Skin betting: exposing the elephant in the room

Over the last year, the convergence between competitive video gaming or eSports with real-money gambling has gone into overdrive, with more mainstream gambling operators adding eSports betting services to their 24-hour schedule.However, the inevitable has happened. The underground, somewhat dark web of skin betting on the popular eSports game franchises has caused a ‘first-kill’, just like one of the characters in Counter-Strike: Global Offensive (CS:GO). Is the industry experiencing its groundhog day, facing another DFS-style backlash from the oldguard regulators who don’t understand eSports, moving to quash a flourishing albeit yet-to-be regulated activity?

Most analysts talk about how big fixed-odds eSports betting could become for mainstream sportsbooks, and yes that is a fast-growing vertical. However, skin trading as it operates today has been ignored or gone largely unrecognised by traditional sportsbooks, with demand being serviced from within the existing eSports ecosystem. If you do a Google search for “skin gambling’ you get 19,700,000 results returned; compared to only 300,000 for “eSports gambling! That’s a bit of a giveaway as to where the actual demand curve lies in terms of betting propensity on eSports.

Skin trading, with the likes of CSGO Lounge and OPSkins among the many such platforms, is fulfilling a market need among today’s savvy digital traders and bettors that perhaps prefer engaging in this form of ‘digital betting’ as opposed to the mainstream fixed odds offered by sportsbooks looking to target the eSports demographic.

Let’s recap on what skin gambling or trading is. Skin trading is an economy built around the buying and selling of decorative virtual in-game items, more commonly referred to as ‘skins’, that can be acquired in the video game, which are also traded and sold for real money on certain platforms.
Skins are central to the actual player and game experience for American behemoth video game developer and digital distribution company, Valve, who introduced them a few years ago via their digital marketplace platform called Steam.

The US-based company is the developer of the hugely popular video game titles Dota 2 and Team Fortress. The jewel in their crown, CS:GO (Counter-Strike Global Offensive), has sold 21 million copies and generated $567 million and counting in revenue for Valve, which provides an idea as to how lucrative these games are.

Skin gambling and skin trading has very quickly given rise to sizeable community marketplaces, which are connected indirectly to Valve’s Steam platform via API technology. These platforms, which include CSGO Lounge, CSGO Diamonds and OPSkins, provide the ability to trade, buy and sell virtual ‘skins’, such as knives and guns, used in the video games Counter-Strike, Dota 2 and Team Fortress 2.

The players use or transfer their skins from Valve’s Steam platform and can then trade and bet these in-game skins in tote pools, either on the outcome of eSports matches or in casino-style jackpots. They generate millions of dollars in betting trades per day.
The market size is difficult to determine as most of the skin trading platforms are largely unregulated. Some observers such as Bloomberg have suggested that the skins market in 2015 was worth $2.3billion with some three million-plus active players, so the stats are significant and growing. If we take OPSkins, of which their website publishes user data, they had 1,845,384 players total to date and 8,482 players active in the last 48-hour period.

You can visit the site to see the real-time stats and all the currently active skins, which number 881,447. Skins can trade for a couple of dollars to thousands of dollars, with thousands of transactions a day taking place, with OPSkins just one of hundreds of similar sites accommodatingthe market demand.In terms of the money flow and economics, it’s basic supply and demand.

The majority of these skin platforms accept and cash-out daily using bitcoin as the digital currency of choice to facilitate the trading activities taking place on the platform.

 

The elephant in the room

There are some similarities to how allegations of insider trading recently  about the implosion of daily fantasy sports in the USA. A similar series of unfortunate events is unravelling in eSports and skin gambling. A player named Michael John McLeod filed a lawsuit in June of this year against Valve Software, the owners of the Steam platform and the game maker of Counter-Strike: Global Offensive (CS:GO).

The lawsuit centres around accusations that Valve is indirectly profiting from illegal gambling surrounding its game Counter- Strike: Global Offensive, and therefore could be construed as to aiding and abetting illegal online wagering as it pertains to the various Federal Acts in the USA. Furthermore, while details are still sketchy according to the lodged papers, McLeod hasn’t indicated how much he is seeking in punitive damages and compensation. He did state that the company (Valve) did and was aware of the interdependencies between its game, its platform and skin gambling, which of course still needs to be proved. In a notice posted on the Steam website, Valve said it would no longer permit thirdparty websites to use Steam in this way, stating that: “to run a gambling business is now allowed by our API nor our user agreements. Valve’s Erik Johnson also emphasised they had “never received any revenue” from these third-party sites, and stated it would “start sending notices to these sites requesting they cease operations through Steam, and further pursue the matter as necessary.” Thelawsuit remains ongoing.

 

The opportunity for affiliates

It’s well-known within the burgeoning eSports fixed odds betting vertical that skin gambling, effectively an offshore and unregulated activity, could have ‘first kill’ on the growing, regulated eSports betting market merely by association.

It’s clear with this lawsuit that district attorneys and regulators will be looking to shut down this activity, not just because it’s grey and unregulated, but also because one of the highly controversial aspects of skin gambling is that players are able  to set-up accounts with little to zero ageverification. A 13-year-old being able to register an account for a skin platform and start gambling his game skins raises huge societal concerns and implications.

My personal take is that because the skin gambling websites which are connected to Valve’s Steam platform via the open APIs which are readily available, is that this access is bound to be rescinded or restricted, thus cutting off the supply ofskins to these marketplace communities.

This, in turn, is bound to have an effect on the popularity of the actual games such as CS:GO, of which the trading of skins is intrinsically linked. It is perhaps likely to result in millions upon millions in lost revenue within the skin gambling ecosystem, which has to by the laws ofeconomics flow elsewhere.

This therein presents the opportunity entrepreneurial operators and their affiliates looking to fill this traffic void and demand, by promoting regulated eSports trading and betting products.