Poker News

The United States Security and Exchange Commission (SEC) issued an investor alert last week, cautioning people about Bitcoin as well as other, lesser known forms of virtual currency.

Bitcoin has been gaining more and more attention over the past year, but has been known in internet poker circles for longer than it has been by the general public. While still not particularly widespread, its popularity has increased amongst Americans looking for a way to deposit money on poker sites, as it has become more difficult to make money transfers to and from poker rooms since Black Friday.

Bitcoin is a decentralized, peer-to-peer virtual currency, not backed by any government. Bitcoins are generated through “mining,” which is essentially using computing processes at high volume to keep the Bitcoin network functioning. After some time (and it can be a long time), a Bitcoin is produced. These Bitcoins are logged and transferred on a peer-to-peer network; there is no centralized Bitcoin banking system.

The advantage Bitcoin offers for poker players is that because they are exchanged in a peer-to-peer system and no government oversees the currency, they fall outside the restrictions placed on internet gambling in the United States. The Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA) prohibits financial institutions from transferring money to or from gaming sites, but since financial institutions are not involved in Bitcoin, that law can be skirted.

Bitcoin isn’t widespread in the online poker world yet, but a few sites do accept it as a form of currency. SealsWithClubs.com only uses Bitcoin as its form of currency, while America’s Cardroom and WinPoker.com both accept it as well as traditional currencies.

Of course, there are risks in using Bitcoin, which is why the SEC published its alert. The obvious risks fall under the warning, “Investments involving Bitcoin present unique risks.” Because governments and banks (U.S. or otherwise) have nothing to do with Bitcoin, Bitcoin caches are not insured, as one’s bank account would be. So if someone’s store of Bitcoins is lost, like what happened with Mt. Gox, the world’s most popular Bitcoin exchange, there is really no way to recover vanished virtual funds. Additionally, as Bitcoins are not regulated by the government, there are no real rules for the currency nor reliable legal recourse if things go wrong. And, as we have seen in the past year, the value of a Bitcoin is extremely volatile. To illustrate, according to CoinDesk.com, one Bitcoin was worth about $118 one year ago. That price soared to $1,147 at the beginning of December and is now down to $438.

A lesser known risk of Bitcoin, the SEC warns, is the greater risk of fraud when it comes to Bitcoin investment schemes. This stems largely from the currency’s newness and volatility. As it is a “new and developing currency,” many people who are interesting in diving into the Bitcoin market aren’t very educated as to how things work. This allows fraudsters to more easily trick people into “investment” schemes where the only goal is to enrich the scammer. Additionally, because Bitcoin value ran up so quickly last year, people may look at it and dream of getting rich quickly. After all, plenty of people who invested in Bitcoin early made thousands, if not hundreds of thousands or even millions of dollars. People looking for a quick buck may be more vulnerable to an unscrupulous fraudster who is more than willing to take advantage of them.

Just like an investment, the SEC says, people must be sure to educate themselves as to exactly what they are getting into.

2 Comments

  1. ElPorito says:

    Nice article.

    I would like to add that it is not entirely true that once a wallet is lost, it can’t be recovered. The great thing about bitcoin is that even if you encounter a HD crash and you happened to have your wallet stored on your system, you can recover it to any other online or local wallet. All you need is your “public key”. https://bitcoin.org/en/secure-your-wallet

    In addition you don’t have to keep your coins on your PC or in an online wallet. Bitcoin owners can comfortable take the coins “off the grid” and store them on a so called “cold storage wallet” which can be a USB stick or even a piece of paper with a QR code.

    In theory this beats any “real banking”. Yes you’re bank account is insured against theft but not against inflation.

  2. Dan Katz says:

    True. I was simplifying it a bit to illustrate the point the SEC was trying to make.

    Thank you for the clarification.

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