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Dear Bitcoin: Patience Is a Virtue. Love, Poker.

Lessons from a former online poker exec.

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 ̵#8212; 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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