Welcome to the July 2020 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. We aim to leverage our unique expertise and existing assets to generate yield and capital growth for investors over the long-term.
Since inception, $100,000 invested in the Waterhouse VC Fund has risen to $313,140, as at 30 June 2020.
Digital currency: From the grey market to all markets
The Chinese government has a deeply rooted and rigid hostility towards gambling. Any form of gambling by Chinese citizens is considered illegal, including online gambling with overseas operators, or even operating casinos overseas to attract Chinese people as customers.
Recently, the government in China has intensified its policing of online gambling, and not just in land-based ‘gambling dens’ but online platforms and payments too. Since launching an enforcement initiative in February, the government has already confiscated over US$32bn in illegal gambling-related funds.[1] This is compared to the US$2.6bn seized in 2019.
The largest online gambling channel in China is through betting agents, who take bets off retail customers, pool the bets and place them through either online channels or land-based channels overseas.[2] This model has been around for decades and remains by far the largest component of ‘grey market’ gambling out of China. However, the more centralised nature of this model means it is easier to shut down, which has been evident lately. Further, this model has been suffering from the shift to the business-to-consumer (B2C) channel for a number of years.
The direct B2C channel, where customers go to offshore websites and place the bets themselves, is a smaller but much faster growing segment of the industry. Chinese B2C wagering has grown on the back of broader e-commerce adoption, the ability to indirectly market to the Chinese via large international sports (mainly the English Premier League), and the aforementioned crackdowns on betting agents.[3] Gambling industry consultants Regulus Partners estimates the direct B2C Chinese online gambling market is worth about US$15bn in net revenue terms.
German payments company Wirecard, which collapsed last month in a fraud scandal, was the biggest payment provider to grey market gambling operators.[4] Now that they’re out of action, operators will need to find new avenues. Bitcoin will be one option.
Since Bitcoin’s creation in 2009, it has been used for grey market wagering. It is preferred by punters because it provides a layer of anonymity, useful for hiding your betting activity from governments and banks. The advantages to the operator are cost savings from the removal of an intermediary, as well as eliminating chargebacks, which take place after a scammer has topped up their betting account but then request a refund from their card issuer by citing illegal activity.[5]
It’s not just Bitcoin though, as the technology underpinning Bitcoin has been used to recreate traditional fiat currency in digital form. For example, Tether is the largest digital representation of the US dollar. There are over US$9bn Tether in circulation and its daily turnover far exceeds the turnover on the Australia Stock Exchange. What’s more, with interest rates at near zero, there is almost no cost to hold USD in Tether and it is a far more useful tool than traditional US dollars since it can be spent internationally any time of day or night. The key advantage for users however, is the speed of settlement which is very important in gambling. With traditional methods, it can take up to three days for clients to get paid.
According to Bitcoin investment firm ListedReserve, “the idea that digital currency is something for the future is wrong, it has been here for years. The most telling factor being the explosion in the usage and market capitalisation of Tether which at US$9.1bn is now the third largest digital currency behind Ethereum (US$21bn) and Bitcoin (US$170bn). We fully expect Tether to get to the number two spot in 2021 and we will see many more digital versions of traditional government currency simply because they are so much more useful than bank accounts."
Bitcoin and Tether’s advantages listed above extend to operators in regulated markets, and further acceptance from these companies will bring bitcoin betting out of the grey market and into the mainstream.
For wholesale investors that want to follow gaming’s global growth, please follow us for updates on Twitter @waterhousevc. For investors who want to closely follow the latest developments in Bitcoin and digital currencies, subscribe to ListedReserve’s weekly newsletter here.