Why do Casinos always win?

25 Oct 2020

The downtrend in 2020 indeed causes many people to lose money heavily. That is the reason why BMV provides mainly knowledge, not trading signals or suggestions. Instead of giving you fish, we want to give you a fishing rod.

Today, in the context of the downtrend of the Altcoins market is still not over, I will summarize some important knowledge that you need before stepping into the Crypto market - a really big casino. And one of them is what people call “The Casino Secret”.

I. The Casino Secret

1. Why does the casino always win?

In Gambling, there’s a well-known saying of successful players, that is “The house always wins in the end”. Of course, the House, also known by its familiar name “Casino”, is not a charity. Casinos are also businesses, so they have their own business model and that model must give them enough profit to operate and grow. And in their business model, there are only two cases: Either the player loses and the casino wins, or the player wins and the casino loses.

As we can see, the casino business is always profitable at the end of every quarter or year. That means they always win. So what is their secret?

Many people may think it’s simple, however, every year, gamblers are still broke. And many courses about the casino’s secrets are still available online for thousands of dollars.

The reason casinos always win over long-term periods is because they always have an advantage in every game, even if it's just a little. It is this little advantage that makes gambling become a game of probability. And the casino is simply having more than 50% probability, that’s all.

A good example for this is the famous Roulette game originated from France. In this game, players simply bet on colors (red or black), even or odd numbers, and low (1-18) / high (19-36) numbers. If you hit the color or the number you choose, you will be the winner. This seemingly simple game turns out to be one of the most profitable games for the casino for a simple reason, that is the number 0. This is the money-making number of the casino.

If there were only numbers from 1-36 with black or red colors, the winning probability of the player will always be 50-50. However, with the appearance of the number 0 (some US casinos even have number 00), the winning probability of the casino will always be between 54-55%, and so is the losing probability of the player. This is the advantage of the casino, or “the secret”, which makes the casino always win.

If you still haven’t figured it out, imagine a Roulette with a 55% chance of winning. For every $1 million placed on the casino, the casino will be able to make more than $50,000 in profit or break even. Gradually, if not for 1 day, maybe for 2 days, 3 days or longer, the player will lose money since their winning probability is lower than 50%, and that’s what the casino wants. They don’t want to burn the player’s pocket in a single bet, rather, they prefer taking the money gradually. So the question is, why can this seemingly simple thing cause so many gamblers to lose money?

2. Why do gamblers still want to play (and lose money)?

Even if gamblers know the secret, many players still do not fully understand the core of losing money lies in the volume they play, not the amount of money. Many people are willing to spend $100 to play this red and black game, thinking like “Oh, if the losing amount is that small, then if I play $100, I just lose $5, that’s just a bowl of Pho”. However, it’s not what they think it is.

For example, instead of betting $100, Mr. A bets $10 each time he spins the roulette. In 1 hour, the roulette can spin about 50 times. In 4 hours, that number will be 200 times. So in fact, Mr.A doesn’t play the game with $10, he plays with 10*50*4, which equals $2,000. And if the losing rate is 5%, the money Mr. A loses will be $2,000*5%, which equals $100. The casino will take all Mr. A’s money before he realizes what’s happening. The casino even has some techniques to make Mr. A continue to stay, such as having beautiful female staff, putting no clocks and windows in the casino.

The house’s secret of victory is a game of probability. The secret of the player’s loss is the dangers of double holes, volume or losing control.

So, what does this have to do with Crypto?

3. The biggest casino in 21th century

The biggest casino in 21th century is Crypto. It is no coincidence that Google ranks websites about Crypto Trading or Forex under the label “gambling”. From the lack of intrinsic value to the psychological tricks used by project owners, it all turns Crypto into a game of probability.

And again, this is a game of probability, not a game of “buy low and sell at high price” that new players usually think.

Instead of trying to keep the highest percentage of winnings, new players always try to follow the green and red candles with the hope to buy or sell at the best price, which consequently get them caught up in the market. And without understanding the nature of trading/investing, players are essentially gambling at a casino that is more intensive than casinos in Macau or Las Vegas.

In the Crypto game, the advantages of the owner are very diverse. From things that the player can control such as information and knowledge, to things like transaction fees or gaming psychology, players are always in a passive position and have much less advantage than the owner. It is no coincidence that after a few years, the networth of the CEO of Binance CZ in 2020 is at $2.6 billion, which is doubled compared to the previous year.

So, how to win in this game? The first thing is to be aware of the reasons why we lose money.

II. The psychological trap of the casino

“The house always wins”, “The gambler only stands up when he runs out of money”. These sayings are often used to warn new players. However, most of the other articles are very general about how to avoid the psychological trap of the casino.

From my personal experience, there are 4 mistakes that new traders often make, causing them to lose but do not understand the reason behind it, these are:

Fear of loss: Everyone is afraid of losing. But there is a famous saying: If you can’t stand small losses, you’ll sooner or later suffer big losses. The fear of loss will lead to traders trying to find projects that can bring huge profit with low risk. However, it doesn’t exist.
Limited observation: They usually make decisions based on their personal point of view without looking at the big picture. For example, given that you like a DeFi altcoin, you learn about the project very carefully and decide to hold it since you think it has big potential. However, you forgot to look at the whole market to see the trend (going up or down). And if it’s going down, you will lose money.
Anchor psychology: Making decisions based on the past. For example, if it’s the divergency, you think it will definitely go down and then rush to short with no stop loss.
Herd mentality: This is the most important factor, and also the one that makes Vietnamese people lose money the most. Vietnamese people like to play in groups. And when half of the group share their profits and their FOMO, which lead to the other half also FOMO. And of course, richness will never come to the majority.

It is these psychological traps that cause players in the Crypto market to have lower and lower win rates, and continuously pump more money to recover. But, the more they want to recover, the more they will lose. So, what to do to avoid the psychological trap of casinos? The answer is knowledge and experience. If you are experienced and have suffered loss in the financial markets, then you need more knowledge about Game Theory (some organizations are studying Financial Behavior, which is a subject that will be very popular in the future) and Cycle Theory. Together, these two will be the two powerful weapons for you to take advantage of in the market.

III. Crypto Game Theory

1. Trading Game Theory

By definition, Game Theory is the process of simulating the behavior/interactions between two or more people, in the same environment with rules and regulations. One of the best examples for Game Theory is The Prisoner’s Dilemma (you can google this phrase, there are many good articles for you to read).

Basically, Game Theory has always been applied to study many aspects of life, but the most interesting field, in my opinion, is the economy and finance. You can just simply understand that Game Theory allows you to understand the rules of the game in the market, the players in the market, when and what to do with it.

For example, in learning and applying Game Theory, there will be the following sections:

Game: Purpose of the game
Player: Who is the player and the player’s intent
Strategy: The strategy that the player will use
Payoff: The results that the player receives each time a certain step is completed
Information: Information received by the player at a certain time. Each player can receive different information
“End Game” point: The ending of each player

Okay, so what are the above for? Will it benefit you when you enter the Crypto market?

Let’s find out through an example below.

2. Game Theory in Crypto market

Game: The Game of DeFi

Goal: Attract as much capital into the market as possible. And get rich afterwards.
Players: In this game, there will be many players involved. We have exchanges like Binance, FTX. We have platforms like Compound (COMP), Curve.Fi (CRV), yearn.fi (YFI), etc. We also have Yield Farmers and Traders/Holders. Needless to say, the player’s goal is also to become rich.

Strategy:

With exchanges like Binance or FTX, their strategy to become rich is simple: create waves and attract as many players to join as possible. For example, only in the August-September 2020 period, Binance continuously listed a series of DeFi coins, also including the DeFi Index. Most Binance’s coin lists include leveraged Binance Futures pairs. Binance didn’t even verify the projects it listed (e.g., FUD of Sushi Swap). Binance’s strategy is to get users to trade as much as possible. Traders who trade a lot will have to pay fees for the exchange, who just need to be a middleman to make a lot of money.
With projects like COMP, CRV, YFI, etc., they need to sell tokens. To do it, they must complete 2 things, which are pushing their own token prices and marketing their products. And, we will have projects of several hundred million dollars without legal barriers. In essence, they use the same method as ICO 2017.

So, with traders like you, what is your strategy?

Information: The exchange has information of all traders such as what are the top traders doing, which coins are getting the attention, how are you profiting or losing?, etc.
The project also has information on whether the tokens are sold a lot or not, will there be any buyers when pushing the price up, or if everyone is looking to exit. Knowing the information, the project’s market maker is always able to exit as soon as the market recedes.

How about you? Where do you get the information?

Endgame: DeFi Trend still has a long way to go, but in 2020, DeFi is over. So, what’s the outcome? On Binance, whether the market is going up or down, traders still have to trade, and the exchange still enjoys the fees. The project has sold a bunch of tokens, many parties after the DeFi season in 2020 are either a scam, or “give the project back to the community”, “DAO”, etc., of course, they are millionaires now. And you, how did you end up? If even after reading this article, the concept of Game Theory still sounds very abstract to you, then you can read more below to know how to apply it.

IV. How to apply Game Theory correctly?

What I wrote above is just an overview of how to apply Game Theory to trading and investing. In fact, the number of people studying and applying it to trading in the world is already small (although on the rise), the number of people applying it in the Crypto market or in Vietnam is even smaller. However, at the beginning, I successfully applied it to catch all up waves of BTC and the down waves of Altcoins in the past few days. So, how should you apply it?

Firstly, with examples mentioned above, you can completely apply to the stage of analyzing an Altcoins project to make a decision whether to put money in or not. Questions like who is this team, what is the purpose of the project, what will be the strategy of the project from product to tokenomics to win the market, need to be answered before you put money in to avoid scams.

Secondly, the proficient application of Game Theory will help us stay awake from FOMO, and have logical thinking when making decisions, thereby having a higher win rate. This is what a lot of people lack, especially when it comes to putting money into the Crypto market. Let’s take one more example.

Now, I will give you 2 options:

A: Win a bet of $100M, with 45% chance of winning

B: Win $50M with 90% chance of winning

Most people will choose B, right? Logically, this is definitely a much more reasonable choice.

However, the same case with different numbers:

A: Win $1B bet with 1% chance of winning

B: Win $500M with 2% chance of winning

At this point, a lot of people who choose B in case 1 will switch to A in case 2. Logically, we should choose the option with a higher win rate, and B is still the right choice.

Traders are human, and humans sometimes make illogical choices at times. Case 2 clearly depicts the psychology of most players in the Crypto market. Most of them will choose the most risky options. And because of that, they will always be very careful when buying in an uptrend, and ready to go all in when the downtrend has just started. That’s because they neither think logically nor use tactics, but gambling.

So, how to solve this problem? Obviously, try to make logical choices, with a high percentage of winning instead of gambling. Another way to improve win rate is follow the trend - follow the Cycle Theory. This is a wide and interesting topic, and I will write 2 articles about basic Cycle Theory of Altcoins for you to read! Going with the cycle, the player will always have a higher win rate, what needs to be done now is simply manage your money carefully.

Good bye and see you soon. Don’t forget to follow BMV’s channel so you don’t miss any announcement and useful updates about the market.