The first hand of online poker started on January 1, 1998. The software was primitive and the games were limited (only a single stake of a single game was offered). Its popularity grew as time went on, eventually able to support games 24/7. Most players were on dial-up connections and technical challenges were common. However, it was the start of what would become a multi-billion dollar industry. 5 years later Chris Moneymaker won the World Series of Poker, taking in $2.5 Million in prizes after winning a series of Internet tournaments to qualify for the low price of $39. This led to the industry growing exponentially for several years until there were millions of players worldwide leading to over $2 Billion in revenue in 2005.
After Chris Moneymaker’s win along with the increased coverage on ESPN, Internet poker took off in popularity. Depositing was easy. Most sites took a credit card and would pay any winnings out by check, many times very quickly. Many sites began taking e-wallets as payment- the most popular being Neteller. Players would manage their bankrolls between different sites through these e-wallets by withdrawing from their bank accounts, depositing into their various poker accounts, and if they were fortunate enough to come out ahead, reversing the process to get their money back.
Online poker sites still had issues with payment processing. Fees were quite substantial when paying for using credit cards or payment processors, which were passed on to the customer through a higher rake (fees taken out of each pot). Another problem was stolen credit cards. One payer would deposit using a stolen credit card, play against an accomplice and intentionally lose all of his money to him. When the credit card came back as stolen, the poker sites were unable to recover money since the accounts linked to the stolen credit cards were empty. It was often times difficult to prove that the accomplice was actually involved and sites did not try to recover the funds from players they could not prove were involved. These fees and chargebacks were a major expense for Internet poker sites. However, this was considered a cost of doing business and the industry tried to manage these possible losses through screening customers and limiting deposits.
Additional challenges hit the Internet poker world when the UIGEA was passed in 2006. This act made it illegal for banks to fund illegal gambling (a term that was never defined). Banks erred on the side of caution and blocked payments to most online gambling sites. One major player, Party Poker, left the US market and paid a fine to avoid further penalties. Three major players remained in the US market- Cereus (through their Ultimate Bet and Absolute Poker brands), PokerStars, and Full Tilt. These sites claimed they were not operating illegal gambling operations, claiming poker was a game of skill and not subject to the regulation. However, most banks denied payments to these sites anyway. The sites then used payment processors that disguised the true destination of the funds. Many of these payment processors were not reputable and one even reportedly stole $100 Million from three major poker sites. This lasted for several years until what was termed “Black Friday” (4/15/2011) by Internet poker players. The Department of Justice in the United States seized the domain names of all three of these sites along with several bank accounts of payment processors. Online poker in the US crashed to a halt.
I came across Bitcoins only 2 weeks before Black Friday and it got my attention. One of the largest costs in Internet poker was payment processing (the other being advertising and promotions). Bitcoin seems to resolve many of those issues by reducing the issue of chargebacks and reducing the ability of governments to shut down payments. Internet Bitcoin poker does currently exist at betco.in. While microscopic compared to the rest of the industry, there are games running most of the time. The site is not very sophisticated, has only a handful of players, but overall the experience is not much different than 1998. The industry is much more mature than in that time and there are millions of player starving to play. Bitcoins may be the answer.
The adoption of Bitcoins in the poker community could be a game changer for Bitcoin enthusiasts. There currently are only 6 million bitcoins in existence. In 2005, the entire online poker revenues was over $2.5 Billion. While no official figures describe how much money players had in their accounts, it would be safe to assume that at any point in time, at least this amount was present. The entire Bitcoin economy is worth about $10M at the present time. If only 0.01% of the Internet poker market switched to using Bitcoins, this would mean over $25M would be tied up just in that industry. With only a limited number of Bitcoins, this means that gamblers would drive the price of Bitcoins up tremendously. Any significant adoption by the industry would force an astronomical rise in the price of Bitcoins.
Some time in the future, we may see an online gambling industry centered on Bitcoins. They offer many advantages to credit cards and linking directly to bank accounts. Sites no longer have to worry about fraud and chargebacks and have significantly less transaction fees. It is trivially easy to set up a Bitcoin payment system and trivially easy to pay players when they are done gambling. However, there are some steps that need to be taken before Bitcoins can be taken seriously in the world of online gambling. Currently the mechanisms for obtaining Bitcoins is not very friendly for the casual user. Getting money to a large exchange such as mtgox may take days and give significant fees. Buying coins on CoinPal works for small transactions but has a maximum transaction limit. OTC trading also requires more work than a typical gambler is used to. This represents an opportunity for either online gambling sites or payment processors to provide a service to the general public. A similar payment service for cashing out Bitcoins to local currency would also need to exist to satisfy payouts. Purchasing Bitcoins has been one of the biggest challenges for the Bitcoin economy. Adding the support of a large industry with deep pockets could help make that process much easier.
With the passage of the UIGEA and the recent Department of Justice raids, Bitcoins may be a solution for the industry. We are already seeing a growing Bitcoin gambling economy. The Internet gambling economy is already growing through several different sites: betco.in, BitLotto, Dragon’s Tale, and BTCSportsBet. If this niche market grows toward the mainstream, the demand for Bitcoins would rise significantly. Online gambling and poker may be the first widespread adoption of Bitcoins and could change the landscape significantly.