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Bitcoin fluctuation causes problems for online bettors




As the price of bitcoins drop, so do the winnings of online gamblers who use the currency.

When I first wrote about bitcoins at the beginning of 2012 the concept was a curiosity. It theoretically provided an untraceable way to use currency in any format one wanted without fear of government intervention and in a manner that guaranteed payment (i.e. they could not be reversed). Moreover because it wasn't really currency there was no concern to bettors about paying taxes on "winnings" and they could not be blocked the way credit card payments, Western Union, ETF transfers etc. could by the banks. Switch Poker was the first site to accept bitcoins and later on 5Dimes and some other sites began accepting them as well. Plus, of course bitcoin only gambling sites began popping up as well, although BTCSportsbet which I wrote about first closed shop in 2012 for undisclosed reasons.

When I first wrote about bitcoin, they were trading at about USD$6 each and at the end of the year when the TV show The Good Wife did an episode on the currency, it was trading about $8. There were many fluctuations during that time but it was stable between $3 and $12. Then in 2013 the currency took off. Rumors started hovering that the Chinese banks were going to accept them as a form of payment after Yi Gang, the deputy governor of the People's Bank of China stated that the bank couldn't accept them in the near future but that he personally adopted a long term perspective on them. The currency also gained a lot of recognition when the U.S. Senate said it wanted to hold a hearing on them, possibly to determine whether they would become some form of accepted revenue stateside. At its heyday the currency started trading at USD$1,100 each leaving many like myself wondering why they didn't take advantage of the opportunity when they were trading for $3 or less.

online gambling bitcoinWhile bitcoin presented an interesting opportunity, it was also ripe for failure, which is why I was always cautious about it. Aside from the fact you had to be a techno geek to really understand how the currency worked in terms of mining, there was always going to be some worries as to what would happen if rogue operators came about or if the governments somehow decided to cut down on it. Despite those concerns many people decided to dive right in. Reports emerged about one bettor at Switch Poker that decided to take all his money from the site and convert them to bitcoins when it hovered around $500 and one bettor I know sold all his investments and bought bitcoins when they were trading at around $800 about a month after the $1,100 heyday. While I told him he was crazy he claimed I was the crazy one for "not getting in while the getting is good."

Since that time numerous developments occurred. First, the largest Bitcoin trading site, MtGox, closed down when their system was compromised and over 800,000 bitcoins were stolen and later CAVirtex in Canada shut down operations for similar reasons although it has since reopened. Satoshi Nakamato, the mysterious bitcoin founder was apparently found by Newsweek in Los Angeles and the founder of Silk Road (the torrent based site that traded contraband using bitcoins) was found and arrested. Moreover several other arrests and seizures occurred convincing many that bitcoin maybe wasn't as untraceable as many believed. Second, the IRS announced that Bitcoin was a taxable commodity so that any value that the commodity had over and above what Americans paid for it had to be declared as income on tax forms (and no doubt it would be almost impossible to deduct losses). And third, and most importantly, the Chinese government announced that bitcoins and other forms of virtual currency were not acceptable as real currency in the country and thus demanded that all Chinese banks stop accepting transactions with bitcoins or creating virtual currency accounts or run the risk of being closed down. This was specifically detrimental to bitcoins since almost 30% of all bitcoins were held by Chinese residents.

As a result of all these issues the currency tumbled. It has been losing value almost every week and at last check was trading at just over USD$220 at coindesk. A colleague who has been betting almost exclusively in bitcoins said that he bought 15 bitcoins at $525 each last year which worked out to just under $8,000 with commissions and has built it up to 32 bitcoins more than doubling his bitcoins. Unfortunately, he never cashed any out so at the current value of $228 at time of this writing, his 32 bitcoins are worth around $7,000. If he decides to cash them out for his 113% win, he has actually lost 14% on his investment. And my colleague is just one of many. I've had numerous emails stating similar tales of woe. On the bright side, the number of companies accepting bitcoins for payment has also skyrocketed.

Microsoft, Tesla, Overstock.com, Dell, Home Depot, Victoria's Secret, Tiger Direct and the list goes on all accept bitcoin in one manner or another. And of course bitcoin only sites like Bitcoin Travel also process real transactions using bitcoin as a payment method. But the one area that hasn't seen a huge spike in acceptance is gambling. Satoshi dice, Nitrogen Sports and other BTC sites have gone up slightly but right now only Switch Poker, 5 Dimes, Bovada and BetOnline accept bitcoins. Companies that don't accept U.S. players clearly would prefer to stick with fiat currency which they understand and from all accounts those companies that do accept bitcoins as a deposit method will only payout in bitcoins to ensure they don't get screwed over on a huge fluctuation in the price of the commodity.

The question of course is what is the true value of a bitcoin? Most people in the financial industry I spoke to have agreed it will just continue to go down with many believing the final resting place to be somewhere between $50 and $75. But one financial analyst I spoke to, Harley, said that the true value of them is zero. The reason he believes this is that because they are not controlled by money markets and the governments it is open to competition. And in his view something far more revolutionary will come along that will make bitcoins obsolete.

"There was one point not that long ago that everyone wanted to own Kodak stock. Then better ways of taking pictures emerged making their cameras and film irrelevant and now they are just into digital imaging. And even now they are just a shell of what they once were. Bitcoins, tradecoin, dogecoin, whatever, don't even have that. And there are so many competitors (at last check there were over 500 forms of cryptocurrency). Bitcoins aren't a physical asset and they can't be used anywhere as legal tender and never will. So what's the real value of them? They have grown in value due to curiosity and they will die when people realize that they are essentially nothing but a bunch of numbers in a computer program."

"Many gamblers are ruing the bitcoin gamble . . . "

Harley also pointed to Ripple.com as an example of a new technology that achieves the same benefits as bitcoin apparently does, namely an open source currency exchange and payment processor that is done instantly and with low fees but has far more usefulness as a p2p transactor. In Ripple, users pay each other by using cryptographically signed transactions denominated in either Ripple's internal currency named XRP or with other assets such as gold, air miles, fiat currency or even bitcoins. Most choose XRP because it has additional benefits. And as Harley points out, competition in this space isn't a good thing. And you can be sure that as technology advances new forms of payment methods will also start taking effect and at some point people will wonder what the big fuss about bitcoins was.

Bitcoin aficionados, however, have told me that worrying about what its value is in comparison to fiat currency is irrelevant because bitcoins are its own entity and the real value is trading them around and using them as a form of barter. The fallacy with that argument is that they are being used to buy physical assets or services which have a cost. And that cost is based on true dollars. These retailers don't hold on to the digital currency. Instead they have found a method to immediately convert the bitcoins to dollars or other currency and the cost is the value at the time. So if Overstock.com is selling a product for $460 then if you choose to pay by bitcoin they will charge you 2 bitcoins and then convert those bitcoins to dollars as soon as possible. If the value of the bitcoin drops to $75 the same product will now cost you 6.13 bitcoins. Overstock.com isn't going to still charge 2 bitcoins and absorb the loss. They will charge the true value and just allow bitcoin as a payment option. For that reason the true value of a bitcoin is indeed its price in comparison to a fiat currency. And that's the reason why so many gamblers are ruing the bitcoin gamble. As the value of the cryptocurrency drops so too does their winnings.

For American bettors, however, the biggest drawback is government interference. Every website has a form of getting payments in and out if the customer wants to make the effort, but to many Americans the big benefit was the ability to wager without government intervention which assured they didn't have to worry about taxes and that they could bet where they wanted to and not have to deal with banks. It was the main reason NETeller was so popular before the UIGEA passed. But that was specifically what happened with NETeller. One U.S. government official said at a GIGSE conference in the early 2000s when hearing about NETeller "there's this huge pile of money that is untraceable and that can be sent around without the government knowing? Oh we're interested in that." The next thing one knew NETeller funds were frozen in transit by the U.S. feds and were only given back to U.S. customers when NETeller agreed to play ball. Now NETeller is a legal payment processor in the U.S. keeping track of all records by New Jersey and Nevada gamblers and sending all relevant info to the IRS. So now that the IRS government has indicated that they will get involved in bitcoin and other crypto transactions then there's no real benefit to U.S. gambling site customers. They may as well just pay by credit card or Western Union and not have to worry about the baggage attached to bitcoins such as huge price fluctuations.

Bitcoin always appeared to be a potential savior for the offshore gambling industry but it is evidently clear that there are far too many downsides for this to really be the case in the long run.

Read insights from Hartley Henderson every week here at OSGA and check out Hartley's RUMOR MILL!