Gem and I had
made did not really work out, because over time the
exchanges that got really big and powerful were the official
ones FTX Finance, not in New York, far away away
from regulators noses. They're the ones offering leverage, speculative and
dangerous trading, and they're getting incredible traction. But you're pointing
(21:25):
out is they're doing the things that New York regulators
wouldn't let a financial exchange do, right, being a traditional
financial exchange, right, which is separately why these exchanges had
US arms called dot us or whatever. And let's also
point out that those aren't regulators saying you can't do this,
because they're just mean nasty, unthoughtful, uninnovated, dullards, but that
(21:47):
there are, as you've pointed out, centuries of financial bubbles
that have come along. And one of the responses the
financial industry has learned over the years is you should
embrace innovation, you should allow it to flourish, but you
have to make distinctions between innovation and fraud, or innovation
and self dealing, or innovation and mouthfeasance, and that a
regulatory touch that makes sure that isn't occurring is good
(22:10):
for everyone involved, as good for investors, it's good for borrowers,
it's good for the companies, it's good for the development
of economies. And it doesn't exist there just because it's
a fence post blocking the long march of progress. And
the fact that these exchanges decided to go off shore
might have been a warning signal to people, right right,
(22:30):
and it wasn't. And what's incredible is that money begets money,
liquidity begets liquidity, and so money was being thrown at
these platforms by venture capital firms, by institutional investors, and
then we hit the pandemic and everything exploded. But I
guess the point I'm trying to make is that had
Gemini's story back in twenty fourteen, twenty fifteen, been it right,
(22:54):
the story might have ended on a different note, or
they might have gone away, but it didn't. It went
into a new phase Gemini now when it's to go global,
and when it became clear that this pandemic boom was
creating a whole new threaded bubble, a whole new industry
of leverage around it, they ended up joining in. And
Genesis was the lender that really drove a lot of this.
(23:16):
I mean, the amount of money that it lended, the
growth of its loan book in just two years was
just I mean madness, right. I think it's fifteen billion
or ten billion, very short space of time. And that's
the reason why today we have this feud or dispute
turned bankruptcy fight between the Winklevoss twins and Silver. It's
(23:37):
not because they were in this from the beginning. It's
because they both got in. They both got swept up
in this most recent credit bubble. And I think the
thing to remember here when you're noting how lending spiked
to fifteen billion dollars, all of this lending was in
service of giving the market a big boost in terms
(23:59):
of help the market to inflate the value of crypto,
and then the crypto that was traded among all the
various entities Gemini and Genesis included. Is it fair to
call that self dealing or do you think it was
just raw market speculation? Oh? I mean it is all
speculation that if you mean, look at the way it unraveled.
(24:22):
You had hedge funds that collapsed that then owed money
to Genesis, which then had to find money which wasn't
there from its parent group, which then trickled all the
way down to people who had put their money with Gemini.
That kind of chain reaction, in that kind of domino toppling,
reveals that at the end of the day, what's there
(24:42):
isn't real because everyone's trying to find the original money
which isn't there. That the cash isn't there, right, and
even today, what is the crypto economy? I think people
stopped trying to say that crypto was real. People stopped
trying to say that crypto was being used by people
or merchants. People just gave up because it was just
ely and blatantly not true. All of it was trading
(25:03):
as an asset with hedge funds and borrowing and speculation
and betting. People just stopped trying to pretend right that
it was in the service of some fundamental economic good.
So yeah, I would say as completely expectative, and you know,
I want to stay focused on the Winkelvoss twins, but
the demise of Sam Bankman Freed and FTAX and Alameda.
(25:26):
One of the lessons from that is that these close
relationships between the exchanges and between asset management firms, and
the ready transmission of funds back and forth in this
whirlwind that kept the price of cryptocurrency escalating, there may
be plain old traditional accounting fraud and financial fraud involved
(25:47):
in all of that. There's investigations going on right now
of FTX and Alameda for those very reasons. Do you
think those sort of partner relationships should have been warning
signs too regulators and investors and others observing this that
something hanky might have been afoot? Yes, But I also
(26:08):
feel like crypto is one of those things where everything,
everything should have been an alarm belt. Take the whole
lending earned product, which is the reason why Gemini and
Genesis are at loggerheads. What are they? Why are you
getting interest rates. Why are you getting interest rates many
times above the base central bank rate for parking your crypto?
(26:28):
What does that mean? Who? Either it's being done at
a loss by a company that just basically wants to
grow and it's being given lots of money to grow,
in which case what happens in the future, How sustainable
is that? Or else there are incredible risks being taken
on the other side of the trade to get you
that interest rate, to get you that return, And that's
(26:52):
clearly what was being done too, where that fund was
being lent onto hedge funds, which we're doing very risky trades,
and in the end it all just kind of toppled.
So I guess my point is, yes, of course there
were conflicts of interest, and yes, institutional investors and bench
capital funds hedge funds clearly were far too chummy and
(27:13):
didn't do their homework. On the other hand, there is
something basic just the alarm bells. Whether it's where it's
this venue located, what does it do where it's financials
and why is it offered me such a generous interest rate? Right?
What's the cash? Crypto seemed to be free lunches at
every single floor you know, Warren Buffett has famously said
(27:35):
he looks at lots of companies, but whatever company he
looks at, he always focuses on the management, and as
the management seemed competent and dedicated and capable. And I've
sort of wondered about that in the context of the
Winkle Vas twins. You know, during the time that they
were helping engineer the cryptocurrency boom, they also were spending
(27:55):
a lot of time in the limelight. They invested in
a magazine that routinely featured topless models and Hollywood actresses.
They had their own rock band. Do you think those
might have been indications that they were maybe more enamored
of the spotlight than they were running their own business effectively. Yeah.
The thing is that the Winkle Got Twins. I mean
(28:17):
they are tech billionaires to me, right, I mean, these
are people who came out of the Facebook boom, and
so a lot of their behavior I feel it is
very commensurate with tech billionaires. They're very rich, and they're
always going to be disconnected on some way from society.
The crypto angle. Firstly, these two they're like the portrait
of Dorian Gray, right, they visually represent crypto along every
(28:39):
single step of the way. They're wearing suits when they're
selling it to Wall Street. They're on Twitter with the
laser eyes when it's going up a lot, and as
you say, when everything is tanking, they are discreetly running
away to play in a rock band. For me, there's
something so decadent. They're not even doing their old rowing thing,
because I mean, these guys are guild athletes. They weren't
(29:01):
going back to some passion, they weren't doing something they're
generally good at. It just seemed like they were hiding.
They were going off and playing competent or okay covers
of seventies rock standards days after having laid off ten
percent of staff and their Twitter avatars, which used to
be laser eyed ten people to buy Bye Bye. Was
not just some anonymous things saying come and see our band.
(29:22):
So for me, it just seemed like the height of decadence.
It just reminded me of how tech billionaires and venture
capitalists today, after having gotten so rich and having faced
none of the consequences, just increasingly seemed just to be
checked out. So for me, it just felt like the
end of the story. It felt like by then it
was too late. I mean, if that was your red alert,
you're probably already losing money on crypto. Or it was
(29:42):
like Jay Gatsby pouring Bootleg Jane into a fountain and
dancing wildly around it. We've seen this before. I want
to take another break, you know, to hear from our sponsors,
and when we come back, we will dig a little
bit more into what might be the end for the
Wink of Vases and some of the recent developments around
(30:03):
their crypto empire. We'll be right back. We are back
with William l. Or Ant columns with Bloomberg Opinion, Crypto
savant and always a great and fun guy to talk with.
We are now in this stage in the short brief
flaming history, like a medior of crypto, of what appears
(30:25):
to be yet another epic meltdown phase. What caused the
recent meltdown that we've all been witnessing, the recent meltdown? Obviously,
we have in our heads a lot of things. The
fact that we were locked down during the pandemic, the
fact there was so much social media and so much uncertainty,
we were all kind of vulnerable to a lot of
new narratives such as crypto again, really is going to
(30:47):
take over the world. And by the way, there's a
very good book by Jonathan Bigle, Reckless, which is all
about the most recent bubble, and that really was about credit.
Because if you think about the last two booms, you
had the kind of freaks and geeks revolution boom, and
then you had the retail boom for Thanksgiving dinner boom.
But that was always about buying, you buying bitcoin, you
buying bitcoin. This one was about leverage. It was about
(31:10):
lending and loans and trading on margin. It was really
the credit bubble and all of the rest of the
things that we think about, the influencers, the social media,
the pandemic, uncertainty, that was all triggered as well by
the price. But I think the price could not have
exploded that high without the combination of people using leverage
(31:30):
to choose the price, and at the same time institutions
and big companies making bets that they thought would pay
off in the pandemic. So I think it's fundamentally incredibable.
And of course credit bubbles pop when interest rates start rising,
and when the Federal Reserve and other central banks around
the world started jacking up interest rates in response to
massive inflation. Industries that were running on airplane fumes, like crypto,
(31:57):
came under pressure, right, correct and simple reason that if
you can earn a return on your cash deposit, that
means that other investments that do not produce a return
have to compete with that. It's really just that basic,
basic math, basic math. And so before the whole irony
of crypto offering you an interest rate, the whole irony
(32:18):
is that when returns on real cash were going up,
the returns on crypto and their value was sort of
both falling at the same time. So there really was
no contest. Crypto proved to be unprofitable tech. It proved
to be nastack social media times one hundred times a thousand.
It wasn't digital gold, it wasn't a hedge, wasn't a
story of value. It was a tech risk on megabubble
(32:42):
bets helped by easy money. And so when the easy
money goes away, that bet falls. You had what I
consider sort of an epic description of where the Winkelvy
reside right now. And you describe them in one of
your columns as being stuck in the financial version of
the Hotel California explain that to me. Can I just
(33:02):
quickly say the Hotel California has been a term that
my colleagues and I have been banding around for years,
right because Hotel California describes also just generally buying into crypto,
because when the Winkelvos twins bought their first big stash
of crypto after the collapse, there were a lot of
people trying to get out. Crypto is about people getting
in and then when an a liquid asset like crypto falls,
(33:26):
you are faced with the choice of taking potentially huge
loss just to get out. And so that's why I
think also exchanges look very appealing because they're a way
to sell your cryptocurrency to bring down the pile while
making money of transaction fees. So I just want to
kind of put that out there and say that the
Hotel California issue with though it has been there in
a long time, because everybody rushes in when it's going up,
(33:48):
and everyone's terrified to sell when it's gone down. Today's
Hotel California is pretty much the latest episode in a
long running story which is based on the fact that
they offered this product of lending where people would put
their money on Gemini in hopes for a return. Gemini
would straight away land that onto Genesis, the company we
mentioned earlier, and now it's all kind of gone south
(34:11):
because the market fell, Genesis's partners went bust. Now Genesis
has a hole that it has to fill and it's
essentially not given back the money that the clients of
Gemini were told they could take any time. So the
reason why it's hurts the California is because once again
people who ran in when prices were going up, thinking
(34:33):
I'm going to time this just right, but now stuck
they cannot get ahold of their money. And we've seen
this time and time again. But now I just think
it's a byproduct of the credit bubble. But it's like
another floor of the hotel, and regulators are sniffing around
the Winkelwy's operation. Lawsuits have started to fly. Where do
(34:55):
you think some of that might be headed? So the lawsuits,
you might say, are coming a late in the day
because we saw the first regulatory response to these lending
products a year ago or less than a year ago.
Because they resemble securities in US law, they look like
a security, They walk like a sity. It taught like
a security of regulators. These products where you're offering interest
(35:18):
rates on crypto are securities. Now, maybe you could turn
around and say, well, this is all very late in
the day to be now after this fund freeze, after
FTX has gone down, after this big bankruptcy fight between
Gemini and Genesis. It's a bit late in the day.
But I think it tells you that essentially what we're
(35:38):
dealing with here is the real risk that these people
come back for act number three at number four, at five.
Remember that the Winklevos twins in their fight with Genesis,
have portrayed Genesis and Barry Silbert as the ones that
their own clients should be angry at. Okay, it's a
bit like Billionaire A opens the door to find a
huge crowd of people with pitchforks saying where's our money?
(35:59):
And he's says, hey, WHOA, WHOA. You need to see
Billionaire B, because even though I willingly gave your money
to that billionaire, he's the one who did all this
shady stuff. He's non transparent, go and chasing with pitchforks,
And so the crowd runs to Billionaire B, led by
Billionaire A, who's now picked up a pitchwalk. This is
the Winkelwolf twins. They've picked their pitchfork, and they are
now writing letters saying that, oh, Genesis has lost school
(36:23):
teacher's money lost, grandmother's money lost. We're sharked. We're sharked
to discover there's gambling going on in this casino. Yeah.
And I really wonder without these lawsuits, right, without a
real question mark over whether Gemini's own responsibility in this
is worthy of regulatory attention. Without that, I wonder whether
the Winkelhospons might be thinking great. I think if we
(36:45):
do a deal with Genesis and we get some money back,
we can come out of this with our reputations sort
of semi preserved and get back onto doing business. So
I think it could be fundamentally quite important for their future.
In one of your columns about SPA, you said that,
and I quote you, his apology is as hollow as
his empire. Is there anyone whom you look at as
(37:09):
a model citizen or citizens in the crypto market? I
would love to say yes. I think I guess the
people who I have the least contempt for are the
people who are kind of honest with themselves and they
wear their values on their sleeve. So, for example, the cipherpunks, okay,
the real libertarians who will openly say I'm in this
(37:32):
for my niche pursuits, for my elite pursuits of freedom
and privacy and being outside government control. I kind of
respect at least people who have the honesty to say that,
even if I don't agree with it. And the same
thing goes for the very smart people who actually design
some of these cryptocurrencies, Vitalic Beuta and the designer of Ethereum.
I can't say that that isn't smart. These are these
(37:52):
very smart people. They are doing things that no ordinary
person can do, and maybe in a hundred years, a
thousand years, somebody will finally find it use case for it.
That justifies all of this effort. But the other people,
the hucksters, the people who kind of surf on it,
the people who try and pretend it's tech. It's about
tech and disruption revolution, and it's really just about separating
people from their money. I just don't see any models
(38:15):
or model citizens. Maybe there are people genuinely making money
and getting rich, I just don't really see it as
a kind of model to follow. So what have you
learned from the Winkle Voss's journey about crypto, maybe something
that you didn't know before, given how long you've been
watching all of this unfold. I think the age of
(38:36):
the average entrepreneur, billionaire entrepreneur, the whole second act, that act,
fourth act. This is stuff that I have never seen before,
or I'm just not used to this idea that you
can have multiple lives. I mean, look at Michael Sailor
and MicroStrategy. These are people who actually had really terrible
times in previous crises. They try to bounce back, and
(38:56):
they're going to keep bouncing back, and they're going to
keep finding ways to make money. I'm just kind of
stunned by a lot of it. I also think that
there is something in there about this new generation of
I guess privileged entrepreneur. I mean, they already have money
and they have a network already, They're a new kind
of entrepreneur. And I mean, I think it's also quite
an American phenomenon. Tripto has become a very American phenomenon,
(39:20):
and a lot of the stuff that's coming out as
wild West is really being fit into American capitalism. So,
I mean, I think I've learned a lot not all
of it good. So you're telling me this is our fault,
and since you're a French the decent, it's not your fault. No. Well,
I mean these guys clearly Thede might from Europeans too,
But I just fight it't kind of fascinating that it
was basically copped it by venture capital, blessed by regulators
(39:42):
and bankers, and this is Wall Street and Silicon Valley
melded together, sold as the American dream to a whole
class on Main Street. I'm not saying that no one
else fell for it. I'm saying that it just seems
incredible that it just really checked all the boxes of
American capitalism and sounded super complex and mysterious and innovative
(40:03):
as crypto might just as easily have been described as
quote unquote snake oil. Possibly. Absolutely, the history of frauds
very relevant if you go back one hundred years. These
are exactly the same issues that were being grappled with.
When do you regulate? How do you intervene this whole
idea that actually it's very Unamerican to imposed rules. We've
had all of these debates before, and I just think, yeah,
(40:25):
as you were saying, Crypto has just recreated all of
this and as far as I can see, as yet
to leave. Maybe it's early days, but it's yet to
leave something like the railroads or anything that's useful infrastructure behind. Yes,
I could talk to you about this stuff forever, and
that went by really quickly. Leonell, thanks so much for
giving us a chunk of your brain and a chunk
(40:46):
of your time. Thank you. You can follow Leonel Laurent
on Twitter at Leonel R. A. Laurent, and you can
read his columns on Blueberrig Opinion dot com here at
crash Course, we believe that collisions can be messy, impressive, challenging, surprising,
and always instructive. In today's Crash Course, I learned that
(41:07):
the Crypto kids may be back for more. That despite
their missteps and some of the meltdowns they've participated in,
and maybe the wool that they pulled over our eyes,
they might be coming back from more if they can
get out of the Hotel California. That is what did
you learn? We'd love to hear from you. You can
tweet at the Bloomberg Opinion handle at Opinion or me
(41:29):
at Tim O'Brien using the hashtag Bloomberg Crash Course. You
can also subscribe to our show wherever you're listening right
now and leave us a review that helps more people
find the show. This episode was produced by the indispensable
Anamazarakis and me. Our supervising producer is Magnus Henrickson, and
we had editing help from Katie Boyce, Jeff Grocott, Mike
(41:53):
Niezza and Christine Vanden Bilart. Blake Maples does our sound engineering,
and our original theme song was posed by Luis Gara.
I'm Tim O'Brien. We'll be back next week with another
Crash Course
Welcome to Crash Course, a podcast about business, political, and
social disruption and what we can learn from it. I'm
Tim O'Brien. Today's Crash Course Cryptocurrencies Versus Reality. One of
my favorite scenes in the Social Network Aaron Sorkin's takedown
about Facebook's founders is when the actor playing Harvard President
(00:23):
Larry Summers upbraids the actor playing the dual role of
the Winklevoss twins. Don't ask the university to intervene in
your petty dispute with Mark Zuckerberg, he tells them, and
I quote, everybody at Harvard is inventing something. I suggest
again that the two of you come up with a
new new project in the real world. The Winklevoss twins,
(00:46):
who eventually walked away with tens of millions in Facebook
stock and other payments, did, in need come up with
new projects an asset management firm and a digital currency
exchange that made them Marquie Layers in the recent cryptocurrency
boom and melt out. There are other more significant crypto
players think Sam Bankman Freed, for example, But the twins
(01:10):
fascinate me because they embody the sort of collision Crash
Course lives for between innovation and possible hucksterism, and between
authenticity and possible manipulation. Crypto is one of the most
revolutionary and overhyped inventions of the twenty first century, and
how the Winkelvy intersected with that market is a tale
(01:30):
that sheds light on finance and on financial bubbles, on
what happens when everybody thinks they can get rich quickly.
Joining me today to discuss all of this is Leonel Laurent,
a financial columnist for Bloomberg Opinion and someone who has
spent a lot of time watching crypto evolve. He's joining
us today from Paris. He Leoney, thank you for being
(01:56):
with us. Let's start by demystifying crypto for anyone who
feels mystified by it. You know, I've always thought of
crypto as essentially a digital currency in the cloud and
a replacement for Fiat dollars, paper currency that doesn't really
have a central bank behind it. It just has all
the users gearing teeing one another that the value will
(02:18):
keep going up time and time and time again. How
do you describe it? How do you think of crypto?
That's pretty accurate, and it's accurate. I guess in hindsight,
because I think the term crypto has become very broad.
It's now used to describe, as you say, any kind
of virtual currency, digital currency that is not done by
a bank. I think if you go back to when
(02:40):
bitcoin first emerged, the purists, we're really focusing on the
crypto part of the word cryptocurrency. So in other words,
it's outside the banking system. It's decentralized because it relies
on cryptography, and therefore it is pseudonymous or close tutonymous.
It's private money, but it's also privacy money, and that
has been the kind of and the Winklevosses story gets
(03:02):
into that. There's always been a tension there between the
real hard nuts who are in this for the privacy,
for the kind of libertarian aspect of it, and those
who are in it for what it became, which is money,
speculation assets, nothing to do with privacy, but also nothing
to do with currency, because as we've seen it's been
(03:22):
a decade, we're still using cash, right, We're still using
notes and coins and cards. No one's would use in
crypto as a currency, and as we discovered over time,
it had a very elastic relationship with the notion of value.
But we could get into that later too, But I
wanted to ask you what caused this boom. There is
a real innovation here. It's an attempt to ground transactions
(03:44):
in a different universe. And the blockchain I think has
a lot of uses outside of crypto that are useful.
But I was wondering, when you think about the boom,
what are its foundations? Well, I think we've had several
booms crypto. We had several boom and bust cycles. If
you go back to the kind of first one, and
(04:04):
this is where the Winkelvos story comes in. It really
was the kind of thing that was supposed to follow
a set path involving tech and venture capital, and it
happened in the wake of the financial crisis. Famously, bitcoin
was held up as a response to the banking failures.
There was the collapse of one British bank that was
literally written into one of the bitcoin transactions, right, the
(04:25):
first one. And that kind of story really explains the
first initial boom, which is it pulls in a lot
of the cypherpunks and the anarchists that we're in this
for the cryptography revolutions of before. But it also pulls
in a lot of speculative money. The venture capital story
decided a technology is going to give us a lot
of answers to the questions that we pose, and we're
(04:47):
talking like the midnots, Like what years are we talking
about it? Yeah, well it's the late notes. Bitcoin comes
out just around the same time as the financial crisis,
and so the decade of crypto really was the twenty
ten and the Winklevoss symbolized that attempt to kind of
glom onto it as a venture capital style technological bet
(05:08):
that was going to disrupt society in the way that
you put it disruption. Now we can talk about the
other booms that happened, but that's the first one. And
then it went through several cycles where retail investors got
ahold of it and began to look like a kind
of stock market bubble, and the latest boom was a
credit bubble. So I guess my point is this is
all very financial, it's not very technological. If we look
(05:30):
at the core tech, a lot of it is like
decades old. It's a lot of things coming together. And
just to really tip my hat to the crypto purists,
low interest rates, right, easy money, easy money, that kind
of fed this, and you get this bizarre symboidic relationship
between people who want to kill central banks and people
who want crypto prices to go up. And bizarrely, easy
(05:52):
money was kind of fueling the whole ride. Well, an
easy money in search of profitable returns. The low interest
rate that were engineered after the financial crisis left people
seeking alternate assets that could produce bigger returns than a
stagnant bond market and an unpredictable equity market, and crypto
(06:12):
benefited from that. It's also interesting to me that you
talk about the foundational grounding of this universe over the
last decade. And we'll talk more about this about financial
bubbles and people's emotional and psychological response to them. But
I wanted to dig in a little bit on that
before we get into the Winkle Vye because there's a
(06:34):
long history here, and you wrote one of your columns.
While financial history should have inspired caution, it instead inspired
greed and trust. So unpack that a little bit as
it pertains to the crypto boom. So, as I was
trying to say before, this is very financial. This is
a financial story. What do I mean by that? If
(06:54):
you come along with something new in the world of
money and finance, especially after the financial crisis, come along.
When you say we have something new, most people, especially
those who have the knowledge of financial history, should have
a bit of skepticism because if you're coming in with
something that doesn't fulfill and this was widely widely analyzed
when bitcoin and crypto first emerged. There are definitions of money.
(07:17):
Money works when it is and I'm sure people have
heard this before. Is it a store of value? Is
it a reliable store of value? Is it a good
medium of exchange? Is it a good unit of account?
Bitcoin did not meet the definition of these things, and
so initially there was a lot of skepticism. But the
problem is that if you keep saying that, it doesn't
really help. If people really believe that this time is different,
(07:37):
and so I think that then you have to look
at stories of bubbles, right, the Tulipmania, the south Sea bubble,
credit bubbles. The history of private money is littered with failures.
And the problem is that trying to talk about this,
all people would say back to you is, yeah, but
look at the crisis. Right. Even the Winkelboss Twins would
refer to while they we're getting into bitcoin. Everything they
read in the papers seem to confirm their bias towards
(08:00):
bitcoin again, the Eurozone crisis, the Aurozone debt crisis, that
write downs right on sovereign debt. This was the kind
of economic tale of the bitcoins where they would see
all of this system really on its knees and think,
this is it, right, this is the failure. And what
I think they didn't foresee is that this system would
actually prove quite resilient and in the same way that
(08:22):
today people like Charlie Mungun Warren Buffett are doing victory
lapse around crypto. It's because there was reason to be skeptical,
because if you look at history, somethings are too good
to be true when they're totally disconnected from the fundamentals. Right.
So that's what I mean when I said financial history
should have informed a bit of caution. And when we're
talking about the two hook bubble, you know, we're talking
about the seventeenth century and the eighteenth century, and there
(08:46):
are hundreds of years of bubbles behind this. In human
nature over that long stretch didn't really change all that much.
Greed was still a motivator and wishful thinking combined with
greed could produce some very interesting bubbles, like the one
we just went through with crypto. Nonetheless, there was an
architecture that developed beneath this industry that I want to
(09:09):
talk a little bit about with you too, because I
think that's useful for figuring out what the winkelby we're
up to. The industry essentially developed into two main arteries
more or less right, exchanges and then lenders, people who
were offering tokens and building markets around trading them. Is
that a fair, if overly simplistic description of what the
(09:31):
industry came to look like. Well, you've just perfectly described
how we've tried to use financial sected terms, financial industry
terms on an industry that is trying to create something
new and in a way almost ignoring all of the
lessons that got the financial industry to state whereds in today.
Let's take exchanges. The exchanges in the crypto world, by
calling themselves exchanges immediately conjured up images of regulated exchanges
(09:54):
like the Chicago Mercantile Exchange and others. That is not
what they were. And if we go back to the
first real bitcoin boom and bust, which was in the
It was about ten years ago Mount Gox, which was
the biggest bit coin exchange, right went belly up. It
called itself an exchange, but it really wasn't. I mean,
it wasn't the kind of trusted and trustworthy regulated exchange.
(10:16):
And even today, wait wait, wait, so what would you
call it? What would you call it if you weren't
going to call it an exchange, A sesspool, a trait.
I'm going to be polite, and I'm going to be
polite to say that even a decade on ftx, Binance,
all of these places that are called exchanges their platforms,
that's all. They are, their venues, and they do lots
(10:37):
of stuff behind the scenes that no one really knows.
They launched their own coins. FTX had its own token,
Binants has its own token. They're brokers too, they handle
your trades, they invest as well. They do everything right.
I mean the phrases the house always wins. It's easy
to slip into gambling language. Is this really an exchange
or is it a casino? Basically, my point is that
(10:59):
the exchange helps them out. It is nothing like a
regulated exchange. But that's the catual term that was used.
It gives them credibility, It gives them establishment s dial credibility,
and they also suffer serve a purpose because the whole
irony is that crypto it was supposed to be. You know,
you could be your own bank, private money, totally decentralized.
(11:21):
But humanity just finds decentralization awkward. It is an elite pursuit,
it's a niche pursuit. So that's the big irony. In
the end. People gravitating these exchanges because they are centralized
and they take a lot of power and get rich.
And that's why so many of the richest people in
crypto billionaires. They're exchange owners. They're not people who were
smart and god and early. They own the exchange, They
(11:43):
set the rules, and they make the money. And so
you're also describing another interesting phenomenon there, the development of
the exchanges or a response to the market evolving and
lots of various operators and smarties and others decent ending
on this to see what they could do with it.
Is there an emblematic moment around that, you know, that
(12:06):
second step of going from crypto being mined and crypto
being traded to crypto taking on the clothing, if not
the authenticity of financial exchanges and more sophisticated markets. We
may be getting a bit ahead on the Winklevoss story,
but I definitely think for me, the emblematic year or
(12:27):
moment is twenty thirteen twenty fourteen, because that's when you
have the collapse of Mount Gox. So you have a
narrative where an exchange got really big and very powerful
and then just went bust. You have the Silk Road
being shut down, so you have a sense of regulators
trying to clean up a wild West. And then you
have this is ten years and shut down Bray the
way Silk Road shutdown in part because they worried about
(12:50):
money laundering and crypto rather than simply being used as
a libertarian currency, also being used to fund possibly fund
crimes and money laundering and other dark deeds. Well, I mean,
we could spend all data on matther because that is
precisely what the libertarian cipherpunks were totally amenable to. That's
what they want, they said, the freedom to do what
you want, and that may involve that's known as the
(13:11):
four horsemen of the crypto apocalypse, which is to say,
money laundering, crime, pornography, gambling, all of this stuff they're
okay with. And just to add to your point, post
Silk Road came the narrative of the wild West is
over now at the time for regulated exchanges, and this
is when the Winklevos twins found their exchange, Gemini. This
is a decade ago when they're all sitting at a
(13:34):
hearing in front of the New York Department for Financial Services,
several crypto entrepreneurs, and they're saying, the wild West is over.
We've solved it and now we can get on with
doing regulated business. And they were saying, we've solved the
wild West problem by offering a quote unquote exchange. Right. Well,
the difference was that this time the phrase this time
(13:56):
is different always seems to apply. This time it was
going to be regulated on shore in New York with
a new license and it was going to be part
of the Wall Street furniture. That was the narrative, at
least for the Winkelvos twins and for Gemini. The idea was,
don't overregulate your laws currently work. Give us a path
to regulation and we will do that. And that was
(14:19):
a decade ago. All of these questions are cyclical. They
keep coming back because this is the nature of crypto.
It is not a straight line, it's a constant circle.
Here's a detail that I just love is the fact
that you met with the winkel Vye I think back
in twenty seventeen. Tell me about that, right, So that
was in late twenty seventeen. It was in New York.
(14:40):
It was really at the height of the bitcoin boom.
I mean, sadly not this bitcoin boom, the last bit.
There's been too many. It was late twenty seventeen. Nicola
was hitting a record and the Winkelvos twins were doing
a tour of Wall Street and I remember meeting with them.
They were very affable, very tall, as everyone knows, very
start by bed for a minute, describe them for me,
(15:01):
because they are very tall. I think they're each like
six foot five at least. Former Olympic crew rowers. Yeah,
and it was a bit twin peaksy. Sorry for the
terrible pun, but they were moving through the office. They
had just done a tour of Wall Street and they
were wearing suits. And later on, while reading the history
of their adventures in crypto, you see suits are a
(15:21):
recurring theme. They've always been seen as suits, but they
were wearing suits because they wanted to blend in. They
were trying to sell a product to Wall Street. They
were trying to get regulatory approval. They were trying to
really bring this into everyone's pocket through an ETF, through
regulated products. The delusion would persist, right, But this was
the kind of height of the retail mania where every
question or Thanksgiving dinner was so are you going to
(15:43):
buy bitcoin? And so we talked and yeah, this was
their moment, this was their time to shine on Wall Street.
What did you talk about? I mean, we talked about
what their aim was, right, their view of bitcoin, which
they said publicly on the TV set, which they were
selling bitcoin as the new gold. Right, Bitcoin was going
better than gold at being gold, It was going to
be in everyone's portfolio, it was going to be a
(16:04):
hedge against a lot of things, and it was going
to be an asset to store. And as a result,
it should be in the mainstream, and they were the
best vehicle to get it. And as you were having
that conversation with them back then, what was going on
in your own mind? What did you think about the
fact that two six ft five guys in suits we're
saying crypto is the new goal. I mean, I was
(16:27):
skeptical from the beginning, and I think it's been hard
to well, I've always made an effort right to at
least meet people who believe to try and I guess
shape my own arguments right or try and hear one
day the killer argument as to why this was not
just speculative. But I mean, at the time I wrote,
this was just the most incredible bubble I'd ever seen.
(16:47):
And this was in twenty seventeen. I mean, this is
when Big when at ten thousand seemed completely crazy, but
at the time it was the most incredible burst of
fomo and speculative fever that I've ever seen. The point is,
it wasn't just the retail obviously, the taxi driver and
the cliche of the shoeshine boy. It was the regulators.
I was seeing people from the CFTC. You go on
(17:08):
Bloomberg TV and say we need futures products because we're
meeting invested demank. It felt incredible. I mean, it really
just blew my mind. And at the time I was like, well,
this clearly isn't going to last, and it didn't. But
at the same time, it did, so I feel I
was half right, half wrong. I definitely didn't think that
it would survive and then bounce back and in the
way that it has done. But definitely the whole thing
(17:29):
seemed crazy. So with the images of fomo and speculative
bubbles dancing in my head, Leonel, I want to take
a slight break here to hear from our sponsors, and
then we'll come back and dig into the Winkelvy a
little bit more. We're back with Leonel, la columnist for
(17:50):
bloom Rigg Opinion. We are digging into everything crypto via
everything Twins. And the twins, of course, are the winklevost Wins,
and they named their crypto exchange Gemini, the astrological symbol
of twins. So I guess everything is self referential in
their little world. Do you know specifically how the Winkle
(18:14):
I became interested in crypto and how Gemini itself came
to be yes, because the twins were not shy about
promoting it once they'd done what they I guess considered
to be a first big investment. And that first investment
came obviously with a kind of second act right or
(18:34):
a redemption narrative, because as you pointed out in the intro,
they were best known as the guys who were screwed
over by Zuckerberg on Facebook and who kind of had
fought and fought and fought for the scraps of a
settlement and who are now trying to kind of make
a comeback. So their whole narrative was Act number two redemption.
(18:54):
And the anecdote for how they discovered it, I mean,
they were on vacation somewhere, partying models, alcohol, cocktails the lot,
and then somebody came up to them and said, hey, man,
this is the next big thing, and so they then
learned all about bitcoin and got into it. What's interesting
at that time, though, is that they were acting as
adventure capitalists. It is not the case that they were
(19:16):
sucked in and went to live on a kind of
bitcoin funded commune. These guys had come out of Facebook,
they had their own VC firm, so they really were skeptical.
They asked lots of people about it. They asked all
the questions that you and I and other journalists ask
and when they decided they were ready for it, they
went into it, not just by investing in what was
then a kind of exchange they went into it by
(19:37):
buying Bitcoin two, so they really tried to corner the
market but in both hands. Then they publicized the story
and well Winnow the rest. As for Gemini, as I
was saying earlier, that came after the MTS collapse, and
it was their new narrative, right, it was the digital
goal narrative. It was the suits and ties. It was
the wild West and the hoodies and the kind of
(19:58):
silk road stuff that's yesterday's news. The real story now
is going to be about getting institutional investors and Wall
Street into this product. And they had a partner company
in all of this, right, Genesis. Tell me a little
bit about Genesis and its relationship with Gemini. So we're
going to have trouble with the Genesis and the Gemman.
Just hate hate these names, oh these names. But that's
(20:21):
what we're here to do, shed light and clarity on
this crazy world for our listeners. So Genesis actually comes
a lot later in the story. That comes with the
last boom that we experienced, which was the credit bubble
boom in crypto, the pandemic boom that we all have
fresh in our minds. And even though, as I was saying,
the twins are next to Barry Silbert, who's the head
(20:41):
of the Digital currency group that owns Genesis. They're sat
next to him in twenty fourteen. I think at these
hearings of crypto Silbert has brought into bitcoin. I think
he got them from the Silk Road auction, and they're
both at the same table saying the same thing. This
is now a mature industry, or it's going to be
a mature industry. Anyway. The big irony of this whole
(21:02):
story is that clearly whatever bet Gem and I had
made did not really work out, because over time the
exchanges that got really big and powerful were the official
ones FTX Finance, not in New York, far away away
from regulators noses. They're the ones offering leverage, speculative and
dangerous trading, and they're getting incredible traction. But you're pointing
(21:25):
out is they're doing the things that New York regulators
wouldn't let a financial exchange do, right, being a traditional
financial exchange, right, which is separately why these exchanges had
US arms called dot us or whatever. And let's also
point out that those aren't regulators saying you can't do this,
because they're just mean nasty, unthoughtful, uninnovated, dullards, but that
(21:47):
there are, as you've pointed out, centuries of financial bubbles
that have come along. And one of the responses the
financial industry has learned over the years is you should
embrace innovation, you should allow it to flourish, but you
have to make distinctions between innovation and fraud, or innovation
and self dealing, or innovation and mouthfeasance, and that a
regulatory touch that makes sure that isn't occurring is good
(22:10):
for everyone involved, as good for investors, it's good for borrowers,
it's good for the companies, it's good for the development
of economies. And it doesn't exist there just because it's
a fence post blocking the long march of progress. And
the fact that these exchanges decided to go off shore
might have been a warning signal to people, right right,
(22:30):
and it wasn't. And what's incredible is that money begets money,
liquidity begets liquidity, and so money was being thrown at
these platforms by venture capital firms, by institutional investors, and
then we hit the pandemic and everything exploded. But I
guess the point I'm trying to make is that had
Gemini's story back in twenty fourteen, twenty fifteen, been it right,
(22:54):
the story might have ended on a different note, or
they might have gone away, but it didn't. It went
into a new phase Gemini now when it's to go global,
and when it became clear that this pandemic boom was
creating a whole new threaded bubble, a whole new industry
of leverage around it, they ended up joining in. And
Genesis was the lender that really drove a lot of this.
(23:16):
I mean, the amount of money that it lended, the
growth of its loan book in just two years was
just I mean madness, right. I think it's fifteen billion
or ten billion, very short space of time. And that's
the reason why today we have this feud or dispute
turned bankruptcy fight between the Winklevoss twins and Silver. It's
(23:37):
not because they were in this from the beginning. It's
because they both got in. They both got swept up
in this most recent credit bubble. And I think the
thing to remember here when you're noting how lending spiked
to fifteen billion dollars, all of this lending was in
service of giving the market a big boost in terms
(23:59):
of help the market to inflate the value of crypto,
and then the crypto that was traded among all the
various entities Gemini and Genesis included. Is it fair to
call that self dealing or do you think it was
just raw market speculation? Oh? I mean it is all
speculation that if you mean, look at the way it unraveled.
(24:22):
You had hedge funds that collapsed that then owed money
to Genesis, which then had to find money which wasn't
there from its parent group, which then trickled all the
way down to people who had put their money with Gemini.
That kind of chain reaction, in that kind of domino toppling,
reveals that at the end of the day, what's there
(24:42):
isn't real because everyone's trying to find the original money
which isn't there. That the cash isn't there, right, and
even today, what is the crypto economy? I think people
stopped trying to say that crypto was real. People stopped
trying to say that crypto was being used by people
or merchants. People just gave up because it was just
ely and blatantly not true. All of it was trading
(25:03):
as an asset with hedge funds and borrowing and speculation
and betting. People just stopped trying to pretend right that
it was in the service of some fundamental economic good.
So yeah, I would say as completely expectative, and you know,
I want to stay focused on the Winkelvoss twins, but
the demise of Sam Bankman Freed and FTAX and Alameda.
(25:26):
One of the lessons from that is that these close
relationships between the exchanges and between asset management firms, and
the ready transmission of funds back and forth in this
whirlwind that kept the price of cryptocurrency escalating, there may
be plain old traditional accounting fraud and financial fraud involved
(25:47):
in all of that. There's investigations going on right now
of FTX and Alameda for those very reasons. Do you
think those sort of partner relationships should have been warning
signs too regulators and investors and others observing this that
something hanky might have been afoot? Yes, But I also
(26:08):
feel like crypto is one of those things where everything,
everything should have been an alarm belt. Take the whole
lending earned product, which is the reason why Gemini and
Genesis are at loggerheads. What are they? Why are you
getting interest rates. Why are you getting interest rates many
times above the base central bank rate for parking your crypto?
(26:28):
What does that mean? Who? Either it's being done at
a loss by a company that just basically wants to
grow and it's being given lots of money to grow,
in which case what happens in the future, How sustainable
is that? Or else there are incredible risks being taken
on the other side of the trade to get you
that interest rate, to get you that return, And that's
(26:52):
clearly what was being done too, where that fund was
being lent onto hedge funds, which we're doing very risky trades,
and in the end it all just kind of toppled.
So I guess my point is, yes, of course there
were conflicts of interest, and yes, institutional investors and bench
capital funds hedge funds clearly were far too chummy and
(27:13):
didn't do their homework. On the other hand, there is
something basic just the alarm bells. Whether it's where it's
this venue located, what does it do where it's financials
and why is it offered me such a generous interest rate? Right?
What's the cash? Crypto seemed to be free lunches at
every single floor you know, Warren Buffett has famously said
(27:35):
he looks at lots of companies, but whatever company he
looks at, he always focuses on the management, and as
the management seemed competent and dedicated and capable. And I've
sort of wondered about that in the context of the
Winkle Vas twins. You know, during the time that they
were helping engineer the cryptocurrency boom, they also were spending
(27:55):
a lot of time in the limelight. They invested in
a magazine that routinely featured topless models and Hollywood actresses.
They had their own rock band. Do you think those
might have been indications that they were maybe more enamored
of the spotlight than they were running their own business effectively. Yeah.
The thing is that the Winkle Got Twins. I mean
(28:17):
they are tech billionaires to me, right, I mean, these
are people who came out of the Facebook boom, and
so a lot of their behavior I feel it is
very commensurate with tech billionaires. They're very rich, and they're
always going to be disconnected on some way from society.
The crypto angle. Firstly, these two they're like the portrait
of Dorian Gray, right, they visually represent crypto along every
(28:39):
single step of the way. They're wearing suits when they're
selling it to Wall Street. They're on Twitter with the
laser eyes when it's going up a lot, and as
you say, when everything is tanking, they are discreetly running
away to play in a rock band. For me, there's
something so decadent. They're not even doing their old rowing thing,
because I mean, these guys are guild athletes. They weren't
(29:01):
going back to some passion, they weren't doing something they're
generally good at. It just seemed like they were hiding.
They were going off and playing competent or okay covers
of seventies rock standards days after having laid off ten
percent of staff and their Twitter avatars, which used to
be laser eyed ten people to buy Bye Bye. Was
not just some anonymous things saying come and see our band.
(29:22):
So for me, it just seemed like the height of decadence.
It just reminded me of how tech billionaires and venture
capitalists today, after having gotten so rich and having faced
none of the consequences, just increasingly seemed just to be
checked out. So for me, it just felt like the
end of the story. It felt like by then it
was too late. I mean, if that was your red alert,
you're probably already losing money on crypto. Or it was
(29:42):
like Jay Gatsby pouring Bootleg Jane into a fountain and
dancing wildly around it. We've seen this before. I want
to take another break, you know, to hear from our sponsors,
and when we come back, we will dig a little
bit more into what might be the end for the
Wink of Vases and some of the recent developments around
(30:03):
their crypto empire. We'll be right back. We are back
with William l. Or Ant columns with Bloomberg Opinion, Crypto
savant and always a great and fun guy to talk with.
We are now in this stage in the short brief
flaming history, like a medior of crypto, of what appears
(30:25):
to be yet another epic meltdown phase. What caused the
recent meltdown that we've all been witnessing, the recent meltdown? Obviously,
we have in our heads a lot of things. The
fact that we were locked down during the pandemic, the
fact there was so much social media and so much uncertainty,
we were all kind of vulnerable to a lot of
new narratives such as crypto again, really is going to
(30:47):
take over the world. And by the way, there's a
very good book by Jonathan Bigle, Reckless, which is all
about the most recent bubble, and that really was about credit.
Because if you think about the last two booms, you
had the kind of freaks and geeks revolution boom, and
then you had the retail boom for Thanksgiving dinner boom.
But that was always about buying, you buying bitcoin, you
buying bitcoin. This one was about leverage. It was about
(31:10):
lending and loans and trading on margin. It was really
the credit bubble and all of the rest of the
things that we think about, the influencers, the social media,
the pandemic, uncertainty, that was all triggered as well by
the price. But I think the price could not have
exploded that high without the combination of people using leverage
(31:30):
to choose the price, and at the same time institutions
and big companies making bets that they thought would pay
off in the pandemic. So I think it's fundamentally incredibable.
And of course credit bubbles pop when interest rates start rising,
and when the Federal Reserve and other central banks around
the world started jacking up interest rates in response to
massive inflation. Industries that were running on airplane fumes, like crypto,
(31:57):
came under pressure, right, correct and simple reason that if
you can earn a return on your cash deposit, that
means that other investments that do not produce a return
have to compete with that. It's really just that basic,
basic math, basic math. And so before the whole irony
of crypto offering you an interest rate, the whole irony
(32:18):
is that when returns on real cash were going up,
the returns on crypto and their value was sort of
both falling at the same time. So there really was
no contest. Crypto proved to be unprofitable tech. It proved
to be nastack social media times one hundred times a thousand.
It wasn't digital gold, it wasn't a hedge, wasn't a
story of value. It was a tech risk on megabubble
(32:42):
bets helped by easy money. And so when the easy
money goes away, that bet falls. You had what I
consider sort of an epic description of where the Winkelvy
reside right now. And you describe them in one of
your columns as being stuck in the financial version of
the Hotel California explain that to me. Can I just
(33:02):
quickly say the Hotel California has been a term that
my colleagues and I have been banding around for years,
right because Hotel California describes also just generally buying into crypto,
because when the Winkelvos twins bought their first big stash
of crypto after the collapse, there were a lot of
people trying to get out. Crypto is about people getting
in and then when an a liquid asset like crypto falls,
(33:26):
you are faced with the choice of taking potentially huge
loss just to get out. And so that's why I
think also exchanges look very appealing because they're a way
to sell your cryptocurrency to bring down the pile while
making money of transaction fees. So I just want to
kind of put that out there and say that the
Hotel California issue with though it has been there in
a long time, because everybody rushes in when it's going up,
(33:48):
and everyone's terrified to sell when it's gone down. Today's
Hotel California is pretty much the latest episode in a
long running story which is based on the fact that
they offered this product of lending where people would put
their money on Gemini in hopes for a return. Gemini
would straight away land that onto Genesis, the company we
mentioned earlier, and now it's all kind of gone south
(34:11):
because the market fell, Genesis's partners went bust. Now Genesis
has a hole that it has to fill and it's
essentially not given back the money that the clients of
Gemini were told they could take any time. So the
reason why it's hurts the California is because once again
people who ran in when prices were going up, thinking
(34:33):
I'm going to time this just right, but now stuck
they cannot get ahold of their money. And we've seen
this time and time again. But now I just think
it's a byproduct of the credit bubble. But it's like
another floor of the hotel, and regulators are sniffing around
the Winkelwy's operation. Lawsuits have started to fly. Where do
(34:55):
you think some of that might be headed? So the lawsuits,
you might say, are coming a late in the day
because we saw the first regulatory response to these lending
products a year ago or less than a year ago.
Because they resemble securities in US law, they look like
a security, They walk like a sity. It taught like
a security of regulators. These products where you're offering interest
(35:18):
rates on crypto are securities. Now, maybe you could turn
around and say, well, this is all very late in
the day to be now after this fund freeze, after
FTX has gone down, after this big bankruptcy fight between
Gemini and Genesis. It's a bit late in the day.
But I think it tells you that essentially what we're
(35:38):
dealing with here is the real risk that these people
come back for act number three at number four, at five.
Remember that the Winklevos twins in their fight with Genesis,
have portrayed Genesis and Barry Silbert as the ones that
their own clients should be angry at. Okay, it's a
bit like Billionaire A opens the door to find a
huge crowd of people with pitchforks saying where's our money?
(35:59):
And he's says, hey, WHOA, WHOA. You need to see
Billionaire B, because even though I willingly gave your money
to that billionaire, he's the one who did all this
shady stuff. He's non transparent, go and chasing with pitchforks,
And so the crowd runs to Billionaire B, led by
Billionaire A, who's now picked up a pitchwalk. This is
the Winkelwolf twins. They've picked their pitchfork, and they are
now writing letters saying that, oh, Genesis has lost school
(36:23):
teacher's money lost, grandmother's money lost. We're sharked. We're sharked
to discover there's gambling going on in this casino. Yeah.
And I really wonder without these lawsuits, right, without a
real question mark over whether Gemini's own responsibility in this
is worthy of regulatory attention. Without that, I wonder whether
the Winkelhospons might be thinking great. I think if we
(36:45):
do a deal with Genesis and we get some money back,
we can come out of this with our reputations sort
of semi preserved and get back onto doing business. So
I think it could be fundamentally quite important for their future.
In one of your columns about SPA, you said that,
and I quote you, his apology is as hollow as
his empire. Is there anyone whom you look at as
(37:09):
a model citizen or citizens in the crypto market? I
would love to say yes. I think I guess the
people who I have the least contempt for are the
people who are kind of honest with themselves and they
wear their values on their sleeve. So, for example, the cipherpunks, okay,
the real libertarians who will openly say I'm in this
(37:32):
for my niche pursuits, for my elite pursuits of freedom
and privacy and being outside government control. I kind of
respect at least people who have the honesty to say that,
even if I don't agree with it. And the same
thing goes for the very smart people who actually design
some of these cryptocurrencies, Vitalic Beuta and the designer of Ethereum.
I can't say that that isn't smart. These are these
(37:52):
very smart people. They are doing things that no ordinary
person can do, and maybe in a hundred years, a
thousand years, somebody will finally find it use case for it.
That justifies all of this effort. But the other people,
the hucksters, the people who kind of surf on it,
the people who try and pretend it's tech. It's about
tech and disruption revolution, and it's really just about separating
people from their money. I just don't see any models
(38:15):
or model citizens. Maybe there are people genuinely making money
and getting rich, I just don't really see it as
a kind of model to follow. So what have you
learned from the Winkle Voss's journey about crypto, maybe something
that you didn't know before, given how long you've been
watching all of this unfold. I think the age of
(38:36):
the average entrepreneur, billionaire entrepreneur, the whole second act, that act,
fourth act. This is stuff that I have never seen before,
or I'm just not used to this idea that you
can have multiple lives. I mean, look at Michael Sailor
and MicroStrategy. These are people who actually had really terrible
times in previous crises. They try to bounce back, and
(38:56):
they're going to keep bouncing back, and they're going to
keep finding ways to make money. I'm just kind of
stunned by a lot of it. I also think that
there is something in there about this new generation of
I guess privileged entrepreneur. I mean, they already have money
and they have a network already, They're a new kind
of entrepreneur. And I mean, I think it's also quite
an American phenomenon. Tripto has become a very American phenomenon,
(39:20):
and a lot of the stuff that's coming out as
wild West is really being fit into American capitalism. So,
I mean, I think I've learned a lot not all
of it good. So you're telling me this is our fault,
and since you're a French the decent, it's not your fault. No. Well,
I mean these guys clearly Thede might from Europeans too,
But I just fight it't kind of fascinating that it
was basically copped it by venture capital, blessed by regulators
(39:42):
and bankers, and this is Wall Street and Silicon Valley
melded together, sold as the American dream to a whole
class on Main Street. I'm not saying that no one
else fell for it. I'm saying that it just seems
incredible that it just really checked all the boxes of
American capitalism and sounded super complex and mysterious and innovative
(40:03):
as crypto might just as easily have been described as
quote unquote snake oil. Possibly. Absolutely, the history of frauds
very relevant if you go back one hundred years. These
are exactly the same issues that were being grappled with.
When do you regulate? How do you intervene this whole
idea that actually it's very Unamerican to imposed rules. We've
had all of these debates before, and I just think, yeah,
(40:25):
as you were saying, Crypto has just recreated all of
this and as far as I can see, as yet
to leave. Maybe it's early days, but it's yet to
leave something like the railroads or anything that's useful infrastructure behind. Yes,
I could talk to you about this stuff forever, and
that went by really quickly. Leonell, thanks so much for
giving us a chunk of your brain and a chunk
(40:46):
of your time. Thank you. You can follow Leonel Laurent
on Twitter at Leonel R. A. Laurent, and you can
read his columns on Blueberrig Opinion dot com here at
crash Course, we believe that collisions can be messy, impressive, challenging, surprising,
and always instructive. In today's Crash Course, I learned that
(41:07):
the Crypto kids may be back for more. That despite
their missteps and some of the meltdowns they've participated in,
and maybe the wool that they pulled over our eyes,
they might be coming back from more if they can
get out of the Hotel California. That is what did
you learn? We'd love to hear from you. You can
tweet at the Bloomberg Opinion handle at Opinion or me
(41:29):
at Tim O'Brien using the hashtag Bloomberg Crash Course. You
can also subscribe to our show wherever you're listening right
now and leave us a review that helps more people
find the show. This episode was produced by the indispensable
Anamazarakis and me. Our supervising producer is Magnus Henrickson, and
we had editing help from Katie Boyce, Jeff Grocott, Mike
(41:53):
Niezza and Christine Vanden Bilart. Blake Maples does our sound engineering,
and our original theme song was posed by Luis Gara.
I'm Tim O'Brien. We'll be back next week with another
Crash Course
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