– also referred to as item betting – is more of a genre of gambling products
as opposed to a unique product.
Our research suggests that skin betting is far and away the most popular way for esports enthusiasts to bet, but the murky nature of the industry complicates precise analysis of market size – and also raises questions regarding the long-term viability of the industry.
Skin gambling 101
Below find our white paper that serves as an introduction to the market for virtual item gambling, or read on for a condensed version.
What it is
Skin betting is effectively identical to “traditional” gambling (e.g., the type that happens in a Vegas resort or at an online casino like Bet365), save one key difference: instead of betting using cash, players bet using in-game items from Counter-Strike: Global Offensive (CS:GO) and Defense of the Ancients 2 (Dota 2).
The in-game items are generally items that can be used to change the appearance of your game character or items, hence the term “skins.”
Following that swap – skins as the underlying currency instead of cash – skin betting is broadly indistinguishable from traditional gambling. Players bet skins on things like:
- Esports matches
- Coin flip games
- Casino games like blackjack and roulette
How big is it?
There is low visibility into the skin betting vertical. Very few, if any, publicly-traded companies are directly involved, and many of the operators appear to be small outfits with opaque ownership.
That reality complicates a precise analysis. But based on my research for Narus Advisors / Eilers & Krejcik Gaming (involving a mix of acquired data, channel checks, and a healthy amount of speculative modeling), I feel confident making the following observations:
- Skin betting is far and away the most popular way to bet within the esports community.
- The total handle across all skin betting sites – based – was on pace to exceed $7bn in 2016 prior to Valve’s crackdown.
Why it works
A few key attributes of skin betting help to explain its popularity:
- Low friction: For the typical gamer, signing up for a skin betting site and placing a bet is a matter of a handful of clicks. The games are quick and generally have no learning curve.
- Abstraction: The use of skins instead of cash is akin to the replacement of cash with chips in the casino, creating a level of abstraction that likely increases the typical willingness to wager.
- Compelling value proposition: Many players might regard unused skins as having lower value than they actually do, and the chance to parlay those items into the acquisition of new (often random) assortments of skins can similarly be overvalued. That creates the perception of a value gap that allows players to justify wagering when they know it’s a long term losing bet (e.g., a lottery with a rake).
- Low barrier to entry: Skin betting sites are often hyper-simple games, making it low-cost for a new operator to enter the market.
- Highly social product: Videos of skin betting – especially massive wins – are popular on platforms like YouTube and Twitch. Streams of skin betting sessions are a common sight, and streaming platforms are often a significant source of traffic for skin betting sites.
While the growth of skin betting has been impressive, there are material questions surrounding the near-term future for the industry.
- Lack of regulation: The skin betting space is effectively unregulated. Such spaces have typically run into significant issues with fraud, or run afoul of key stakeholders (media, lawmakers, etc).
- Legal ambiguity: The question of the legality of skin betting remains an open one. The example of daily fantasy sports is instructive when considering possible trajectories for a wagering product that attempts to operate outside of the legal / regulatory framework for gambling in the United States.
- Saturation: There are dozens and dozens of operators, a landscape that is splitting revenue and liquidity. Compressing revenue and liquidity would likely result in a whole greater than the sum, especially for jackpot products.
- Lack of product innovation: The simplicity of the product may well be an asset. But it’s unclear whether leading skin betting sites have the capacity or interest in developing additional iterations to drive additional interest.
- Lack of supporting structure: The small-scale nature of many skin betting sites also means that ancillary functions – marketing, affiliate programs, customer service, and so on – are undeveloped, a reality that may depress consumer interest.
- Dependence on Valve: The entire product is built on the back of the Steam marketplace. If Valve were to take a dim view of skin betting, the ability of skin betting to sites to accept and pay out skins would be dramatically diminished.