Mad Crypto: The curious case of Gemini

This post first appeared in Frank Chaparro’s weekly column “Mad Crypto,” which is sent to Genesis members’ inbox every Monday morning.

Gemini's recently announced Referral Program got me thinking about the cryptocurrency exchange. 

In many respects, Gemini has faced some big headwinds, including the steep decline of its stablecoin, Gemini dollar, and the relatively muted growth of its trading venue. At first glance, the Referral Program — which allows users to earn $10 whenever they invite a friend to the platform — seems like a move that a less charitable man than myself would describe as a desperate attempt to boost its business. 

Looking at the numbers would support that man's case.

Gemini stands out among its stablecoin competitors, which include the likes of USDC, the coin backed by cryptocurrency exchange operator Circle, and Paxos' PAX. But not in the way they would want. Since the end of last year, the supply of the cryptocurrency has plummeted from approximately $100 million to $6.8 million. By way of comparison, PAX has a market cap of nearly $200 million. 

For much of its existence, likely due to its conservative nature, Gemini has lagged behind its peers in terms of trading volume. To increase its profile, the firm launched a large marketing campaign at the start of 2019 — aimed at projecting its brand as the "regulated" cryptocurrency exchange. Indeed, it is regulated by the New York Department of Financial Services (as are Coinbase and Bitstamp).

Still, although it appears that Gemini’s volume has moderately increased since the marketing campaign, my colleague Steven Zheng noted that the increase is more likely the result of bitcoin’s recent price jump from the low $3,000s in January 2019 to $10,000 in August. Gemini, for what it's worth, is notorious for its high fee schedule.

This backdrop makes it really easy to write off Gemini, but such a conclusion would ignore some important tailwinds that are harder to quantify.

First, unlike many of its competitors, Gemini doesn't necessarily have to worry about money in the bank. To be clear, I have no idea if the firm is or isn't profitable. But with billionaire twins Cameron and Tyler Winklevoss (combined $1.45 billion net worth) at the helm, it is clear the firm doesn't face the same pressure to make easy money to appease investors. It is not clear if the exchange has venture capital investors; the Winklevii provide a financial guarantee for potentially several more years. And can provide a backstop if cash flows are tough.

In the world of cryptocurrency, this level of security builds a strong foundation for an exchange business. Whilst others turn to listing more and more coins to squeeze out as much revenue as possible, Gemini has remained one of the more conservative platforms from a listing and policy perspective. It has also built out some of the most sophisticated offerings, including its block trading functionality. It is one of the few exchanges that offers colocation services to high-speed traders out of a New York data center. And it is building out its platform via a new Chicago operation, which snagged several former Coinbase employees after the exchange shut its Chicago office earlier this year. 

From a staffing perspective, anecdotally, the stability appears to help retain talent. Unlike rival Coinbase, Gemini hasn't seen too many departures of its senior leadership on the institutional side. The team includes stars such as Sarah Olsen, managing director of the firm, Esther Babb, director of corporate development, and Jeanine Hightower-Sellitto — all of whom held impressive positions in the Wall Street world. 

In any case, it will be years perhaps until we see whether this strategy pays off. We will be watching.