Why fees could be the biggest hindrance to crypto gambling

17 September, 2020

Utility is a subject of much debate within the cryptocurrency community. The fact is that cryptos like Bitcoin and Ethereum need more utility - which is to say, ways to spend them like cash - for them to become the alternative monetary systems many hope they will be.

Online gambling is considered one of the best industries for providing that utility. But there is a problem: transaction fees.

Recent price increases of both Bitcoin and Ethereum demonstrate just how problematic transaction fees can be. When it comes right down to it, the average consumer who would choose cryptocurrency over some other payment form is less worried about the security and politics of each option. He or she is more concerned about cost and convenience.

Cryptocurrency seems ideal for the gambling industry. It is safe, secure, and relatively fast. In most cases it is also relatively cheap in terms of transaction fees. But that is not always the case, as Bitcoin and Ethereum recently demonstrated. And without changes to the system, transaction fees could prove the biggest hindrance to crypto gambling moving forward.

People looking to spend

Before getting into the details of transaction fees, it is important to establish that people are looking to spend cryptocurrency. Those of us in Asia, Europe, and North America tend to look at Bitcoin et al as securities more than fiat alternatives. But that is not the case everywhere. Take Latin America, for example.

Latin American is third from last in terms of total crypto volume. The region represents less than 10% of all worldwide crypto activity. But what they do with the cryptocurrency they have is important. In Latin America, crypto is not an investment. People do not buy it, wait for the price to rise, and sell it for a profit. No, cryptocurrency is daily currency in many Latin American countries.

The recent Chainalysis 2020 Geography of Cryptocurrency Report clearly shows that Latin America is a leader in both payments and remittances, as a percentage of GDP. 1 Remittances are especially important. Some 90% of all cryptocurrency flowing into Latin America is coming by way of remittances.

It is key to understand that the banking system in many Latin American countries excludes a large percentage of the general population. Simply put, average consumers cannot meet the requirements to establish bank accounts and use banking services. Thus, they are left to live in a cash economy in which their national fiats are questionable. Large numbers of them are turning to crypto as an alternative.

Spending and transaction fees

It is clear that people want to spend Bitcoin, Ethereum, and other cryptocurrencies the same way they spend fiat. What is interesting is that many merchants - including those in the online gambling sector - offer free crypto transactions. But nothing is ever truly free. Someone pays a fee every time a cryptocurrency transaction occurs. It is just a matter of who.

Coin miners process cryptocurrency transactions. Those miners earn profit in two ways. First, they are rewarded for their work in newly released coins. Second, they charge a fee to process the transactions. The amount miners earn differs from one crypto platform to the next.

Given that Bitcoin is the clear leader among all cryptocurrencies, these become the standard by which everyone else is judged. Bear in mind that Bitcoin went through its most recent halving earlier in 2020. Halving is an exercise that cuts in half the amount of coin miners earn, thus reducing the speed at which new coin is released and helping maintain value by limiting supply.

If you are a miner and your mining revenue is cut in half, what are you going to do? You are going to charge more to process transactions. That is exactly what happens. But there is another issue at play: Bitcoin's limited scalability. Because it doesn't scale well, increased traffic slows down processing times and encourages miners to concentrate on those transactions with the highest value. People willing to pay more get their transactions processed faster.

This explains why Bitcoin's recent flirtation with $12,000 a few weeks ago led to an average transaction price of USD $6.47 in August (2020). Ethereum fared even worse. Its transaction price reached $6.68 in August. Both cryptos became virtually unusable as money at that point because the fees were too high.

Gamblers aren't into fees

All of this brings us to the question of gambling with cryptocurrency. Most of your reputable online casino properties give visitors access to a payments page that lays out all of the deposit and withdrawal options. Visitors can scroll through the options and note everything from transaction time to fees charged.

Some online casinos charge for cryptocurrency deposits and withdrawals. Others do not. Those that don't obviously have an advantage. If you are an online gambler looking to make a deposit, are you likely to go with a casino that charges or one that doesn't?

How do those casinos offering free crypto deposits and withdrawals get away with it? They either absorb the fees themselves or they work with payment processors who do not charge them fees. In such cases, the processors are absorbing the fees. The point is that someone is paying the transaction fees at some point along the line.

It stands to reason that payment processors and merchants will not continue absorbing fees if these keep going up. At some point, those fees will have to be passed on to the consumer. Therein lies the problem for online gambling. If cryptocurrency ever does become the de facto payment system for the gambling industry, any incentive to waive fees will suddenly evaporate.

Consumers have different needs

Cryptocurrency proponents have done a particularly good job promoting things like decentralization, security, and privacy. All those things constitute very good reasons for using cryptocurrency. But they do not mean much to the average consumer who doesn't have philosophical objections to fiat. To most consumers, cryptocurrency represents just another payment system no different than debit cards and e-wallets.

Consumers have different needs compared to idealists and investors. Latin America proves that. Consumers in those countries are not all that concerned about daily Bitcoin price fluctuations. They are not concerned about buying low, selling high, and doing it all on a decentralized network that is not subject to government snooping.

What do they care about? Going to the store to buy food for their children. They worry about paying for housing and healthcare services. If Bitcoin makes it possible to pay their bills within a system that doesn't allow them to have traditional bank accounts, they will use Bitcoin.

You could make the case that the same mentality exists within the gambling community. Your average player looking to get in a few rounds of Mega Moolah or Pixies of the Forest probably doesn't think a whole lot about decentralized finance. He thinks about spinning the wheels and watching the symbols fall in winning combinations. Make it easy and cheap to play and you have his attention.

Fees don't have to be problematic

The good news in all of this is that transaction fees do not have to be problematic for gambling operators. At the same time Bitcoin and Ethereum were seeing transaction fees in excess of $6.00, Bitcoin SV had an average transaction price of less than $0.01. They were not alone. Litecoin, XRP, Dash, and others consistently have much lower transaction fees.

At this point, the issue seems to be one of scalability. Transaction fees will always be part of the cryptocurrency equation for the simple fact that miners have to make a living. A truly scalable network allows a free flow of traffic that encourages miners to make their money on volume rather than individual transactions. Furthermore, less congestion means more competition for every transaction. That ultimately keeps transaction prices low.

An analysis of scalability compared to transaction fees suggests that Bitcoin may not be the best choice as a payment system for online gambling. Bitcoin is also limited in its usefulness. Its only real function is payments. Ethereum, Bitcoin SV, and a number of others have practical applications above and beyond payments. Thus, they seem like more attractive options for an all-in-one platform.

When free markets prevail

Wrapping all of this up is the simple principle of free markets. When free markets are allowed to prevail, consumers make choices based on their own best interests. We see that very clearly in Bitcoin's inability to start that bull run everybody was talking about back in January. Bitcoin's two biggest problems are scalability and transaction fees.

Free markets will not sustain high transaction fees when competing networks offer substantially lower fees. That is just the reality of personal economics. It is a reality that could be hindering cryptocurrency as a payment system for gambling.

Digital currencies of some sort are poised to overtake minted currency within the next few years. Will private cryptocurrencies be able to compete? That depends on a variety of factors, including transaction fees. If they eventually cannot compete in the marketplace of daily commerce, they are going to have a hard time competing in the gambling arena.

What is the lesson here? Address scalability and transaction fees. Fix the problems inherent to both and you create utility. Once you do that, the gambling industry opens up nicely.

1) How Latin America Mitigates Economic Turbulence with Cryptocurrency