For the brave few for whom the volatile world of cryptocurrency investing is just not exciting enough, a growing number of bitcoin and alternative coin casinos are setting up shop.

Cryptocurrency and gambling appear to go hand in hand. Of course, gambling on the internet is nothing new. Online poker has been a staple of the internet gambling industry for more than a decade, and it isn't difficult to place conventional bets online outside of the U.S. Soccer, in particular, has seen a boom in this kind of traffic due to the ongoing World Cup in Russia.¹

But cryptocurrency brings something new to the proverbial gambling table, at least where it's legal - provably fair gambling. In essence, the same mechanisms that ensure that funds stored in blockchains remain securely stored can be remixed to demonstrate that an online game is not rigged or otherwise stacked in favor of the house. In other words, it's possible to use blockchain technology to secure the methodology of the game in question, and, as a bonus, cryptocurrency itself can be used as the betting medium. This differs from traditional gambling venues in that some kind of trusted third party, be it the casino itself or a government regulatory agency, has to conduct periodic audits to ensure that gambling best practices are in place and the potential gambler has some semblance of a fair shot.²

Cheating can still occur on the fringes of the audit, however, and there is still that thorny trusted third-party issue to deal with. Provably fair cryptocurrency gambling essentially conducts a hidden audit over the course of each individual gambling, offering a level of security that just wouldn't be possible in a brick-and-mortar establishment or even a traditional online gambling venue.

We're first going to take a look at how the technology works. We're then going to try to put together a snapshot of the legal issues involved with so-called bitcoin casinos and try to get a sense of the overall size of the market. Finally, we'll try to get a sense of where the bitcoin gambling industry as a whole is headed.

Provably Fair, Broken Down

Provably fair gambling boils down to using cryptographic hashes to confirm data on both sides of a transaction - in this case, a bet or a game. It's not wildly different than the encryption used to handle normal bitcoin transactions, though a few extra layers need to be applied to account for the unknowns surrounding placing a bet. In order to breeze through the tech a little more easily, let's put a hypothetical spin of the roulette wheel under the microscope.³

When a gambler spins the virtual roulette wheel, a tile on the wheel is selected via a random number generator. The spin's result is made up of a unique data fingerprint and a secret number, randomly generated. That number is unique to that particular spin because it is generated by a hashing algorithm. The gamer then "nudges" the wheel along and generates a second random number. The game plays out, and here's where provably fair really kicks in. After play concludes, the secret fingerprint that was originally generated can be checked by the gambler to ensure that the initial spin plus the gambler's random number matches the final result. The gambler, in essence, conducts an instant audit using the data that was encrypted - unalterably - on the casino's blockchain.

This process can be applied to a variety of gambling scenarios, including card games. Rather than a virtual roulette spin, the hashing and fingerprint method is applied to shuffles. Apart from the mechanics of each individual game, the process remains the same. The casino introduces a random element, the player introduces a random element, and both can verify that a fair game took place.

The real-world equivalent would be allowing a gambler to physically spin the roulette wheel or shuffle the house's deck of cards themselves after the professional game runner took his or her turn - with the added bonus that the human potential for error has been removed from both parties, as all random numbers/spins/shuffles are conducted electronically.

The Legal Situation

Cryptocurrencies have the potential to transcend national boundaries. Indeed, that was a key point of the cypherpunk movement that ultimately led to Satoshi Nakamoto's landmark bitcoin white paper.

The reality is that national governments remain very much concerned about what kind of gambling takes place within their national borders. The U.S., for instance, has relatively strict gambling laws, and online gambling sites may not be based in the U.S.⁴

There's a catch to this, however. Gambling sites based outside of the U.S. may accept U.S. players, as it is technically not against federal law to gamble outside of the country. This can vary a bit by state, but the chances of prosecution are extremely low. Quite simply, the volume of online gambling and the difficulties involved in tracking money moving both online and outside of the U.S. makes enforcement a challenge.

This challenge is doubled when cryptocurrencies enter the mix, as there are currently only two ways the U.S. government can find out about your crypto holdings. You can voluntarily surrender the information, such as on a tax form, or the government can pressure an exchange to reveal certain information under as-yet vague regulatory statutes. Some exchanges, like Coinbase, have already caved to U.S. government pressure in exchange for - hopefully - more leeway in conducting business within the U.S.⁵

Money to Be Made

The size of the online gambling industry and its future are directly intertwined. The size of the global online gambling industry is estimated to be almost $38 billion. For comparison, the gross gambling market yield globally is about $450 billion.⁶ So, online gambling makes up a sizable chunk of all gambling across the world, and that share is likely to grow as adoption increases.

While it's hard to put concrete numbers on the size of the provably fair cryptocurrency gambling industry, it can safely be assumed to be a fraction of the online gambling total. However, provably fair is steadily gaining acceptance over traditional online gambling outlets due to its automated audit system and relatively simple ease of use. Since the online gambling industry has gained in dollar value every year since 2009, it stands to reason that the trend will continue - particularly as more and better outlets become available. One conservative estimate puts the online gambling industry at $60 billion by 2020.⁷

In short, it's fairly straightforward to predict that bitcoin casinos will grow in size and relevance as time goes on. bitcoin adoption will speed along this trend, and the somewhat murky U.S. laws surrounding the situation can actually be leveraged to favor bitcoin gambling over traditional online gambling. Fiat currency used for gambling abroad has been the basis for the few U.S. state prosecutions of online gambling, and that occurred when the Internal Revenue Service stung an individual for claiming winnings gained by online gambling.

Cryptocurrency introduces a level of insulation from those kinds of government processes. It is most assuredly not legal, and this cannot and should not be construed as legal advice, but conceivably a gamer in the U.S. who wins big on an offshore site and stores his or her money in crypto in a private wallet may never have to disclose her or her winnings to the U.S. government. This is much harder to accomplish with fiat currencies. For emphasis - under current U.S. law, this scenario would definitely be viewed as tax fraud.

Luckily, the crypto world encompasses much more than just the U.S., and this will undoubtedly advance the state of bitcoin casinos and bitcoin gambling in general through at least the 2020 time-frame.

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1) Online Betting Firms Gamble on Football Crazy Nigeria, Africa News.
http://www.africanews.com/2018/06/26/online-betting-firms-gamble-on-football-crazy-nigeria/

2) Nevada Gaming Control Board: Audit Division Overview.
http://gaming.nv.gov/index.aspx?page=54

3) What is Provably Fair Gambling, BetChain.
https://www.betchain.com/provably-fair

4) Online Gambling - Is It Legal? LegalZoom.
https://www.legalzoom.com/articles/online-gambling-is-it-legal

5) Coinbase tells 13,000 users their data will be sent to the IRS soon, The Verge.
https://www.theverge.com/2018/2/26/17055264/coinbase-cryptocurrency-tax-irs-compliance-court-order

6) Gambling Industry in the US, Statista.
https://www.statista.com/topics/1368/gambling/

7) WinIOTA and the Future of the Gambling Industry, Medium.
https://medium.com/@WINiota_42868/winiota-ico-and-future-of-gambling-industry-71ea6f00d877