What is Behind Online Gambling and the Rise of Bitcoin

Posted by Harry Kane on Wednesday, November 7, 2018

At first glance, it may be hard to believe that the online gambling industry in the UK (and indeed the rest of the world) produces gross gaming yield (GGY) that it does.

After all, customers do not pay subscription or entry fees to join branded casino sites, while operators tend to give away thousands of pounds in promotional offers to brand new players in the current marketplace. On paper, this seems like a recipe for financial disaster, and one that very few businesses could sustain.

While it’s fair to say that some operators have failed to achieve success in the sector, however, this innovative and deceptively lucrative business model has proven to be hugely successful. But how does it work, and why is Bitcoin adding a unique dimension to the marketplace.

Introducing the House Edge and the Power Creative Marketing

Let’s start with an obvious assertion; online casinos require a significant initial cash injection if they’re to launch successfully and win custom.

This capital enables them to provide access to games and online wagering without demanding some form of subscription payment from customers, while it can also be deployed to create generous promotional offers and financial incentives for new registrants.

As a result of this, casino brands have to absorb considerable losses before they can begin to turn a viable profit. So long as these can be sustained, however, companies can quickly leverage the unique nature of online gambling to generate significant profits going forward.

One of the key elements to consider is the so-called house edge, which is applied to all forms of casino activities both on and offline. This varies for every casino game and is built-in to the prices and odds that are made available to players, while it effectively stacks the odds in favour of operators (guaranteeing them at least an incremental profit over time).

Take American Roulette, for example, which features a noticeably high house edge of 5.26% (the corresponding figure for roulette is just 2.7%). This is considered to be one of the most profitable casino games for operators, as a player can expect to recoup just £0.9474 for every single £1 that they wager).

The latter figure is referred to as the return-to-player (RTP) rate, and this plays a pivotal role in the online casino model and the way in which specific games are marketed to customers. After all, the term ‘house edge’ relates directly to the competitive advantage held by operators and given that this is prevalent across every single game is stands to reason that new players may be deterred from gambling in the first place.

Instead, operators use the relevant RTP rate to market individual games, as this is a clear value indicator to players and relays precisely how much they can expect to win over time. As a result, brands can develop positive and effective marketing campaigns that encourage players to pursue wins or a viable profit.

No single casino game embodies this better than virtual slots, which accounted for nearly two-thirds of the online gambling GGY in 2017. These titles are marketed heavily on their individual RTP rates, while operators are also legally bound to share this information with customers as a matter of course.

There are high, mid and low variance slots available to players, offering RTP rates between 90% and 97% on average. In the case of low variance and certified slots with an RTP rate of 97%, customers are given a clear incentive to play for real money during the base game while also accessing potentially lucrative bonus rounds.

However, even low variance slots have a corresponding house edge of 3%, which is far higher than table games such as blackjack and baccarat. In fact, this is also higher than the house edge associated with European Roulette, but the focus on return to players values helps operators to navigate this issue.

In real terms, however, how does this translate into profitability? This is partially based on volume, with online gambling now considered to be a mainstream activity that is becoming increasingly accessible. In fact, the number of active online customer accounts increased by approximately one-quarter to 28.7 million at the beginning of 2018, with this set to grow incrementally in the near-term.

Operators then invest heavily in the promotion of online slots and similar games, leveraging the house edge to secure a considerable profit for every £1 spent. So if £1 million worth of bets is placed on a slot with a 97% RTP rate, players would recoup an average of £970,000 while operators banked a cool £30,000.

Given that the market-leading brands accept millions of pounds in bets every single day, it’s easy to see how they’re able to bank considerable profits within a relatively short space of time. This also highlights the no-lose scenario facing established online casinos, which are able to sustain regular profits and reinvest some of these into their promotions and marketing campaigns.

How Else do Online Casinos Become Profitable?

For established brands, the primary focus should be placed on maximising the value of deposits and processing payouts in a timely and cost-effective manner.

This not only helps to breed consumer loyalty and cash flow, but it also reduces the cost of operators and increases profit margins even further.

To achieve this, a number of casinos are now integrating the cryptocurrency Bitcoin into their platforms. Currently being used as a prominent deposit option by several market leaders, this enables parties to complete instant transactions and credit their accounts immediately.

At the same time, any associated transaction fees are minimised, creating a win-win scenario for players and brands alike. Not only do customers have more money to gamble with, for example, but operators are also able to reduce the cost of processing a high volume of payments in a short space of time.

By way of contrast, debit card operators tend to take between three and five working days to complete transactions, while also charging parties 3% of the total value. This can cost online gambling firms huge sums of money, but Bitcoin and similar digital currencies are now enabling them to avoid this issue.

This will become increasingly important in the future; particularly as online casinos adapt to Brexit and the Remote Gaming Duty (RGD) increase scheduled for October next year. However, there’s little doubt that online casinos will continue to generate huge profits for the foreseeable future, regardless of the challenges that lie in wait.