I have received a lot of messages, comments and emails over the last week basically saying ‘gambling is not investing!’ Well the people who sent me this message are 100% correct, but only because they think I am actually gambling on a Bitcoin site. So before I delve into understanding Bitcoin gambling investing further, let me state the obvious first:
- No one will ever make money gambling on a Bitcoin casino or Bitcoin dice site (in the long run).
- I do not gamble on any Bitcoin casino or Bitcoin dice site with my Bitcoins.
- Bitcoin casinos are not that different from a casino in Vegas, in that, the house always wins.
- I am investing in Bitcoin gambling sites as the house and I call that Bitcoin gambling investing.
What Is Bitcoin Gambling Investing?
So using the Vegas example again, a lot of money is required to run/build/create a casino and also pay out the occasional winners. If you run a casino and players want to bet $10,000 on black or red on roulette, you have to be prepared to pay them $10,000 if they win.
What happens if that player has a lucky streak and wins 10 times in a row placing $10,000 bets? You now have to pay out $100,000 dollars!
So this is where a bankroll comes into play. As a casino you need to ensure you have enough money to pay out the winners. In Bitcoin gambling sites the general rule of thumb is that you need to set the maximum amount someone can win to 0.5% of your bankroll (if you have a house edge around 1% – if the house edge is higher or lower this ratio changes) to avoid a catastrophic event happening to your bankroll.
Using the scenario above and assuming $10,000 is the maximum someone can bet (ignoring that roulette has a much higher house edge), then the bankroll would need to be $2,000,000 ($10,000/0.5%) to allow for a player to bet a maximum of $10,000 a bet.
$2,000,000 is a lot of money! Most Bitcoin developers that have the skill set to build a casino do not have access to a bankroll of that size. And in today’s market, players want to bet $10,000 and sometimes more on a single bet. So the casino owners need to get a sufficient bankroll which usually requires them to attract investors and creating a crowd funded bankroll.
How Do Bitcoin Casinos Attract Investors?
To get investors for a crowd funded bankroll, casinos need to make it an attractive place to invest. In this case they need to share a high percentage of the sites profits with investors. The standard today is that bankroll investors get anywhere from 50% – 80% of the sites profit if they invest in the bankroll.
The exact terms might change as to whether it is a share of the profit/loss or a percentage of profits after the house takes their cut first. Always read the fine print for these details as a straight profit share is very different to when a casino takes their cut off of every bet wagered first.
The profit split given to investors (the 50% – 80% share of the house edge) is evenly distributed to investors based on their share of the bankroll. So if you have 1 Bitcoin invested in the bankroll and the bankroll is 100 bitcoins, then you get 1% of the bankroll investors share.
What happens if a player has a string of wins?
There is only one reason you should worry about a player or ‘whale’ having a big win and impacting your bankroll and that is if the bankroll is not managed correctly. If the bankroll is managed correctly (meaning the maximum win is a very small percentage of the total bankroll), then statistics will do the rest and you should very rarely suffer any long term losses due to to a player winning.
It is easy enough to simulate the whale scenario in excel using a random number generator (or better program for the technically minded) and see just how impossible it is with a 1% house edge and a 0.5% maximum win to destroy the bankroll over time. As opposed to showing theoretical examples below is the real investor returns at Crypto-Games over the last two years:
The investor returns over time in their bankroll has been very smooth. This comes down to the fact that they have a 0.8% house edge (on dice – larger on other games) and a maximum win set to less than 0.5% of the bankroll, plus they share 70% of the profits with investors. I have interviewed one of the founders of Crypto-Games here if you are interested in learning more about them.
What is a poorly managed bankroll?
A poorly managed bankroll is where the maximum win is a large percentage of the total bankroll, anything over 1% is significantly riskier than 0.5%. This means that returns can be chaotic and you may lose in the short to medium term. A large maximum win as a percentage of the bankroll is usually called ‘leveraging’ your investments in Bitcoin Casinos. This is where a site lets you leverage your investment so you get more exposure to the bankroll. That being said not all leveraged investments are bad.
I currently have over 5 Bitcoins invested in YoloDice that is leveraged at 10x (although the site sets the maximum win from a bet at 2.5% of the bankroll so it is arguable 5x). However, the saving grace for YoloDice is that they share 80% of the 1% house edge with investors. So at other sites where I am only getting around 0.5%, at YoloDice I will be getting 0.8%, so this increase in profit share decreases the risk of leverage slightly (It is still a risky investment).
What sort of returns can I actually get?
This completely depends on a number of factors which can include:
- Does the casino attract a lot of betting volume? The more the better.
- Does the casino share a lot of its profit with investors? The more the better.
- Does the casino share profits and loses with investors or does it just take a flat cut on every bet? A share of profit and losses is much better for investors.
- What are the expected returns (the betting amount x the house edge x the profit share with investors) relative to the size of the bankroll. The higher the expected returns relative to the bankroll size the better.
I have had 5 Bitcoins in total invested in different sites for the last 8 months. To date the 5 Bitcoin investment is now worth over 7 Bitcoins, so I have made over a 40% return on bitcoin over that time frame (much higher in US dollar terms due to the rise in Bitcoin). You can find all my month recording and notes at Bitcoin Gambling Investments or just look at the weekly chart of returns in the plot below as a percentage:
40% Returns In 8 Months! This Can’t Be safe? What’s The catch?
It does sound too good to be true and it is for the following HUGE risk factors:
- Generally no one knows who runs these sites, and they can and have run away with investors money in the past. My best guess is that over 10,000 Bitcoins have been stolen from sites that have run away with everyone’s money.
- The site could get hacked and your Bitcoins could be stolen.
- The site may not get enough traffic and betting volume so your returns are low.
- The site could be highly leveraged or have a long bad streak and you lose money.
- The site gets shut down for legal reasons and all the Bitcoins are taken.
Diversification is a arguably a safer way to invest in Bitcoin gambling sites, as it can reduce your risk of a catastrophic event. However, there is not that many reliable sites that you can actually invest in, so diversification is limited. Qualitative factors are worth taking into consideration as well that can include:
- Negative or positive feedback on any forums or review sites.
- How long has the site been in business? The longer the better.
- Are the site owners making money? My opinion is if the site has a huge bankroll but their profits are small, there will be a temptation for them to steal the bankroll.
Finally, most of the sites I have invested in I have interviewed on the Bitcoin Businesses page. So check them out as well if you are considering investing in any Bitcoin gambling site and if you have any questions we can ask them directly.