Bitcoin’s meteoric rise in the last three months has recaptured the news headlines and the imagination of speculators the world over, especially as it continues to set new highs almost daily.
Pundits are now asking the obvious question: “How sustainable is it?,” considering bitcoin has slumped precipitously following previous rallies. And, of greater interest to readers of this newsletter: “What does this mean for the gaming industry?”
The answer to the first question is “this time feels different” – intentionally ambiguous, for reasons discussed below. As for the second, the spotlight naturally falls on operators of crypto betting sites and their customers. There are benefits – and challenges.
The last big crypto rally saw bitcoin top out close to $20,000 in December 2017, before plunging to less than a fifth of that price within four months. Some observers of the current rally justifiably point nervously at the back end of that boom as a sign of things to come – especially as today’s prices hover close to double the previous peak.
But things feel different, this time around.
In the cryptocurrency world, the fourth quarter of 2020 will forever be remembered as the period when big institutional investors finally arrived to put the long-awaited institutional floor under the value of digital assets seemingly magicked out of thin air.
Reports emerged of firms like Microstrategy and Grayscale Investments plowing billions of dollars to take long-term positions in bitcoin. Grayscale’s chief mused recently that his firm had seen increasing investment into its main bitcoin trust from more conservatively minded pensions and endowments. Wall Street giant Morgan Stanley meanwhile boosted its shareholding in Microstrategy to 11 percent.
Anecdotal accounts have also surfaced of the declining supply of bitcoin available on the biggest cryptocurrency exchanges, driven by a surge in the number of multi-million dollar buy orders. These indications of underlying demand from large investors, combined with scarcity, point in turn to further support for bitcoin prices.
The scope of activity and investment from the financial sector this time around certainly didn’t exist during the 2017 rally, which is broadly regarded to have been driven by retail investors and nascent crypto-focused hedge funds.
With institutional interest, a long-discussed narrative seems to be finally taking hold of bitcoin as a store of value, offering an alternative to gold as a hedge against inflation fueled by decades of easy monetary policy. If this idea continues to gain traction, bitcoin could rise as high as $146,000 in the long term, JPMorgan strategists hypothesise.
All well and good from an investment standpoint, but what does it mean for the gaming industry, and crypto operators in particular? This time, looking at what happened in 2017 is a little more instructive. Some crypto sites then saw a bump in activity and turnover that correlated nicely with higher bitcoin prices, especially as the rally accelerated in the final months of that year.
The accepted thinking goes that in a short period of time, bitcoin customers found themselves much more wealthy in fiat-currency terms (bitcoin rallied more than 17-fold that year). So enriched, these customers now had larger means to indulge in their favourite pastime. (One bitcoin is divisible to eight decimal places, such that holders can still make single-digit dollar bets (or less) with crypto operators, even with bitcoin at $40,000.)
And a similar trend may be emerging with the current bitcoin rally. Cloudbet, one of the longest established crypto operators, saw betting volume in November and December surpass the average of the previous six months by at least 40 percent. Based on daily averages this month, January bets are on a pace to be almost double the wagers placed in January 2020, data from Cloudbet show.
“Bitcoin prices are certainly helping,” a spokesperson for the operator said. “We saw similar trends in 2017.”
It follows that if bitcoin prices slump dramatically, it’s possible that that impacts betting activity as well. The latest rally has certainly been marked by a couple of significant one-day declines, including the 20 percent slump on Jan. 11. Prices have recovered since then, but as of Monday are still about a tenth below this rally’s peak.
And it’s this volatility that turns some off bitcoin for betting: What might be worth “x” amount in fiat-currency terms on one day is worth 20 percent less the next. Thousands of dollars in winnings could evaporate overnight if prices take a turn for the worse.
Of course, the reverse is true if crypto prices rise suddenly. Bettors have to come to terms with these swings, if they want to ostensibly partake of the various advantages of betting with bitcoin.
One solution for the volatility – and an opportunity for crypto operators – is by integrating stablecoins into the mix of cryptocurrencies they support. Coins like Tether (USDT) and USD Circle (USDC) have their values intrinsically tied to a central-bank issued currency (the US dollar in these two cases), which offer bettors all the advantages of blockchain betting without the price volatility of non-stablecoins.
Stablecoin integrations really picked up steam in the wake of the 2018 price crash. Cloudbet introduced five last year, including USDT and USDC. Sportsbet.io, the crypto sportsbook that’s part of the Coingaming Group, offers Tether.
Crypto operators in particular would do well to take heed: Some customers have little appetite for the ups and downs of bitcoin.