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Why the Fantasy Sports Scandal Reminds Me of Bitcoin

Back in the middle 1990s, I was covering Eastman Kodak Co. (NYSE: KODK) for Gannett Newspapers by day.

By night, I was working on my MBA in finance at the Rochester Institute of Technology College of Business.

Somehow, I still found time to play on the newspaper's softball team (with such teammates as Trif Alatzas, a man of profound character who's now the executive editor at The Baltimore Sun, and Steve Mills, a terrific investigative reporter who's now at The Chicago Tribune). I hit leadoff and played centerfield… and actually wasn't too bad.

And I also found time to play rotisserie baseball – which folks now refer to as "fantasy baseball."

I was invited into it by Tom Walpole, a friend and Rochester CPA. My team was the "Poison Pens" – a name chosen by my league compatriots in a fun swipe at the way we made our living.

As you can tell from my tale, rotisserie baseball back then was a pretty informal affair. It was laid back and meant to be fun.

In the two decades that have passed since then, fantasy baseball – and football, and basketball and hockey – has become big business.

Big… and murky.

So when a scandal involving this innovative new multibillion-dollar business broke this past week, I wasn't exactly surprised.

A DraftKings employee has copped to releasing data before the start of the third week of NFL games – and winning a whopping $350,000 on FanDuel.

Indeed, it was eerily familiar… and reminded me of a very similar scandal that broke not that long ago.

I'm talking about bitcoin.

As surprising as it seems, these two cases are very, very similar.

Let me show you what I mean.

  • Bitcoin/Fantasy Sports Similarity No. 1: Both came out of nowhere: Bitcoin is a new payment system and a new technology (the blockchain) that were largely unheard of by mainstream consumers until they burst into the public consciousness back in 2013. Same is true of the "big business" version of fantasy sports, which started years ago as informal games that pitted groups of friends or coworkers against one another. Nobody saw the growth that's ensued, with backers like the New England Patriots' Robert Kraft or the Dallas Cowboys' Jerry Jones.
  • Bitcoin/Fantasy Sports Similarity No. 2: Both experienced explosive growth: Bitcoin gained traction in the mainstream realm, and the price skyrocketed: David Zeiler, a former bitcoin miner who's a colleague of mine here at Money Map Press, says bitcoin prices soared 8,500% in 2013 – only to fall 85% by January of this year. The cryptocurrency saw venture funding soar 238% (to more than $311 million) from 2013 to 2014 – and it was accepted by 90,000 merchants by the end of last year. It entered the pop-culture realm, with mentions on network TV shows and on the evening news.

    Fantasy sports are traveling a very similar path. In that realm, companies – led by DraftKings and FanDuel – set up daily and weekly online matches, with entry fees ranging from 25 cents to a thousand bucks. Eilers Research, which follows the business, says daily games will generate roughly $2.6 billion in entry fees this year and will grow 41% a year through to 2020, when that revenue will reach $14.4 billion. DraftKings has a three-year deal with the NFL and has landed hundreds of millions of investment dollars from FoxSports. Rival FanDuel has raised similar amounts from NBC, KKR & Co. LP (NYSE: KKR) and Comcast Corp. (Nasdaq: CMCSA).

  • Bitcoin/Fantasy Sports Similarity No. 3: Both are largely unregulated: Because both of these are new businesses – indeed, are terrific examples of "convergence economy" businesses (new ventures created when multiple new technologies "meshed" in a way that opened up new opportunities) – they both fell into a kind of "No Man's Land" when it comes to regulation.

    With bitcoin, that lack of oversight was a key allure – until the Mt. Gox scandal of February 2014. Launched in July 2010, the Mt. Gox bitcoin exchange was by late 2013 handling nearly three-quarters of all bitcoin transactions. The venture suddenly closed, suspended trading, closed is website and exchange service, and filed for a form of bankruptcy protection. The scandal exacerbated the precipitous price drop we saw in bitcoin.

    Fantasy sports falls into a similarly "gray" area when it comes to regulation. It's not gambling, per se, so it doesn't fall under gambling laws. And it's not an "investment," either. But it relies on the kind of data and sentiment shifts that are characteristic of both.

It'll be interesting to see how this all plays out…

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