Gambling is big business, and online gambling represents a significant and growing proportion of that business - about 8% currently.
Research company H2 Gambling Capital, which values the online gambling market in terms of gross winnings, put the global market value at €21.73bn ($28.54bn) in 2012. Furthermore, the firm expects a 9.13% compound annual growth rate through 2015.
Right now bitcoin gambling only accounts for a tiny percentage of the total of online gambling revenues. However, it is clear that the opportunity exists to make significant income within the industry and, with bitcoin's advantages in terms of low-cost, speedy payments, cryptocurrency-based gambling firms are doing their best to do just that.
CoinDesk spoke to some of the bitcoin gambling community's experts to see what challenges they're encountering along the way.
The bitcoin world loves to gamble, in one form or another. In his book, The Anatomy of a Money-like Informational Commodity, Tim Swanson points out that half the transactions on the bitcoin network were being used to transmit bets to SatoshiDice, one of the earliest bitcoin betting sites, created by Eric Voorhees.
Further, an analysis in August 2013 showed that roughly 5% of the value of all bitcoin transactions in June that year were flowing through SatoshiDice. That means lots of very small transactions, which is, after all, one thing that cryptocurrencies are very good at.
Ivan Montik, CEO at SoftSwiss, provides online casino software for entrepreneurs, and its solutions support fiat and bitcoin gambling. "We've got about 400 requests for the launch of a bitcoin casino in the last six months," he said. "We constantly have three to five casinos in the set-up phase, and could have had more if we had more resources."
Not all bitcoin bets are low in value. Montik said that there are some high rollers in crypto-land:
"On one client website, launched just about a year ago, there are single wagers reaching 200-400 BTC. The total amount of bitcoins wagered on all of the sites operating with the SoftSwiss platform is equal to $10m per month."
The regulation challenge
Cryptocurrency's success in this market depends on several factors. One of the most important is regulation and, notably, SatoshiDice doesn't operate in the US market, because of the strict gambling laws encountered there.
In 2006, the US Justice Department introduced the Unlawful Internet Gaming Enforcement Act (UIGEA), designed to quell the rising tide of Internet gambling sites. It made it illegal for US players to process payments using US banks.
In April 2011, the US government raided the three most popular online poker sites operating there, in an event known as 'Black Friday'. This had a chilling effect on online poker sites in the country.
Bitcoin, however, has emboldened some entrepreneurs, who are openly allowing US players to gamble using the cryptocurrency. One of these is Seals with Clubs, managed by seasoned poker player Bryan Micon.
"It would be trivial to circumvent some ban. Seals is open to the world. There's no banking at all done on the site. It's a pure bitcoin poker site, so this is a totally brand new thing," said Micon. "It's only been a few years for the legal world and there's nothing at all that says anything about this protocol."
There are also signs that individual states are softening their approaches to online gambling, in any case. Delaware has allowed online gambling, as have New Jersey and Nevada. The latter state has also passed a law enabling it to form partnerships with other states to let their residents gamble in its online casinos.
Slowly, then, things seem to be opening up in the US, which is creating a more positive environment for cryptocurrency gambling sites that are already operating there, anyway.
The importance of innovation
Another thing working in cryptocurrency's favour is the innovative nature of its community. The cryptocurrency concept is itself entirely new, built on the cryptography-based decentralised autonomous networking principles introduced by Satoshi. In such an innovative environment, is not surprising that new technologies and gaming models have sprung up.
Adrian Scholz, founder of SatoshiBet.com, argued that the 'dice' gaming model on which sites like SatoshiDice were built is an example of such an innovation.
"This game did not exist in online casinos before bitcoin, yet it turns out to be more popular then games like roulette and blackjack."
There are other breakthroughs that came from the crypto gambling community. "Take Provably Fair, which created a trustless shuffling system," he said. "Take HTML5. Most of the classic online casinos run games still require Flash or Java plugins."
"Take investing! Just-dice introduced the concept of allowing players to be part of the bank, which turned out to be pretty much the ultimate marketing vehicle," he concluded.
There are other areas of innovation, too. In particular, mobile gaming is becoming increasingly important.
Cloudbet, formed in 2013, is a sportsbook and casino environment where players can deposit instantly, bet, and withdraw again as soon as bets are graded. The firm recently launched a mobile casino, and is preparing a mobile sportsbook.
"We're now seeing that a lot of gaming industry experts are coming in with a wealth of gaming industry knowledge and experience," said Cloudbet spokesperson Leandro Rossi, in an indication that the industry is maturing.
Challenges to overcome
There are still challenges for those wishing to start bitcoin casinos, however, and different experts see different threats.
Scholz singled out legislation as the biggest issue. "We saw major operators that were willing to introduce bitcoin (for example Vera&John held out because of the unclear state bitcoin is in," he said. Although now, that casino has taken the taken the plunge.
Mitonik pointed to marketing as another significant problem. Effectively, as the space begins to fill out, it could become difficult for new entrants to make themselves heard above the noise.
"If you've never dealt with marketing before, you'd better prepare the budget and let professionals work on it."
Mike Hadjuk, founder of Infiniti Poker, argued that security is the biggest problem. "Nobody is impermeable. Even the Pentagon can get hacked. To me that's our number one concern," he said.
Hadjuk is another example of an innovator in the cryptocurrency gambling space, having created a service that would allow players to view each other using live web cams.
The soft launch of his service was compromised by players creating multiple accounts and using them in combination to steal no-deposit credits. He is now preparing for a Q4 full launch.
Micon also highlighted security as an issue:
"It's about keeping the bitcoin safe. That's not just about securing cold storage - it goes beyond that. It's about looking after issues such as automated cash-outs, to help sites scale without allowing criminals to take advantage of poorly configured scripts.
Seals with Clubs was hacked last December, and lost 42,000 passwords in the process. Micon explained that the team behind the site learned a lot from a security perspective. "No one lost their coins. We were able to drastically improve up to and beyond industry standards for our password table," he said.
Perhaps the biggest challenge for cryptocurrency gambling sites, though, is the uptake of bitcoin itself.
Cloudbet's Rossi said:
"There is still a high educational barrier to entry. People can transact with Visa and MasterCard without understanding how the payment network works, but to transact with bitcoin there is still a requirement of technical knowledge."
The company has launched mainstream campaigns to educate potential players about bitcoin, but this is something that the bitcoin community has to broach collectively, he indicated.
The good news for bitcoin gambling sites is that they are still early in the process, meaning that there is lots of room for disruption, said Micon:
"Some kid is going to come up with some bitcoin gambling game. They will be 12 years old and they'll make $480,000. That's just what's possible."
Possible, for sure. But with a few challenges along the way.
Gambling image via Shutterstock.