The gambling demand for Bitcoin

by on January 7, 2014 at 2:08 am in Economics | Permalink

Usually the house wins!  (With the exceptions of counting cards at blackjack or beating the table at poker.)  So why not try a game where the odds are — if not outright “better” — at least a lot less clear?  Enter Bitcoin.  No matter what your theory of its future value, there is no simple story which flat out amounts to “the house wins,” if only because of the opaqueness of the matter.  It is also a fun gamble and bundled with various symbolic commitments to future tech, libertarianism, and so on.  For many people that is better than affiliating with Vegas, the local football team, or perhaps Macau.  You can follow the price on as frequent a basis as you wish, rather than having to wait for a sporting event to take place.  And unlike in equities, futures, and options markets, you can feel — rightfully or not — that the pros also don’t know what they are doing.

I can’t find a reliable source on how much is spent on gambling each year, legal and illegal, but a variety of unreliable sources are suggesting a few hundred billion a year for the U.S. alone.  It’s likely to be well over a trillion dollars worth for the world as a whole.

Let’s say one percent of that gambling demand spills over into the cryptocurrency arena.  That’s a flow of $10 billion a year to fund new cryptocurrencies or bid up the value of old ones, maybe more.  Bitcoin also may interest people in gambling who otherwise do not gamble or think of themselves as gambling types.

I don’t gamble and I don’t enjoy gambling, but if I were going to gamble, I would prefer to gamble with Bitcoin than to bet on a dog race.  And it has to be better than buying a lottery ticket.

To the extent we are uncertain about the future gambling demand for Bitcoin, the price of Bitcoin will be correspondingly volatile.  And we have no solid sources for trying to estimate such future demands.  At the very least it seems likely that such demand has not yet peaked or close to it.  In any case, the trading of Bitcoin itself will reveal information about the shape of the demand curve and thus the trading of the asset can inject further volatility into the market, a standard result when not everything is a flat, horizontal demand curve.

Here are various tweets related to Bitcoin and gambling.

anon January 7, 2014 at 2:46 am

“And unlike in equities, futures, and options markets, you can feel — rightfully or not — that the pros also don’t know what they are doing.”

This is a pretty unsatisfying dismissal of equities, futures, and options, as a more accessible alternative to speculating on BTC.

anon January 7, 2014 at 2:59 am

To clarify. I say this because pros knowing what they’re doing doesn’t cost you very much. If they center their markets exactly around the most efficient price, you pay half the bid ask spread plus fees, which is pretty low in developed markets. The speculator doesn’t really compete with pros, he is the customer of pros.

rluser January 7, 2014 at 3:54 am

This is a particularly unsatisfying post. Without assurances otherwise, I would suspect Tyler Cowen of intoxication.

My own initial attraction to bitcoin was for the express purpose of gambling. Scratch that. It was for arbitrage against the gambling of others — in large part this is the story of avoiding capital controls by using bitcoin as a conduit.

Why is a bitcoin play better than a lottery play? I can think of numerous lottery plays I would prefer to an abundance of bitcoin plays (though they tend to be short lived). The main attraction for bitcoin speculators is high volatility.

As anon alludes above: more established markets offer more efficient pure gambles.

ummm January 7, 2014 at 4:33 am

With any post about bitcoin there are haters to follow. Been long bitcoin since the low $100′s and not selling

prior_approval January 7, 2014 at 4:48 am

A better example of ‘gambling’ would be where the house issues chips in amounts far above the amount that the house redeems the chips in terms of another currency.

The clearinghouse casino is where the real betting is going on – that one can even get cash.

‘As the price of Bitcoin trundles to new heights, more and more people are looking to cash in their Beenz and run like Hell before exchanges vanish or are “hacked,” and are finding it to be a rather daunting task. With the popular Magic: the Gathering Online eXchange taking almost two years to allow withdrawals, Bitcoiners are turning to smaller exchanges that are ill-prepared to handle the volume, small-potatoes ATMs, or shady parking lot deals made through LocalBitcoins.

We’re here today to detail the story of a man in Canada who happened to mine some Bitcoins back when CPU mining was possible, then forgot about them until the hype started to bubble the price unsustainably. This adventure is proving to be a little more difficult than expected. Here is his story so far, as outlined by SA Forums goon UberJumper:’

The article ends thusly – ‘What the Christ indeed. For anyone left paying attention, cashing out in any appreciable way is a disaster, and you won’t get anything close to the “value” quoted on the various exchanges, which isn’t terribly surprising given that they seem to be subject to manipulation and in no way represent what people are actually receiving for their pogs. If UberJumper and his Bitcoin millionaire pal manage to get anything more out of the system, we’ll let you know.’

http://buttcoin.org/easy

ummm January 7, 2014 at 6:22 am

Kugman has been critical of bitcoin since 2011. How did that turn out? We need to hold the hacks accountable.

Z January 7, 2014 at 8:32 am

We don’t know until the last sucker staggers through the door. If everyone knew when the scheme would collapse, it would not attract so many suckers.

Explodicle January 7, 2014 at 9:57 am

That’s hyperbolic. There’ll never be a “last sucker” because a handful of people (myself included) would buy all 21 million bitcoins for $1, just as a conversation starter at parties. “Remember Bitcoin from back in the 2010′s? I have ALL of them now.”

If someone offered you a well-preserved German Papiermark, would you keep it?

Z January 7, 2014 at 11:49 am

I have a trillion dollar bill issued by Zimbabwe. It’s worthless too. That does not mean I will throw it out, but that’s not how we determine the value of things. Plus, your Bitcoins are never going to be much of a conversation piece unless you intend to live inside a computer.

Explodicle January 7, 2014 at 3:33 pm

“I have a trillion dollar bill issued by Zimbabwe. It’s worthless too. That does not mean I will throw it out, but that’s not how we determine the value of things.”

Why would you spend the time to acquire and store something you don’t value?

“Plus, your Bitcoins are never going to be much of a conversation piece unless you intend to live inside a computer.”

You caught me! :-D

Helvering January 7, 2014 at 4:28 pm

Tons of bright tax minds- judges, practitioners, professors– have worked to define the exact moment when realization events occur for specific items, that magical moment when you tally a profit/loss (e.g., December 31 or January 1?). Bitcoin is a lot of fun within that theological dispute.

When gambling you win/lose when money is transferred. With currency issued by foreign govts, U.S. taxpayers accrue income/loss on an annual basis regardless of dispositions. To take a worthlessness loss on intangibles, you need a definitive disposal not an opinion of worthlessness. Which category do 21 million bitcoins fit in?

prior_approval January 7, 2014 at 9:14 am

One of the strangest things about this comment section is that so many people care about Krugman. I don’t.

What is bizarre though, that pretty much all I know about Krugman and his various views comes from this web site at this point.

I spend more time paying attention to the ‘Five Wise Men’ – http://en.wikipedia.org/wiki/German_Council_of_Economic_Experts

Well, four men and a woman – maybe the GMU Econ Dept can strive for a similar balance, though it will taken more than a few new hires to get there.

Ray Lopez January 7, 2014 at 6:44 am

Looks like TC is going all in with bitcoin. If an academic is going long, time for a correction then? :-)

Z January 7, 2014 at 8:31 am

Well, I would prefer to bet on a lot of things over a dog race. That has nothing to do with the relative value of those other things as a unit of currency.

Dan Weber January 7, 2014 at 9:15 am

One interesting thing about Bitcoin is that you can gamble directly against the protocol, which is stochastic in its nature of who gets to finish the next block. In some ways this strengthens the protocol (gamblers tend to watch the result of the game very closely, if only for entertainment purposes), and in some ways it weakens it (getting 50% of the network to agree with you may be easier if you can get the gamblers to pile in randomly — you can’t do it consistently, but you might temporarily be able to get a few “fake” confirmations out that allow you to double-spend against someone who accepts a few confirmations).

Explodicle January 7, 2014 at 9:15 am

Thank you for your posts lately, this is quickly becoming one of my favorite Bitcoin blogs!

IMHO there are two really interesting aspects to Bitcoin gambling:
1) It can be “provably fair” – the dice are rolled by Bitcoin miners and any cheating is exposed instantly. BitVegas (a Minecraft casino) is a good example.
2) Since there is no inflation, long bets don’t have an opportunity cost vs simply saving the money. This makes prediction markets much more viable.
These make it much more attractive than traditional gambling on the stock market.

Jeff January 7, 2014 at 9:32 am

The house wins at poker too, by virtue of charging a rake. It’s just that the house isn’t a competitor, provided you are better enough than the other players to overcome the rake the game is beatable.

Blackjack is much less beatable, even counting isn’t profitable unless you’re playing on a team b/c otherwise the large bet variations give you away. Not only that, but a 3% edge (which is pretty good in the counting world) isn’t enough to keep the house from getting lucky once or twice and busting the invidual player anyway on a big bet.odds.

Finch January 7, 2014 at 10:47 am

> provided you are better enough than the other players to overcome the rake the game is beatable.

That depends on the rake. There’s probably not enough margin in skill to overcome very high rakes. When people discuss the return of online poker to the US, they often forget the importance of decent competitive economics to keep rakes down. Poker with a very high rake becomes a lottery.

Patrick B. January 7, 2014 at 10:11 am

I’m a professional casino/poker software developer of many years and I also have a side interest in privacy and crypto including, of course, BitCoin. There are some BTC-based casinos out there but from my knowledge of the industry these are fledgling days.
The industry has always operated partially in the shadows (I’ve experienced a few eyebrow-raisers regarding how companies operate), so something like BitCoin is just what the doctor ordered. But things won’t swing in that direction overnight. Here’s what I think will be needed to get the online gambling industry on to cryptocurrencies:

1. A safe, reliable way to convert local currency to BTC. I know that if I’m going to be spending my cash, I want to be sure it won’t disappear!
2. Margin studies and reliable value predictability. If my BTC value doubles tomorrow, I’d want to know why the online casino is not honouring its latest value. Similarly, casino operators need to figure out what they can reliably support so that they can be very clear about how price fluctuations are handled. Until BTC fluctuations level out, this will be a problem.

Since many countries don’t recognize BTC, gambling with them is perfectly legal. However, with BTC’s increasing popularity, numerous governments are cracking down to make it a real currency, along with all of the state limits that that imposes on it (no online gambling, no non-state-run gambling, etc.)

As I mentioned, many companies in the industry circumvent these limitations but at great cost and headaches. Introducing another payment option that, at present, isn’t very well understood (technically) makes it an unattractive alternative. But if gaming interactions could also be obfuscated and hidden from the prying eyes of the authorities, BTC would (in my mind) be a very viable option. Something like Tor would do the trick nicely, but that would have to be easily usable by the average player as well. On the bright side, some serious work is being done in this area so to me it’s simply a matter of time.

Kronrod January 7, 2014 at 11:05 am

> If my BTC value doubles tomorrow, I’d want to know why the online casino is not honouring its latest value.

This is no problem if the gambling is denominated in Bitcoins instead of USD. You send Bitcoins to the online casino, and you get Bitcoins back. When thinking in terms of Bitcoins, exchange rate fluctuations do not matter. Also, since the gambling site has mostly fixed and very little variable costs, volatility in daily income does not hurt as much as it hurts someone who delivers physical goods such as pizza in exchange for Bitcoins. I think online gambling is one of the most suitable business areas for Bitcoins. Note that the irreversibility of Bitcoin transactions also solves the pain gambling sites have with credit card fraud. It is not necessarily the case that fraud is less likely, but at least there is no credit card company any more that could freeze funds or issue a chargeback.

bighak January 7, 2014 at 11:23 am

With bitcoin you can do all betting in BTC and base your operation in the most permissive jurisdiction in the world. Foreign government wont be able to do anything.

August January 7, 2014 at 10:12 am

It is far less easy to gamble with bitcoin than with, well, almost anything else. The choke point is buying them. The exchanges are bottlenecks and it is very hard for a whale to put up any serious money and actually buy a sizeable chunk of bitcoin. There are some attempts at creating derivatives, but it remains to be seen how they will actually work, because they will run into the same problems- you actually have to be able to hold X number of bitcoins at some point, and the distributed nature of bitcoin has made this practically impossible so far. This is why some Wall Street character hasn’t already cornered the market. They’d exhaust the exchanges and the price would rise meteorically if they actually had to deliver on a contract with bitcoin. In this case there are many ‘houses’- all the little guys who mine the things.

dead serious January 7, 2014 at 12:45 pm

http://www.reuters.com/article/2013/12/11/us-etf-bitcoin-secondmarket-idUSBRE9BA15520131211

Why someone would buy into this and pay 2+20% or whatever and not just buy the stupid Bitcoins outright is beyond me. Same for gold funds.

August January 7, 2014 at 5:04 pm

I think these guys are sitting ducks. They can’t go from one side to the other easy enough, so they’ll either end up stuck in cash when they need bitcoin, or in bitcoin when they need cash. Additionally, they are exposed to government officials, who will very likely crush them when they decide they want to crush bitcoin.
Still, they’ll probably make enough in the short term to keep those Christmas bonuses coming. It isn’t like they actually care about the future.

dead serious January 7, 2014 at 7:11 pm

Agree with everything you wrote.

Patrick B. January 7, 2014 at 10:12 am

I should mention that the same cryptographic proofs used for BTC verification could be applied to online casinos, which would provide much more insight and fairness than what’s available today (you just have to trust that the casino is generating game play more or less randomly).

Explodicle January 7, 2014 at 11:33 am

They already have “provably fair” bitcoin gambling (see my post above). But this only catches cheating without actually preventing it. The next step is to gamble within a smart contract – the entire mining network would hold the pot instead of a central server, so the only way to cheat would be to hack other players.

Ed January 7, 2014 at 10:30 am

The blog post and comments refer to the direct purchase of Bitcoin as a gamble in and of itself.
However, Bitcoin can also be used as a medium for other gambling games.
Satoshi’s Dice, for instance, is one of the most popular sites that accepts bitcoin.

Gambling on a gamble, one might say.

bighak January 7, 2014 at 11:32 am

Step 1: Disregard as a pyramid scheme
Step 2: Realize that the bitcoin protocol + a liquid btc market allows humans to do all the trades the government doesn’t want to happen. Ex: Gambling, drugs, etc
Step 3: Realize that bitcoin is going to be very useful anywhere where the government fails to satisfy market demand (ex: The unbanked poorest billions of the third world, international remittances, currency control, etc)
Step 4: ???
Step 5: To the moon!

David January 7, 2014 at 11:43 am

BitCoin is currently priced at 100 billion dollars in transaction volumes. So replacing PayPal and wire transfer. To go up another factor of 10, it has to be very popular for international payments snd e-commerce. Beyond that it really needs to be a currency.

Ray Lopez January 7, 2014 at 6:45 pm

@David- seems people are multiplying the nominal spot price of bitcoin as found in MtGox, times the number of bitcoins mined to present, and coming up with a figure like $100B. That’s not the way to value bitcoin IMO. If everybody tries to sell bitcoin it would crash in price. The spot price is not reflective of the true price. The true price is harder to measure but with the analogy to gold it might be determined by the ‘industrial’ uses of bitcoin. Off hand, that might be things like how much illegal drug trafficking is done online and paid in bitcoin, since right how it’s the most widely circulating cryptocurrency.

Anon bitcoiner January 8, 2014 at 10:18 am

Market depth is irrelevant to transaction volumes because each transaction DID have a real-life value, and that value can be measured in dollars. I agree it’s nonsensical to calculate the total worth of all bitcoins this way, and it’s inaccurate to appraise any large bitcoin holdings without using market depth. But with $100B worth of bitcoin DID change hands.

“What’s the GDP of the EU, measured in US dollars? You must calculate this GDP as if all those Euros were sold for dollars… for some reason.”

Anon bitcoiner January 8, 2014 at 10:20 am

(translated into the topic of this blog, I guess what I’m trying to say is that transaction volume is based on >marginal< price)

GamblingWithBitcoins January 17, 2014 at 4:54 pm

Bitcoin is not legal so why online gambling with btc should be legal??

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