Sports Betting Busts: The Top 4 Reasons Sportsbooks Go Bankrupt
While there are a plethora of online sportsbooks that have long histories of reliability and solvency, there’s an equal amount of sportsbooks that have shuttered due to bankruptcy.
Contrary to popular perception, most sportsbooks don’t go bankrupt just because they’re fraudulent. Anything from poor cash reserves to shifting rules and regulations can sink sportsbooks.
Much like any business, sportsbooks run the risk of becoming unprofitable if they’re poorly managed and maintained. For more information on what causes sportsbooks to cease their operations, read on!
Do Online Sportsbooks Really Go Bankrupt That Often?
Absolutely! According to the Oxford Handbook of the Economics of Gambling, over 1,050 online sportsbooks are now defunct. Just for some context, there’s an estimated 579 online sportsbooks currently in operation today. This means that nearly double the amount of active sportsbooks have closed down for some reason or another.
Considering that the first bet at an online sportsbook was placed in 1996, this means that an average of 48 sportsbooks goes bankrupt every year. That’s nearly one per week!
1. The Sportsbook Is Fraudulent
If your online sportsbook is operated by bad actors who set out to defraud bettors from the onset, chances are it won’t be around for very long.
There’s a reason that most people can quickly spot scammy sportsbooks, and it’s because they’re almost all characterized by long payout times. Illegitimate sportsbooks operate much the same as traditional Ponzi schemes, in the sense that they use new incoming bets from their customers to pay out winning bettors who are owed money, too.
Of course, this isn’t a sustainable or legal business model. After a while, these sportsbooks either run into legal trouble, decide to make off with their ill-gained profits or lose the ability to pay bettors back. Any of these factors – either in isolation or combination – can cause sportsbooks to shut down.
Additionally, these sportsbooks could just be identified as scams within the sports betting community, and could quickly lose the vast majority of their client base. Regardless of their reasons for closing down, scammy sportsbooks don’t often have a ton of longevity.
If you’re wondering how to spot sketchy online sportsbooks, check out our guide on the subject.
2. Starting out with Insufficient Funds
As with any kind of gambling operation, the house has to have enough money to pay out winning bettors. Liquidity is essential to longevity for all online sportsbooks. Sportsbooks can go out of business simply because they didn’t invest enough money into their business at the start.
Have adequate funds ready in case of disaster takes some foresight, as it’s natural that there will be bets, games, or time periods when the house is massively exposed. No matter how much an online sportsbook manipulates their lines to attract equal action, there will be some games where they end up taking massive losses. If you need an example, look no further than Black Sunday, where sharps nearly crippled Vegas sportsbooks with some perfectly-applied middling strategy.
Of course, paying out customers is the most essential function of sportsbooks, and if they’re unable to do so because they can’t absorb a string of winning bets by their customers they’ll go bankrupt.
Most frequently, this happens when a sportsbook starts attracting more betting volume than they were planning for. If a sportsbook plans to receive $20,000 in bets every week they’re suddenly earning $200,000 in betting volume, there’s a chance they’ll go bankrupt.
3. Changes In Rules and Regulations in a Sportsbooks’ Licensing Region
Online sportsbooks are expected to comply with rules and regulations of their licensing regions, which has been known to force some out of business. Shifts like these can cause radical changes in a sportsbooks’ business model, ultimately proving unsustainable.
For example, when Gibraltar doubled its corporate tax rate to 10% in 2011, some of the licensed sportsbooks in the region shuttered. Many moved to neighboring jurisdictions with a tax rate that was more favorable to their business model, but some just couldn’t afford the costs associated with packing up and moving.
4. The Owners of Online Sportsbooks Are Prosecuted
As we mentioned in our guide to sports betting’s legality, betting at an online sportsbook is a wholly legitimate endeavor, but owning and operating an online sportsbook that caters to US-based bettors isn’t risk-free.
In 2006, the CEO of BetOnSports.com, David Carruthers, was arrested under the provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO). BetOnSports was listed on the London Stock Exchange at the time of Carruther’s arrest, had taken in approximately $4 billion in wagers (98% came directly from the United States).
This was at a time when US government attitudes towards sports betting were largely negative. Wanting to make an example of BetOnSports.com to discourage online sportsbooks, Carruthers was charged with racketeering, conspiracy, and fraud for his involvement with BetOnSports.com. He was sentenced to 33 months in prison.
The arrest of Caruthers only bankrupted BetOnSports.com for a small period of time, and they were ultimately able to reopen under the same brand and domain name after some astute internal restructuring. However, this online sportsbook incurred massive financial penalties and was restricted from appealing to US bettors. Their business never really recovered, and they ultimately never reached their pre-2006 heights.
Some sportsbooks, including both datawager.com and betwestsports.com, weren’t as lucky after their founders faced prosecuted. Both of these sportsbooks were forced to halt operations after the founders were arrested in the United States in 2008.
Bet with Our Sportsbooks Without the Worry
With all the questions swirling around online sportsbooks, how can you know that the online sportsbook you’re signing up at is safe and not in danger of bankruptcy?
You can always seek out people in the online sports betting community and ask them where they gamble, or you can trust one of the 30 online sportsbooks our team has personally vetted. All of our recommended sportsbooks have a long history of proven credibility amongst bettors.
Still need a helping hand choosing which of the 30 sportsbooks is best for you? Take a look at their available bonuses, and see which one best suits your betting needs.