Sports gambling is big business. In 2012, $3.45 billion was wagered in Nevada sportsbooks alone[1].

In the next decade, I think the entire industry will be disrupted - and gambling volume will increase by at least one order of magnitude.

What will happen

Sports gambling today is largely the same experience that it was 50 years ago. Even online sportsbooks just replicate the casino model virtually. Yet I think the industry will soon see a set of fundamental changes:

  • Market-based: Rather than betting against a casino, gamblers will bet against other gamblers, in an market that is functionally equivalent to a prediciton market[2]. Sportsbooks will become clearinghouses.

  • (Much) lower commissions: Peer to peer contracts will drive down commissions by over 100x. In the current model, sportsbooks take ~10% of winnings - so ~5% of wagers. They can partially justify this because they take on risk[3], and because of uncertainty in predicting which teams gamblers will prefer. (All else equal, casinos prefer to have equal amounts bet on each side.) Both factors are irrelevant to a clearinghouse.

  • Real time: A sportsbook stops taking bets at kickoff, but a market can continue trading throughout a game. Prices will track game developments - if you think your team will convert a 3rd and 10, you can buy shares with a couple clicks. I think this sort of in-game gambling will become extremely popular.

  • Efficient futures: Long term contracts are even worse value than single game bets in a sportsbook. To guarantee a payout of $100 in next year's Superbowl, you'd need to bet $135[4]. This crowds out betters and eliminates the possibility of negative positions - there's effectively no way to gamble that a team won't win the Superbowl. Again, this completely changes in a market. Low commission futures contracts, combined with the possibility of holding funds in escrow, will be very attractive to smart gamblers.

Drivers

These shifts will be made possible by recent developments:

  • Bitcoin: Today there is too much friction depositing and withdrawing money for most people to participate in online gambling. Bitcoin changes that. While not completely anonymous, governments simply won't be able to regulate online wallets to the degree they can credit cards and banks.

  • Mobile: Ubiquitous smartphones will allow in-game gambling to flourish. Most people take out a smartphone for some reason while watching sports - it will soon be seamless to make a couple of trades when responding to a text. Keep in mind that this is still fairly recent - the gambling population likely lags in smartphone adoption and app usage.

Why this seems inevitable

These markets already exist, though the products are surprisingly bad. Will they gain adoption as the products mature?

If you beleive that Bitcoin will soon be ubiquitous in some form, it follows that markets will become at least as easy to use as a traditional sportsbook. When this happens, anybody who gambles in a traditional sportsbook will be explicitly paying a premium for an equivalent product. That's sustainable in some industries, but not when the product is fluid cash.

This suggests that gamblers will shift from sportsbooks to markets for the bets they make now. With money in markets, in-game gambling will be readily available, and it will be appealing. Rather than stressing to place a bet before kickoff, some gamblers will opt to see a few plays and then decide. Further, some gamblers that are losing money on one game will succumb to loss aversion and go bet on another one.

Implications

It's dangerous to predict the social impications of a paradigm shift, but I can't resist noting a few:

  • In game gambling enables adds a whole new class of interactivity to sports. Sports aren't immersive like video games and movies; I can rarely watch sports without other activity. I need people to talk to or a second screen. With in-game gambling, that screen can be focused on following the market, the game within the game. This could have strange implications - a "good game" would be a function of the number of back and forths, not the quality of play.

  • One of the reasons poker has become so popular is that it appeals to self-serving bias - it's possible to attribute success to skill and not luck. This has never been the case with sports gambling, but will be with low commission markets. The allure of arbitrage opportunities and betting against conventional wisdom will draw many competitve people to sports gambling that would never consider it today.

  • If you believe even slightly in efficient markets, you'll note the potential for insider trading. If the concierge at Lebron James' condo sees that he was out late last night, she can sell shares in today's game. Currently, these slight advantages aren't profitable - they are again overwhelmed by the sportsbook's edge - but not with low commissions. Over time, if the concierge gambles on every small proprietary detail like this, she will almost certainly come out ahead.

A final note

This post ignores an absolutely fascinating use case for "Bitcoin gambling": the possibility of using a blockchain to enforce bet outcomes themselves, which could theoretically eliminate a central sportsbook altogether. I'm not sure if this is feasible in practice, or if it's even solving a need once these markets exist. But it's fascinating to think about, and I'd be curious to hear any theories about how this could work.


[1] This is of course a small minority of the worldwide market, which could be worth $1 trillion. (That's total value - not amount wagered.)

[2] I say "functionally equivalent" and not "is" because it could differ from our current understanding of a prediction market. For example, prices could be masked as standard casino odds instead of shares. The important point is that trades excute against other gamblers, with the market charging a standard commission independent of outcome.

[3] For example, one day in 2012 Vegas lost $6-8 million. This still doesn't justify current commissions, though - sportsbook margins are unnaturaly high.

[4] Odds randomly copied from this page, then I got that number with:

# list of (payout, bet) tuples
odds = [map(float, line.split()[-1].split('/')) for line in text.split('\n')] 
# sum of how much you'd need to bet on each team to guarantee $100
total = sum(100 * bet / payout for payout, bet in odds)