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Fantasy Forex Wins Big:

jhaddock (February 17, 2009)


The Meteoric Rise of the “New Breed” of Fiat Currencies

The website “MyMMOShop.com” made headlines this month, with their announcement of a US$10 million dollar deal to sell their site to myMMO, Inc. That’s right…despite a global recession and tepid performance across so many sectors of the economy, the market for Real Money Trading (RMT) is still on fire.

Image RMT – or trading in-game currencies for cold, hard cash – isn’t really anything new in the world of Massively Multiplayer Online Role Playing Games (MMORPG’s for short…or MMO’s for even shorter).

You may have already heard about “gold farming” and how it’s becoming a cottage industry in China…where over 100,000 gold farmers park themselves at a computer every day to harvest gold from the virtual world’s demons and treasure chests.

But with MyMMOshop.com’s sale, this kind of ‘fantasy Forex’ has reached a new level of sophistication…and it’s definitely worth taking a look a look at it.

Real Economy Invades the World of Warcraft…

We recognize that RMT and MMO’s might be new to you, so we’ll give you the skinny on how this all got started.

An MMO is essentially a virtual gaming world online. Much like the pen-and-paper Dungeons & Dragons games of 1980s fame, these games often focus on heroes and dwarves and dragons and goblins…mythical beasts and ‘quests’ to save the princess.

But unlike their pen-and-paper counterparts, these games are full-fledged online realms, where thousands; or even hundreds of thousands of players converge from all over the world. They team up to raid dungeons, go out on quests, save princesses, etc. In doing so, they accrue experience – which makes their player stronger, faster, or smarter – and gold…which can be traded in for goods and services in the online world.

And as the games grew in popularity, so did this gold’s purchasing power.

Friends and co-workers wanted to play along, so they purchased experienced characters or in-game currency on eBay. Rather than plying their skills online for hours at a time, experienced players purchased gold and rare artifacts with real-world cash.

The demand for in-game currencies – and a means for safely converting them into real dollars – became so significant that websites like MyMMOShop.com started popping up, offering RMT services for gamers and gold farmers alike.

Some games even went so far as to offer exchange services themselves, tracking their currency’s supply and demand and offering market exchange rate data (see Second Life’s chart for “Linden Dollars” below.)

Image Now – today – some of these fantasy economies have become frighteningly real.

A 2007 study of “MMORPG Economics,” estimated a single game – Runescape – to have a US$2.1Billion economy, with a per capita GDP of ~US$400. If the author’s estimations are correct, then that means Runescape is about the 149th largest “national” economy on the planet, making its virtual, in-game economy larger than roughly thirty real-world economies.

With the same scale as real-world national economies, one must wonder how these “virtual” economies are managed, and whether they’re victim to the same vicious cycles we see in the real world.

In a (Near) Perfect Economy…

We wouldn’t need a Federal Reserve or Ben Bernanke.

And that’s the case with every major online MMO, where the money supply is micromanaged by computers. Similarly, they don’t use interest rates, discount windows or quantitative easing to enact monetary policy.

Instead, the game’s masters use a different set of tools to achieve similar ends.

By killing enemies and raiding dungeons, players collect raw currency…generating “money.” Image

The second, sterilizing component of most in-game economies is called the “money sink.” This occurs when players trade their newly found money to the game’s non-human vendors in exchange for goods and services. The non-human vendors aren’t players, so they don’t keep an account of their own…effectively destroying the traded money.

Surprisingly, the prevalence of RMT and for-profit gold farming actually leads to “economic growth,” in these fantasy economies. More players are playing more often, generating more money, more goods and more value-added services. This can lead to greater market volatility, but the supremely capable “central bank” computer algorithm behind it all keeps the system safe from spiraling inflation.

Now That’s all Fine and Dandy…But What Are You really Getting At Here?

Aside from being a fantastic tangent from the big business of currency trading, what does the rapid ascent of video game money really mean to you?

Well, first off, one should note that the value of this money isn’t exactly “imaginary,” it’s subjective. The in-game goods and services have demonstrable value to the game’s players. And since players are willing to substitute real economic resources – like their time and the games’ monthly fees – these currencies have also demonstrated utility to the user.

By the way; those are the same criteria by which any fiat currency is deemed to be valuable.
So next time you pull out a dollar at the supermarket, remember to ask yourself “What’s the difference between my dollar and a piece of gold from Lord of the Rings Online?”

It’s about 24 cents.

Best Regards,

Matt

Matt Collins is the editor of The Sovereign Society’s Offshore A-Letter. Visit www.sovereignsociety.com to view more of his original work.

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