Could Virtual Currency be the Future of Internet Betting?

By: Hartley Henderson - Exclusive to OSGA
Published: Jan 13, 2012

I recently spoke with someone in the industry who was confident that bitcoins or a variation thereof was the future of internet betting. The man, who works for an offshore sportsbook said that he has tried to convince the owner of the sportsbook to accept bitcoins as a payment option but the owner has balked at the idea claiming he doesn't understand them.

If I had any say, all transactions at our book would be done in bitcoins, the man said. They are untraceable and totally out of the control of any government. And most importantly they are an investment which someday I'm confident will rival silver prices.

Hearing that, I decided to do some research of bitcoins to see what the fuss was about. The idea sounded somewhat intriguing although the complexity of how they are made left me somewhat confused. Apparently programmers (known as miners) run an application that allows them to create bitcoins. The code to create the bitcoins is then verified by other miners and once all miners agree that the code is correct that code is stored in a computerized warehouse. The coins themselves are stored in the miners digital wallet. There is a maximum of 21 million coins that can be produced but each coin is divisible to 8 digits. So in actuality there are several quadrillion bits of coins that can be used for transactions. A video at weusecoins.com gave a useful explanation but I still wasn't sure how bitcoins, or possibly another one devised by the industry could ever replace physical currency at a sportsbook, casino or poker room. However, after talking with others it was clear that they are already being used for that purpose. In November, Switchpoker.com based in Costa Rica decided to accept Bitcoins as payment. All poker games at Switchpoker.com are played in Euros so the site converts bitcoins to the current value of Euros to be played in the poker room. Cashouts are sent back to the players in bitcoins. The current exchange rate posted at Mtgox.com is used for the exchange rate. But one site in particular, BTCSportsBet.com operates exclusively using bitcoins. I spoke to the site's manager who wanted to be referred to as R.C. for this article to explain why he believed this could be the future of the industry.

The first question I asked R.C. is what makes bitcoins a better option than cash for online gambling.

As you know, money transfer is vital to the sports betting, casino, and online poker industries. Bitcoin is an amazing solution. Through a combination of math and cryptography - it is a completely decentralized currency/commodity. That means no entity is in control, it is managed by all the nodes of the network, collectively. You can think about it like bitorrent, if you are familiar with the file sharing protocol; purely peer to peer with no central management.

Through this cryptography and decentralized design, each node on the network is a 'bookkeeper' of which bitcoin addresses own which coins. You cannot fake or forge a transaction or create coins outside of the system. Each node has a record and will not accept forgeries. So, even though there is a public record of all bitcoin transactions, the key is that nobody knows who owns a particular address and thus those bitcoins. So on the one hand it is completely transparent - all coins and transactions are public, but on the other hand nobody knows who owns those coins/bitcoin addresses. You can see how it could be useful to gamblers.

Currently bitcoins are worth about 6$ each, the value fluctuates with supply and demand like any other currency or commodity. Part of the value is in their utility. I can send bitcoins to any user in the world, for essentially no cost. And it is fast. Transactions are verified by the network in minutes, and can be processed automatically. BTCSportsBet.com handles dozens of bitcoin transactions daily, with no human intervention. All deposits and withdrawals are processed automatically. This is incredibly efficient. Players at BTCSportsBet.com can deposit in the morning, bet a game, win, and withdraw right after the game. Deposit again later, bet more games, and then withdraw again. All quickly and with no fees - and most importantly no banks, credit card companies, Western Union, PayPal, or any other third parties being involved! What other sportsbook in the world can run that efficiently with processing transactions? And once bitcoins are sent, they cannot be reversed or charged-back like credit cards. What merchant, vendor or sportsbook would not love non-reversible payments where fraud is not possible? From the user point of view, the user does not need to verify or even give identity to the merchant (unless something is to be shipped), so they would not be subject to identity theft.

What R.C. didn't mention is that in no country is peer to peer wagering illegal. There is nothing in the law that stops person A from wagering $20 with person B on the outcome of a game. What makes the transaction illegal in some countries is when an intermediary acts as the bookmaker. That is precisely why Betfair and Matchbook are seen as technically illegal by the U.S. government. Both are peer to peer wagering operations but they also take a commission on the winning bets. BTCSportsBet.com doesn't do so. They simply have paid members. In fact clubwpt.com (owned by the World Poker Tour) does the same thing. Poker players play tournaments with each other but instead of taking rake, the WPT charges a membership fee and with that membership they are entitled to play in the tournaments to which the WPT offers a prize. And because the bitcoin peer network verifies all transactions when they happen there is no way to cheat or renege as one possibly could on the other sports betting sites.

Another obvious advantage to bitcoins is they don't fall under the UIGEA because there is no money involved and there is no way the DoJ can effectively intrude. R.C. perhaps explained it best:

As far as UIGEA, there are no banks or processors involved. Moving bitcoins around is just like moving an image file or other data around. I would expect to see bitcoin-specific legislation before any attempt to apply the UIGEA. But even with legislation, I expect the future of bitcoin to be bright. There is no central authority to shut down. There are laws against file sharing copyrighted works, but due to the distributed nature of bitorrent it cannot be effectively policed.

As far as pressure from the DOJ or other entity (it's not a viable concern). Bitcoin can be classified as a commodity, or a currency, or nothing at all (it's just data). One can argue that it is like Facebook credits or World of Warcraft Gold. The government is not going after them. Also, the terms and conditions for BTCSportsBet.com states that the player is responsible for determining the legality of playing with bitcoins in his or her jurisdiction. Sign-ups are anonymous and the site does not know the origin of the players. No personal identification is requested; even an email address is optional. A player can sign up, send bitcoins, wager, and withdraw without the site ever knowing who he or she is. The properties of bitcoin allow this to happen. There can be no fraud, identity theft, or reversed transactions. All of those headaches are a massive cost to the industry - so you can see why bitcoin may be a significant factor in the future of online wagering.

If there is one concern with bitcoins it's the huge fluctuation in prices. When they first came out they were virtually worthless then went up steadily to about USD$1 until an online news site reported that drug dealers were using bitcoins to peddle illegal narcotics at a torrent site called Silk Road. Drug dealers and other contraband dealers were offering everything from marijuana to LSD and heroin for bitcoins. The products were then shipped in the mail. And since bitcoins are untraceable, the drug dealers likely believe they can't be identified. At that point the price of bitcoins skyrocketed to $27 each. Of course that article also caught the eye of the U.S. government and the DEA. A senator and DEA investigator sent a letter to Attorney General Eric Holder to investigate bitcoins because of these transactions. Nevertheless the price remained high but plummeted after some hacking attacks occurred which resulted in stolen bitcoins from digital wallets and from the bitcoin trading site Mtgox.com.  But the exchange was able to successfully intervene before most of the stolen coins could be withdrawn. It's also likely that the network will someday try to stop drug deal transactions as well although it could be quite difficult since no one knows who owns the bitcoins or what they are being used for. While many on the network are libertarian they also know that messing with the DEA could spell doom to the currency. And sending drugs through the mail is a crime in almost every country regardless of how the dealers get paid.

Another possible concern is that bitcoin's founder Satoshi Nakamoto is unknown. It's fairly clear that Nakomoto was a pseudonym and he hasn't been in the news at all. It's hard to imagine why someone that invented a potential internet changing item would not want to be public. One could never imagine Mark Zuckerberg staying on the sidelines after he invented Facebook. Nakamoto could have a very good reason for staying out of the public eye but it certainly raises flags.

Of course not everyone is enthusiastic about the idea. I spoke to a very large sports better who laughed at the idea of using bitcoins to gamble.

I'm taking the Warren Buffet approach on this, the gambler said. If I don't understand it I'm not buying it.

But then again he and others like him probably scoffed at the opportunity to buy EBay for 25 cents a share back in the 1990s because it was a concept that made no sense at the time. But those who were willing to take the risk on Ebay or Yahoo then are likely millionaires today.

Of course the great value of bitcoins will come when more merchants accept the currency for physical items. Bitcoins are being accepted for some tech items, alpaca socks and of course the illegal drugs mentioned earlier, but there is hope that at some point places like Amazon.com will also accept the currency. In fact there are numerous vendors on Ebay that are willing to accept bitcoins as payment for goods.

As for BTCSportsBet.com, R.C. says he has hundreds of active customers and for the BCS Championship game there were about 100 wagers at an average wager of about 5 bitcoins. That number is small but the company only opened last year and all online sportsbooks started small.

R.C. is excited at the future of BTCSportsBet and the industry as a whole.

Where else can someone in the Ukraine, China, Brazil, anywhere globally - open an account with the same trusted sportsbook, not provide any personal information, fund the account in minutes, wager, withdraw directly after the game for no fees? That is the compelling use case for online wagering with bitcoins.

We'll continue to monitor the site and bitcoins at OSGA to see if he is indeed correct.

Contact Hartley via email at Hartley[at]osga[dot]com.

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



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