Tag - poker

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On Being Early and Being Right
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Why I’m Betting The House On eSports, Part II
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Why Mt. Gox May Be Headed for Bankruptcy
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Dear Bitcoin: Patience is a Virtue. Love, Poker

On Being Early and Being Right

Over the past ten years or so, I have been relatively early to three highly nascent, wild wild west style industries: online poker, daily fantasy sports and bitcoin. In two of them – poker and bitcoin – I experienced significant professional and financial successes. In the other, daily fantasy, I lost my shirt. With bitcoin’s recent rise I figured it could be instructive to briefly explore the analogies between the three and develop a framework for spotting the emerging markets of the future.

On Being Early and Being Right

Jeremy Liew, General Partner at Lightspeed Venture Partners has repeatedly said that if one wants to spot emerging modes of communication and behavioral change, look to the products and services teen and tween girls are adopting. Similarly, I would argue that when it comes to emerging professional industries or financial markets, one should look towards how college aged kids are spending their time as well as the long-tail of the internet’s forums (including Reddit).

I believe this is the case for two primary reasons: (a) college aged kids have a substantial amount of disposable time and some variable amount of disposable income and (b) they are highly incentivized to increase their amount of disposable income – at a time in their lives when losing what little they have is not a significant loss. This combination pushes college students towards higher risk, higher return opportunities, some small percentage of which will materialize into mainstream markets and industries.

For example, although I’d played poker with my friends in high school, I found my way into online poker in a professional capacity my Sophomore year of college as the World Series of Poker was beginning to expand. It was the ideal format for a college student: success demanded thousands of hours of gameplay and continual learning and discussion via online forums. Very few adults with either part-time or full-time jobs could afford that much disposable time. My first startup, Cardrunners, where I ran marketing, had thousands of college students as customers, and many of the site’s pros were poker players who had made their millions during college.

You’re seeing a similar evolution in the world of professional gaming, or eSports; except that in eSports, the pros are often even younger, some still in high school. It is for the same reason: an adult with a full-time job, even one who loves gaming, will struggle to put in the tens of thousands of hours it requires to become great. These industries that demand obsessiveness are highly biased towards youth.

I discovered bitcoin in 2012 after the poker industry’s Black Friday as it was one of the few mechanisms to deposit and withdraw money from online poker sites. From there, I gradually became more interested in the technology, and began actively writing about bitcoin in 2014 in publications such as the WSJ and Recode as well as attending and speaking at Bitcoin conferences. I was also the first mainstream writer to publicly predict Mt. Gox’s insolvency, although, by that time, it was largely too late for most customers to withdraw their money.

During my poker years, I spent hours each day learning and communicating through the Two Plus Two Poker Forums. I still frequent them occasionally although only lurk at this point. They have a thread, over 850 pages long, all about bitcoin (there is an additional long thread about altcoins). You can watch the discussion evolve throughout the years. If you’d been paying attention to the forums back then, April 2011, and made even a small investment in bitcoin, you’d surely be a millionaire by now. [I love the first response given that it’s the same thing, verbatim, that bitcoin minimalists say now, even though it’s now trading at $3,400.]

On Being Early and Being Right2

There are other gems of niche industries and markets hidden throughout the Two Plus Two forums, although none have become as mainstream as bitcoin. You’ll likely find similar insights if you scour Reddit. We all know that one day another technology market will emerge that rivals or leapfrogs the attention and excitement given to cryptocurrency. I have a strong suspicion that early adopters will discover it through forums such as Two Plus Two or Reddit. I do worry that if that discussion moves to Slack or Telegram that it will be harder for the average person to find. I wrote about that concern here.

Daily fantasy sports, where I struck out both professionally and financially, was an industry where I simply wasn’t as personally passionate. In retrospect, I feel that my interest was a bit opportunistic. I still remember discussing at length with my friend Chris, who at the time was building the first ever Daily Fantasy site, Instant Fantasy Sports (in which I invested), about how we could port the functionality from the online poker sit-n-go format into fantasy sports and make an equivalent sit-n-go draft. I thought there were a lot of parallels, but I ultimately wasn’t excited by watching sports games all day nor obsessing over player statistics. This made it difficult to be credible either as a player (gamer) or an operator. I suspect that’s the reason I failed.

When it comes to being early and being right, I believe that passion is the ultimate insight. We humans have a lot in common. If you are passionate about an emerging industry, odds are that many other people are equally as passionate, or have the potential to become passionate if awareness is raised. Not all passions will materialize globally like bitcoin, but niche industries matter – even cosplay has developed into a $5-10 billion market. These emerging interests, industries and professions will continue to accelerate as the internet increasingly democratizes communication and awareness. It’s a fun time to be alive, and if you bet on your passions, odds are that you will discover others who feel similarly.

Why I’m Betting The House On eSports, Part II

For the past nine months or so, I had written off fantasy eSports (Vulcun, Alphadraft) as an uninteresting niche in the potential betting markets around gaming. My hesitancy was twofold: (a) I didn’t see why incumbent platforms such as FanDuel or DraftKings couldn’t also service eSports & (b) Given my time in the poker industry – where there were ample poker celebrities yet fantasy poker never materialized – I didn’t think it could yield a sustained, large market. I assumed that gamers would only want to bet on their own game-play, not others’.

I was 100% wrong and it’s a painful mistake. Here’s why –

When you consider the evolution of betting markets, a given industry has historically supported only a single dominant betting experience: either observer or first person. Here’s how I define those terms:

  • Observer/Fantasy – In this betting model, you are betting on the outcome of a third party(ies) against either a group of people or against a market maker (casino/house). However, the outcome of your bet is entirely dependent on the actions of others. For example, if you are betting that $GOOG will have a good quarter or that the Cubs will win the World Series, you have zero direct involvement in that outcome. In fact, in these markets, manipulation of the outcome is often considered illegal.
  • First Person – In these models, the outcome is entirely dependent on your own actions. For instance, when playing poker, you are not betting on the outcome of some player in another room, you are betting on your own decisions of what cards to play, when to stay in and when to fold. Assuming that the “luck” of the cards breaks even long term, your performance is entirely dependent on your own actions, not a third party’s.

Because my experience in betting markets was biased by 6 years in the poker industry (both as a professional player and then as an executive at CardRunners Gaming), I naively assumed that betting markets were strongest as first person experiences. What I didn’t realize at the time is that if you look historically at betting markets, online poker is actually the rare anomaly, not the norm.

In fact, the “observer” angle being the dominant form factor is actually intrinsically logical. Why? Because betting markets fundamentally must be built to scale. But First Person markets are unnaturally constrained by time – namely, that an individual can only earn the rewards of his or her own performance. Part of what makes the stock market such a brilliant, liquid, market is that you can generate rent from the hard work of millions of people. In the poker world – the opposite – you were limited by your own efforts.

Further, the truth is that at a theoretical level, poker could well have supported the “observer” model as well. Meaning that there’s no fundamental reason that fantasy poker (or betting on the performance of 3rd person players) could not have become a scaled market. The reason that market never emerged is because online poker lacked an “enabler:”

Fantasy eSports has excelled because of the presence of an “Enabler” – most notably, Twitch – which live streams desktop and console games for enthusiasts to watch. So important is Twitch to the fantasy eSports experience, that it is in fact directly integrated into Vulcun’s platform. Poker never had a similar enabler.

The First Person: Anyone Can Be a Pro

What gets me so excited about eSports is the potential flywheel affect between the observer and first person sides of the eSports betting market. Here’s what I mean –

I still remember the 1997 NBA Finals when Michael Jordan, playing with an awful flu, hit a buzzer beater over the Utah Juzz. It was such an exhilarating moment that literally all my friends on my block, without any formal coordination, ran outside to the alley to play a game of basketball…we simply couldn’t only watch the game, we needed to play.

A decade later, I was sitting in a glitzy hotel with the top executives at Full Tilt Poker pitching an unprecedented partnership between CardRunners and the gaming giant. They seemed unimpressed by our brand – mostly doubting the value a group of college aged poker whiz kids could add to their platform when compared to their TV poker celebrities such as Phil Ivey, Chris Ferguson and Mike Matusow.

I disagreed. I told them their position was flawed – that their high volume players were disproportionately represented by college aged or young adult males who had enough disposable time to invest hours a day on their platform. For these players, old school road gamblers simply were not relatable. Our college whiz kids, I countered, represented a “relatable fantasy experience.” They are the same age, with similar backgrounds, and no discernable difference in intelligence – they would serve as a relatable inspiration for the aspiring pros to work towards their goals of being great.

The argument worked. We inked what was then, one of the largest partnerships ever with an online gambling operator.

That argument applies to eSports as well. Unlike the NBA or NFL where professional performance is largely constrained by genetics to maybe a few thousand individuals in aggregate, becoming an eSports professional is theoretically available to the vast majority of the 208M gamers worldwide. Of course it requires immense hard work, and tens of thousands of hours of gameplay – nevertheless, becoming great at eSports remains one of the most democratic opportunities of any sport in existence.

It’s for these reasons that I’m also bullish on the First Person side of the betting market. While I’ve seen recent estimates put the total number of gamers who’ve played eSports for real money at sub ten percent, I expect that number to increase greatly as prize pools expand, media coverage increases, and low budget qualifiers enable recreational players to compete on arena stages with professionals.

Because eSports is unique in that its structured to provide liquid markets across both fantasy and first person, there is a real flywheel potential – that fantasy eSports and spectator style viewership will drive enthusiasts towards betting on first person games while first person gamers – constrained by their own time – will want to scale their earnings across the fantasy markets. It’s this flywheel effect – the first I’ve ever seen in a betting market – the leads me to believe eSports could become the highest monetized gaming market in history.

And Now For The Counter:

There are basically three big reasons why eSports from a “First Person” betting market perspective might well outright flop:

But not all volume is the same. Online poker sites were able to extract disproportionate revenue per player by enabling “multi-tabling,” in effect allowing players to play many simultaneous games of poker. Although the option was available to all players, only professionals had the dexterity to manage 12 simultaneous hands of poker profitably.

Daily Fantasy Sports offer a similar experience known as “multi-entry” where players can (often without manually even inputting the same lineup) replicate their desired lineup across multiple tournaments of varying buyin-size instantaneously and without friction.

Both multi-tabling and multi-entry enhanced two things: (a) platform liquidity – enabling more games to run, and (b) generated increased revenues per player.

As far as I can tell, first person eSports lacks a parallel infrastructure – meaning that no single gamer can provide liquidity across multiple games simultaneously. And while I don’t think it’s a pre-requisite for a healthy ecosystem, it does make me wonder if it’ll be harder for First Person betting platforms to scale. I can envision some creative solutions to this problem, but nonetheless, it worries me.

  • Skill Gap – In poker as in fantasy sports, there are mathematical long-run winners and losers. However, in the short-run (small sample sizes), the skill gap between an amateur and a professional is not insurmountable. The effect of this delta in skill (let’s call it 65/35 to keep it simple) means that a complete amateur will still emerge victorious from a poker tournament or DFS match a reasonable percentage of the time.

The intrinsic issue for eSports is the skill gap: namely, that a professional gamer will beat a new or amateur player pretty much 100% of the time. That makes it difficult for amateurs to have an enjoyable experience when entering the market. It also makes it difficult to market a betting platform to recreational players (because it is therefore fundamentally impossible to have a “Moneymaker” moment or replicate FanDuel’s aggressive marketing of averages Janes winning DFS tournaments).

All that said, this problem is not unique to eSports. For example, boxing solved a similar problem with defined weight classes. The “handicap” system introduced by the PGA allows an expert and a rookie to play a competitive game in spite of skill differences.

That said, where there is a lot of money on the line, there is a huge incentive for players to misrepresent themselves as inferior to their actual skill. I don’t know if the skill gap question is ultimately the Achilles heel for eSports but it could be the factor that forces external regulation of the industry.

  • Platform Integration – eSports first person betting requires players to engage an off-platform third party to wager, settle bets, and track tournaments because the game providers do not have betting functionality built in. In a practical sense, what this means is that unlike the fantasy eSports platforms that have integrated Twitch directly, there is a lot of friction in first person tournament betting in that a bettor must: (a) Join a third party betting provider (b) Fund Wallets (c) Select match from a 3rd party lobby (d) Then connect to Game directly and play.

For competitive gamers, that level of friction is irrelevant: they are already regularly engaged with multiple third parties: gamer forums, gaming news sites, existing tournament platforms, etc. The unknown questions really are: (a) Will game developers respond to demand and open their platforms to enable direct integration by tournament facilitators and aggregators or (b) Will recreational players be comfortable multihoming between platforms in the same way we engage with other sports (ie, we watch a game via television/stream while betting or playing fantasy on a 3rd party such as Yahoo!, Fanduel or Bodog).

Parting Thoughts

In my opinion, eSports betting markets aren’t yet even in the first inning of their journey. For comparison sake, at the time of this publishing:

  • PokerStars regularly eclipses 100k active players on its platform during off-hours (that number can spike to 250k+ on Sundays)
  • Although FanDuel/DraftKings don’t report simultaneous players, FanDuel did report 1M players who placed an active bet in Q4 2014. I think it’s a safe assumption that on peak NFL Sundays, a good 20% were likely DAUs meaning they hit 200k players on peak days.
  • Vulcun reports players “Online Now” and I’ve personally never seen more than 2,000 simultaneous logins. **I have no scientific way of tracking this, but I check occasionally and gives a rough size of scope.
  • Kickback reports “Players Online” and I’ve never seen more than 150 simultaneous logins. **Again I have no scientific way of tracking this, but I check occasionally and gives a rough size of scope.

These stats reflect that the industry is in its absolute infancy, but with the potential to saturate exceptionally quickly, especially given the viewership of Twitch and Youtube.

I’ve written a lot so will leave it there for now. If you are building any platforms in the eSports space or have some great resources to check out, please e-mail me or post in the comments. Thanks!

Special thanks to Taylor Caby for his feedback on this post

Why Mt. Gox May Be Headed for Bankruptcy

This article was originally published on Coindesk on February 17, 2014

It has been a tough week for bitcoin: a freeze on withdrawals at Mt. Gox due to transaction malleability, multiple DDoS attacks across the exchanges, and a consequent plunge in price.

In my view, however, Gox should be everyone’s biggest focus. While their price spreads and cash-out delays have plagued the site for more than six months, I believe their current situation and recent statements belie transparency and suggest insolvency. Namely, that their business model and recent past raise a number of red flags that make comparing the company to now-bankrupt online gambling operators highly relevant.

Three weeks ago, I took to Re/code to describe how the evolution of online poker is likely to be correlated and instructive to bitcoin’s development. In it, I wrote: “I believe we could see a major exchange go under, especially if regulations and wire transfers become more complex, or if the cost of acquiring customers becomes more competitive.”

I have seen this story play out nearly a dozen times before during my tenure as an executive in the online poker world and, in this article, I want to set out why I think Mt. Gox is in big trouble.

Fund seizures

Mt. Gox had nearly $5 million in funds seized from its bank accounts in 2013. It’s unclear whether these were operating funds or customer deposits. This is highly reminiscent of seizures in the online gambling world, which deeply affected operators’ solvency.

These fund seizures, such as $115 Million from Full Tilt Poker, or $33 Million in a 2009 DOJ Seizure, were initially smoothed over by their operators. Players were typically reimbursed and withdrawals were honored.

What outsiders hadn’t realized at the time was the strain this placed on individual operators. In order to keep the business running, operators had to remove the ring-fence that protected customer deposits and borrow from customer balances to support operations.

While everyone believed that the poker sites were making billions, their overheads due to staffing and marketing was significant. More importantly, each new seizure forced the operators to move downstream to less and less reputable transaction processors and banks. These processors charged heavier fees because of the heightened risk, and often absconded with deposits, because, well, they could.

We see this with Mt. Gox as well: the company lost its relationship with reputable processors, such as Dwolla, and has never managed to integrate with Skrill or Neteller.

Phantom deposits

It appears that Mt. Gox has long known of, and suffered from, transaction malleability. As explained in this Coindesk post, if a user claimed not to have received their bitcoin (either truthfully or maliciously), Gox was likely to have re-sent the funds to avoid negative press as a result.

This process of fronting money – either in the hopes of recovering the initial transactions or to maintain positive perceptions – is a vicious cycle that depends on deposits outpacing withdrawals to be sustainable. Once that balance reverts, it’s an effective bank run, and the operator will eventually not have enough deposits to cover user balances.

It is highly analogous to the working capital model that caused the insolvency of Full Tilt Poker, once a billion-dollar industry leader. In their case, the black market ACH (automated clearing house) processors they had contracted to transfer player funds from bank account to virtual wallet struggled to convince banks to process those transactions.

Full Tilt, wanting to maintain a dominant image and not lose player liquidity to competitors, chose to credit attempted (but failed) withdrawals to player accounts, hoping to recoup those transactions as their processors improved. This backlog of ‘phantom’ deposits ultimately reached $130 million. Executives later admitted that it started small and spiraled out of control.

Although I have not seen any indication as to the scale of Gox’s equivalent phantom transactions, the ramifications are considerable – especially if malicious customers exploited the issue to their advantage.

Excuses, excuses…

Mt. Gox’s public statements have been only partially accurate, initially blaming bank/processor delays in June 2013, and now admitting a systemic technical issue. This evolution of excuses mirrors those of gambling operators who were quick to blame a difficultly in transaction processing before admitting internal issues.

Eurolinx was a popular poker site from 2006 to 2008. However, in 2009, withdrawals began slowing considerably. Initially, it claimed:

“The situation is only temporary because we have had an unusually high number of withdrawals that, in combination with increased security checks, have caused a backlog and delays throughout the system.”

Weeks later they admitted: “Most of the delays occurred due to payment processor issues we experienced in May and June. The problem has now been fixed, however, we have some withdrawal backlog to deal with.” And, months later, they filed for bankruptcy – leaving players millions of dollars the poorer – and ultimately admitting that they gambled player deposits in the stock market and lost, big time.

FullTiltPoker enjoyed market dominance from late 2006 until their DOJ indictment in April 2011. Soon after being banned from servicing US players, the DOJ gave them permission to repay all depositors, but they failed to do so.

On May 15th, FTP claimed: “Full Tilt Poker faced numerous challenges and hurdles to ensuring the smooth operation of its international business and the orderly return of US player funds. We are absolutely committed to making sure that US players are refunded as soon as possible. We apologize for the delay and the fact that we underestimated the time it would take to work through these issues.”

On May 30th, they repeated:

“We still do not have a specific timeframe for [paying back players]. There has been, and remains, no bigger priority than getting US players paid as soon as possible, and we have been working around the clock to get this done.”

However, at this point, they admitted solvency issues for the first time, saying: “We are raising capital to ensure that the US players are paid out in full as quickly as possible.” The company admitted total insolvency three months later, on August 31st.

In these cases and more, the operators cited seemingly legitimate reasons for process delays. All were rooted in industry truths – difficulty of bank processing or technical complications of implementing a mass refund – but were ultimately covers for deeper issues.

Most worrisome is that in the weeks prior to nearly every major online poker bankruptcy, the operators marketed deposit bonuses and perks – a last attempt to buy solvency and time.

This was true in the case of Full Tilt Poker and Eurolinx, as well as Ultimate Bet, Absolute Poker, GoalWin Poker, Poker in Venice and more. Mt. Gox did the same – offering discounted trading fees as recently as December 19th – a curious move for an operator clearly aware they were facing transactional hurdles.

Tell-tale pattern

I am hopeful, along with the wider Bitcoin community, that Mt. Gox can overcome its difficulties and rebuild consumer confidence.

As Mt. Gox has struggled with both bitcoin and fiat withdrawals, it should be noted that, in a public ledger cryptocurrency, it is possible to certify the solvency of reserves with digital signatures showing the location of all deposits – although no exchange currently utilizes this feature of bitcoin.

While that would solve questions surrounding bitcoin solvency, it would leave fiat concerns unresolved. That said, my experience over the past decade has shown that insolvency tends to follow a pattern, that Mt. Gox clearly fits, and I feel the company is likely to fail unless outside capital comes to the rescue.

Dear Bitcoin: Patience is a Virtue. Love, Poker

This article was originally published on re/code on January 23, 2014.

Having spent much of the past decade in the online poker world — first as a professional poker player, then as an operating executive, and now as an investor/advisor — I have witnessed firsthand its extraordinarily volatile ride through hyper-growth, legal uncertainty, numerous frauds and emerging regulation.

When I look at bitcoin, I see many similarities to the Wild Wild West feel and uncertainty of the online gambling industry in its formative years. I am bullish on bitcoin, but I believe that it’s very early in its development and marketing life cycles, and I think that the parallels from online poker’s development could provide valuable lessons on what to expect and how to engage with the nascent industry of virtual currency.

The consumer doesn’t always win

Bitcoin is good for consumers and merchants, while disruptive to existing payment networks. Legalized, regulated online poker is also a net positive for consumers, would create jobs and would generate valuable revenues for municipalities.

Over the past 15 years, the consumer has watched disruptive companies greatly improve their buying power and choice. Whether via Groupon offering steep discounts or Netflix democratizing entertainment, we have become accustomed to industries ultimately tilting toward the benefit of consumers.

My experience in online poker suggests the principal is true, but is mired in “ultimately.” It is finally receiving formal legalization and legitimization, but that process is happening slowly — the first three states came in 2013, after six years of lobbying. During that period, the government willingly left billions in revenue on the table, while leaving constituents to take their chances with offshore operators — the consumer being the net loser. Just because bitcoin is good for consumers does not mean the government will see it that way in the short term.

The U.S. isn’t everything

November was a good month for sentiment on U.S. bitcoin regulation, with a positive Senate hearing as well as Ben Bernanke’s light endorsement that bitcoin “may hold long-term promise.” But online poker had many similarly positive hearings that were ultimately false starts.

Then, on April 15, 2011, the FBI and DOJ seized the domain names and servers of the leading online poker rooms PokerStars and FullTiltPoker, among others, demanding that they stop servicing U.S. players. The sites quickly complied, and many industry experts held that the loss of the U.S. player pool — between 30 percent and 45 percent of the total market — would crater the industry. They were wrong. In April of 2012, a full year later, traffic was down industrywide by less than 10 percent, and PokerStars had lost only 13 percent of its total player base.

While there may be multiple factors for PokerStars’ resilience (including FullTiltPoker’s bankruptcy, which orphaned countless players), experts believe it was their focus on emerging markets in Asia-Pacific and South America that enabled the growth to continue.

The lesson for bitcoin is that the U.S. isn’t everything — it can survive without U.S. legitimization, or even China’s reported heavy volume. Bitcoin as financial currency has a much wider market appeal than online poker (which has no formal penetration in China), and could find real growth and stability even if only legitimized and liquid in Europe or Africa.

With fast money comes fraud

My circle of friends used to endlessly needle recreational poker players who believed that online players could see their cards or were cheating them. Until one day, my roommate David, a highly successful professional player, came into my room and said, “I’m convinced I just played against someone who could see my cards.” He was right. And the ensuing investigation uncovered the largest online poker ring in history, even landing him on “60 Minutes.”

Over the years, there were multiple cases of intermingling player funds with operating funds, leading to the bankruptcies of smaller operators and even FullTiltPoker, at one point a billion-dollar industry leader. High-stakes poker players have reported hundreds of cases of finding Trojan horses planted on their computers — the most recent scandal involves room break-ins at a five-star hotel in Barcelona.

Some poker sites chose to simply shutter without warning, absconding with player money. One site, JetSetPoker, is notorious for issuing a pop-up at 11:55 pm to all players, informing them that the site would cease to exist at midnight, while offering no options for withdrawals.

The lesson is that these now-bankrupt sites were “regulated” by offshore regulatory agencies, who were ultimately proven powerless. And much of the interpersonal fraud was perpetrated by individuals with stellar reputations in online communities, or even by recognizable television personalities.

We have already seen bitcoin wallets disappear into the night, and history would suggest that more will follow suit — I believe we could see a major exchange go under, especially if regulations and wire transfers become more complex, or if the cost of acquiring customers becomes more competitive. Further, because bitcoin is supported by its community, numerous alt-coins are trading in early development cycles based off the reputation of their developers, many of whom are anonymous forum personalities. Some of these will be scams. And although online poker never had a “cold storage” equivalent to protect players, the rapid rise in price of bitcoin has left billions of value unsecured. Fortunes will be wiped away by poor security.

Exchanges rule, but opportunities abound

As with the poker industry, the biggest opportunity for bitcoin will be as a marketplace. Gaming operators such as PokerStars and FullTiltPoker generated billions in annual revenue.

Conversely, two of my businesses, CardRunners and Hold’em Manager, were each the leaders in their respective niches. CardRunners was the premier educational/training community, while Hold’em Manager was the most popular software analytics suite for players. These businesses topped around $5 million in annual revenue.

It’s therefore not surprising that venture interest in bitcoin to date has focused on the exchanges, such as Coinbase, and BTCChina or its underlying protocol, with Ripple and Circle. But although the bitcoin industry is maturing quickly, mainstream consumer penetration is in its infancy — so there’s real potential for new exchanges to emerge and become dominant. My precedent is that online poker leaders in the early 2000s, such as Paradise Poker and Planet Poker, were displaced in 2004 by PartyPoker, with its superior marketing. PartyPoker’s market dominance was then displaced by PokerStars and FullTilt in 2006, as legal regulations changed and as those companies made huge investments into television advertising and original sponsored programming.

Outside marketplaces, there are still big opportunities. One example is affiliates — a large poker affiliate, PokerStrategy, was recently acquired for $50 million in cash. As the bitcoin audience grows and competition between exchanges heightens, affiliates will increase in importance — and will ultimately be larger than a $50 million price tag. CoinDesk and ZeroBlock are well positioned with their engaged audiences and strong SEO.

A last area for opportunity are SaaS/PaaS plays, which have only recently started to emerge in the online gaming world with companies such as Betable. I see similar opportunities for KYC (Know Your Customer) bitcoin platforms or bitcoin-specific securitization as service businesses. Given the likelihood that bitcoin will soon need to integrate with everything from trading desks to personal tax forms, an aggregated API clearinghouse could also be a big opportunity.

(Disclaimer: The author owns Bitcoin, Litecoin, and Primecoin. They make up less than two percent of his diversified holdings.)

Ezra Galston is currently a VC at Chicago Ventures, and was director of marketing for CardRunners Gaming, the parent company of CardRunners, Hold’em Manager and DraftDay. Reach him @EzraMoGee.

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