Crypto Currency Exchanges: It’s Time to Embrace Online Gambling

This is not the first piece we have written on this topic and it won’t be our last. At least until a major crypto exchange adopts online gambling.

I understand the issues better than most, because I spent 30 years working in finance before I got involved in online gambling. Crypto exchanges want to believe they are part of the “new finance;” they want to be taken seriously. They want to disrupt banking. But it’s been 10yrs since Satoshi Nakamoto brought us Bitcoin, and arguably there hasn’t been a better innovation since. The core blockchain protocol (and the improvements that have followed) were, and remain, the most disruptive aspects. Exchanges that trade Bitcoin and other coins are nothing more than destination website to bring users together. As a group, these businesses are busy investing in OTC & high frequency trading, commercial storage, futures, derivatives, wallets, the crypto related list is endless; but no not gambling (well not traditional gmabling anyway).

The time for self refection is coming — as I write this another crypto winter is underway. What happens my friends when Bitcoin goes to $500 again? How many exchanges will survive? What value then will all these investments in futures (on crypto), OTC trading desks, smart wallets, etc. bring your businesses— can’t you see you are already highly leveraged to the industry? You should be asking how you can increase value to your customers? How can you monetize your relationships with your existing customers the best way? Who do cryptocurrency exchanges serve; themselves or their customers? These are the questions for your business strategy sessions; and, these questions will lead you to the correct investments.

The second biggest problem I face is not getting the exchanges to agree that gambling “might” be a fit; but they want to re-create gambling into something innovative. The want to make sporting events futures contracts (better called prediction markets) and then exchange trade it all in crypto. Look, the gambling industry, particularly the sports betting industry, is a trillion dollar turnover business. Global gross gambling revenues are approaching 100 billion. It’s already a highly innovative industry, just like crypto — they are always looking for new things. Well before Auger and Gnosis, Intrade tried prediction markets, it was moderately successful, but no one can say it was a roaring hit with punters. Today prediction markets are legal in Europe and the UK, but punters continue to flock to the top bookmakers for their wagers. It’s the same with the exchange model — total turnover at sports Betting exchanges is a fraction of total turnover. So this is not the innovation! But this doesn’t alleviate exchanges dual responsibly to a) deliver the product and services that their customers what, and, b) innovate in crypto currency solutions.

First, at least internally you need to admit that 80-90% of your active traders, whether you are a futures exchange or a regular exchange are losing money; and you constantly need new ones. It’s just like gambling. For the exchanges without futures, the churn, as we call it in gambling, is less sever. But it’s still there and you know it. The problem is that you dont understand who your customers are — they are punters at heart. Your businesses are like poker, fantasy sports and similar companies, 10% of the experts eat 90% of the rest. So if you want to be part of the banking revolution; then work with Governments and launch stable coins or other innovative financial products that actually can revolutionize banking and maybe disrupt Swift. But trading Bitcoin futures isn’t a solution — these futures a contracts are not professional risk management tools you are offering, they are gambling products. You might soon be surprised, but Bitcoin could vanish to obscurity sooner than you think.

While you all want to add betting exchanges and prediction markets, let me give you something far better. Cryptocurrencies are the real innovation in gambling, not smart contracts that make gambling transparent. Players don’t want slow running games on blockchain, they just want the following: confidence the bookmakers will pay, security of the player funds and fast payments. So gambling is a trillion dollar turnover industry and none of that exists today! Today everyone has to trust a casino or sports book and all payments are done in fiat, usually credit cards. If Bitfinex started a sports book, and made Tether the only way to wager, it would change gambling forever. Think about it here, just by using Tether, a blockchain enabled stable coin, winning bets are paid instantly and the blockchain would afford the opportunity for the sports book to provide transparency on both the funding and the company’s ability to stake games; this is the holly grail of gambling regulation. And it all can be still done on centralized servers.

But before the exchanges understand this simple fact, they need to understand that Bitcoin isn’t the future (the forks have a better shot). Bitcoin is just a wager or maybe a game. The technology is dated and it’s definitely not the best choice to ether store wealth or transfer it. Satoshi Nakamoto must be rolling around in frustration with the abomination that futures trading has brought (whose added leverage will usher in the demise of Bitcoin trading). Crypto exchanges need to be more humble and realistic. They have an opportunity to disrupt a trillion dollar industry and they are just ignoring it because they want to believe they are financial companies. Well, listen up folks, financial companies are getting into gambling! Cantor Fitzgerald has been involved for over a decade, and now Interactive Brokers is getting into the game. Believe me it won’t be long before Goldman Sacks (who has been making loans to Casinos for decades) jumps into the game too. But it’s the large online crypto exchanges that have the right users now — millions of potential users. And they will cross over fast; and, if you offer USD/EUR back stable coins, you will even pick up some traditional fait players (who may crossover to crypto trading); eventually you will have the chance to disrupt an entire industry.

But that’s only part of the reason why you need to do this now. The bigger reason is that there are too many exchanges. Yes, you all dealt with your declining volumes in 2019, by adding futures- I am sure you are all proud. But all you have done is increase unregulated financial leverage into the crypto currency ecosystem. And this leverage will ultimately lead to a collapse. You took trading turnover from around 8% of total market capitalization in 2017, to 25% in late 2019, but this came at a huge cost that will some be apparent in the coming months when prices collapse and futures go into backwardation.

Instead, I urge you to look at gambling as a fiat gateway; and a new businesses that will not only survive any crypto currency price changes but compliment revenue volatility when it comes. You will be offering your exiting clients exciting new products and your business new revenue streams. Gambling is entertainment, it’s not a dirty business; it’s less dirtier than futures on crypto.

As someone who has worked in both finance, gambling and crypto, I understand the synergies here, which I why I am going to keep writing about this opportunity until you get it!