In the late 1990s, as people were discovering the potential of peer-to-peer networks on the internet, a site called FriendsReunited offered to re-unite you with former schoolmates, a kind of perpetually updated high school yearbook. It was a way, some wags suggested, for the annoying people you avoided at school to track you down as an adult. It was followed within a couple of years by Friendster, and then Myspace.
Cameron Winklevoss at the Olympics in 2008
It’s also around the time that the Winklevoss twins Tyler and Cameron enrol in Harvard University, where they have an idea to build a social network for Harvard students: they will call it HarvardConnection. It’s late November, 2003. After running into some problems with the development, they ask a freshman coder to help them finish the site, and spend a few weeks anxiously pursuing the busy freshman, who re-assures them that the work is underway. But at the start of the new year of 2004, the freshman, Mark Zuckerberg, instead launches his own site called thefacebook.com, which will quickly grow so big that he will drop out of college in his second year to build a multi-billion dollar business, now one of the most valuable in the world.
The outraged Winklevoss twins first complained, and then sued Facebook through their re-named company ConnectU. It took until 2008 to years to settle the case, with Facebook eventually agreeing to pay the twins $20 million in cash and $45 million in Facebook shares four year after that. In 2012 the twins set up a business called Winklevoss Capital Management. During a holiday in Ibiza that year, the twins heard about bitcoin, and on their return to New York they arranged to meet Charlie Shrem, the founder of BitInstant. Shrem, a bitcoin evangelist par excellence, quickly converted the twins into newly born bitcoin enthusiasts and brought them on board as investors in BitInstant.
With a few million sloshing around in the pockets from their Facebook win, the twins started accumulating bitcoin between the end of 2012 and early 2013, buying up around 120,000 coins at a price in the high teens. When they disclosed the investment in April 2013, the amount spent was $11 million. The twins were total converts. Along with growing their own hoard, the twins prevailed upon Schrem during the summer 2013 to raise more investment for BitInstant, to get the business on a solid legal footing.
At that stage, the twins - or their advisers - already seemed to be ahead of the pack, and were operating with a sense of vision rooted in marrying Wild West bitcoin to the sophisticated financial engineering of Wall Street. As private investors, they were able to do as they pleased with their money, but they knew that institutional investors would not allow their money anywhere near the chaotic operations run by Shrem or Karpelès. Institutions holding other people’s money, such as pension funds, can only invest in rated financial instruments, and bitcoin was miles and years from that. But those in control of institutional money funds could invest in bitcoin derivatives such as a bitcoin exchange traded fund or bitcoin futures operating through regulated exchanges.
By 2013, the twins had already envisaged a bitcoin exchange traded fund, and a bitcoin exchange which would set prices for the fund. On 1 July 2013, the twins filed to register the Winklevoss Bitcoin Trust EFT with the Securities Exchange Commission (SEC). Without holding bitcoin, investors would be able to exercise a variety of options such as shorting the EFT. But the application sat with the SEC, which was not at first sure how to regulate bitcoin. Meanwhile, the twins laid plans to launch their own Gemini exchange, designed to attract bigger investors, reasoning that Coinbase was already doing a decent job for personal investors.
Even as the Winklevoss twins were making plans to move bitcoin into the financial mainstream, their investment in BitInstant was about to go south. The Feds were waiting for Charlie Shrem at JFK Airport in New York on a January morning in 2014 as he arrived back from a conference in Europe. It’s unlikely the twins lost any sleep over Shrem’s capture. They had bigger fish to fry.