Credible returns on investment in virtual world finance?

August 12, 2008 9:30 PM

Anybody have experience in investing in virtual world banks/businesses/markets (such as those in SecondLife.com etc)? Do they provide a serious way of making a sensible risk/reward on five or six figure investments?

I have found discussion of investing in virtual worlds in this article for example which concludes its very high risk but maybe someone has heard of a viable diversification strategy out there?

posted by vizsla to work & money (22 comments total)

If you're investing in someone with a business plan, well, how strongly do you believe that that plan, executed by that person, will work out?

Second life is known for being really good self-promoters but with little/flawed product. I'm just some mook but the schemes that are being proposed seems to me absolute junk.

Short term thing? Maybe. Long term? Naw.
posted by porpoise at 9:42 PM on August 12, 2008

Second Life is made of hype and failure, and seems to exist primarily to give crap oldmedia journalists a way to write about CYBERSPACE!!!!!

Enter the second problem, the L$ exchange markets are effectively rigged. .... This game was just a pyramid scheme.

"Linden Dollars are not money, they are neither funds nor credit for funds. Linden Dollars represent a limited license right to use a feature of the simulated environment. Linden Lab does not offer any right of redemption for any sum of money, or any other guarantee of monetary value, for Linden Dollars."

The article you linked, for example, talks about banks. At the beginning of 2008, Second Life decided to ban banks.
posted by TheOnlyCoolTim at 9:50 PM on August 12, 2008 [1 favorite has favorites]

Do they provide a serious way of making a sensible risk/reward on five or six figure investments?

They are essentially unregulated, have little or no oversight from any agency, have no physical assets backing up the virtual money staked, are completely uninsured, and rely on both the virtual bank and the company who is running the virtual world to stay solvent.

Does that sound sensible?
posted by Ookseer at 9:53 PM on August 12, 2008 [2 favorites has favorites]

Ookseer: "Does that sound sensible?"

No less sensible than investing in the stockmarket of a developing country, or in a class of highly speculative stocks in a developed country's stockmarket perhaps?
posted by vizsla at 9:58 PM on August 12, 2008

This reminds me of a Wall Street Journal article I had to read for an econ class about how China was becoming unhappy about the rise of online gaming currency. Just something to take into consideration...
posted by PixelatorOfTime at 10:22 PM on August 12, 2008

If you're interested in uninsured risks, than SL can be a place to make money. Although I have been very active in SL and it provided full time income for my family for a period, I would never, ever put money into any kind of SL investment brokerage. My belief is that to make money in SL from an investment standpoint, your best options are to either back a really top-notch content producer who also has business sense, or back one of the handful of third party services associated with SL.

Out of the many problems associated with SL investments, one of the most basic is that if you don't have a very thorough understanding of SL, you probably can't find the right people to back. In addition, while I could personally formulate something you could really make work well with five figures, it is beyond my imagination what you would do with six figures in SL unless you had a very, very diverse plan.
posted by DarlingBri at 10:31 PM on August 12, 2008

DarlingBri: "while I could personally formulate something you could really make work well with five figures, it is beyond my imagination what you would do with six figures in SL unless you had a very, very diverse plan."

Would be very interested to know what you think is good plan with five figures. Any chance of giving a few tips of what you'd suggest?
posted by vizsla at 10:59 PM on August 12, 2008

No less sensible than investing in the stockmarket of a developing country, or in a class of highly speculative stocks in a developed country's stockmarket perhaps?

Vizsla, if you already have a strongly formed opinion about this topic, why did you ask this question in the first place?

Do you seriously think SL is as risky or perhaps less so than dealing with real people in developing countries where there are real world assets backed up by human sweat and guns if needed?

If so I have some ocean front property here in Chicago I'd love for you to help me develop...
posted by wfrgms at 11:09 PM on August 12, 2008

Well, there are a limited number of ways to make real money in SL. Generally, they are:

1. Clothing, skin, accessories
2. Service provision, from sex to textures
3. Land investment
4. 3rd party SL development
5. 3rd party services that are not development

Again, the ability to deliver any of these services depends entirely on the skills of the people doing the work on the ground, and unless you are very familiar with the market, you will be challenged to identify top quality producers in any of these areas.

In addition, aside from #4 and #5, transactions within SL are micro transactions. Making money is entirely about scale.
posted by DarlingBri at 11:29 PM on August 12, 2008 [1 favorite has favorites]

Oh, I suppose #6 would be currency speculation, but that strikes me as being not a very good idea.
posted by DarlingBri at 11:32 PM on August 12, 2008

DarlingBri: "Again, the ability to deliver any of these services depends entirely on the skills of the people doing the work on the ground, and unless you are very familiar with the market, you will be challenged to identify top quality producers in any of these areas. "

Hmm thanks very interesting. How would you determine whether a producer was top quality or not generally?
posted by vizsla at 12:29 AM on August 13, 2008

Once they open source SL the money will be even more useless than it is now.

Why are you so keen on virtual world investment? This is the internet-- people are used to free.
posted by ®@ at 4:02 AM on August 13, 2008

1. Clothing, skin, accessories
2. Service provision, from sex to textures
3. Land investment

Seems to me your investment would depend heavily on Linden Labs and the SL user base.

In the real world, there is a finite amount of land and fairly consistent ownership laws. In second life, Linden Labs can arbitrarily create land, and their TOS probably lets them take it away from you, move it, or change it however they like. That inner city plot may seem valuable now, but if Linden create a teleporting portal from the middle of town to somewhere remote, new land would be available just steps away from the high value inner city land.

Or one day Linden could simply announce they won't convert linden dollars back to real money any more. Would you have any legal recourse in this situation?

Second, in any future copybot-like situation you're basically relying on Linden to come to your rescue. Will they have the will and the technical capability?

Third, the size of your customer base depends on the popularity of second life, and the economic means of users. The active spending population may decline due to boredom, the emergence of a competitor, or technical problems. Furthermore, users leaving would directly free up resources like land, so you get an increase in supply and a decrease in demand.

Fourth, the currently new economy may change drastically, such as due to taxation.

That said, some people are making at least some money trading in virtual items in computer games. My personal inclination would be to acquire items and resell them fairly fast, rather than storing a large amount of stock in a virtual world, because the longer you hold on to things, the longer you are exposed to the risk of economic change within the virtual world, outlined above.

My other personal inclination would be to not invest more than I was willing to lose entirely. For me that would be two or three, rather than six, figures.
posted by Mike1024 at 4:16 AM on August 13, 2008

Third, the size of your customer base depends on the popularity of second life, and the economic means of users. The active spending population may decline due to boredom, the emergence of a competitor, or technical problems.

Content (skins etc) can be ported. Just sayin'. And conversion tools, in themselves, would be a money-making opportunity..
posted by Leon at 4:52 AM on August 13, 2008

Seems to me your investment would depend heavily on Linden Labs and the SL user base.

That's rather self evident. The greatest risk for anyone in SL is that Linden Lab could go bust, sell, or close their doors one day. That risk is inherent in the platform.

That inner city plot may seem valuable now, but if Linden create a teleporting portal from the middle of town to somewhere remote, new land would be available just steps away from the high value inner city land.

Err, that already happened. You can teleport anywhere in SL in seconds. Rather than killing the economy, what happened is that this fuelled a massive demand for private islands at 1K a pop. Yeah, people who had invested heavily in telehub real estate got hosed. The people who were able to cop on to how SL was going to actually work in the aftermath of that change made a killing, however. There was a tremendous upside.

Third, the size of your customer base depends on the popularity of second life, and the economic means of users. The active spending population may decline due to boredom, the emergence of a competitor, or technical problems.

This has always been true. There are already competitors but SL is the market leader. Economy stats are (or at least were) published monthly by LL and the trend has been steadily upwards.

Or one day Linden could simply announce they won't convert linden dollars back to real money any more. Would you have any legal recourse in this situation?

You don't need legal recourse. You need a secondary currency market, which would immediately (re) emerge. Most people wishing to spend L$ have to purchase them. Currently they are predominantly bought from LL's currency exchange, but in the past they have been bought directly from sellers on 3rd party exchanges.

That said, some people are making at least some money trading in virtual items in computer games. My personal inclination would be to acquire items and resell them fairly fast, rather than storing a large amount of stock in a virtual world,

SL is not WOW. Objects are not finite resources. If you make one shirt, or one chair, or one house, you don't sell that object one time; you sell it an infinite number of times. If I had to make a couch and sell it one time, it would cost $30 and not 30 cents.

Content (skins etc) can be ported. Just sayin'. And conversion tools, in themselves, would be a money-making opportunity.

Creators are fairly ferocious about protecting their copyright and LL does act on DMCA take down notices, as they are legally bound to do. Yeah, there is risk there, but anything online can be ripped off; this is in no way a risk exclusive to SL.
posted by DarlingBri at 5:30 AM on August 13, 2008

Economy stats are (or at least were) published monthly by LL and the trend has been steadily upwards.

I just get the personal impression that in late 2006/early 2007 there was a lot of buzz and talk of things like press conferences in second life, whereas nowadays I mostly hear furry sex jokes.

As I say, that's just my impression - and I'll admit Linden's graphs do show steadily increasing transaction volumes.

SL is not WOW. Objects are not finite resources. If you make one shirt, or one chair, or one house, you don't sell that object one time; you sell it an infinite number of times. If I had to make a couch and sell it one time, it would cost $30 and not 30 cents.

It's true that SL is not WOW; that was just the easiest to find article on selling virtual goods for real money.

In the specific example of land investment, item 3 on your list, is it possible to buy land and then sell it an infinite number of times? Likewise with currency investment.

It's possible I was overly pessimistic in my post, but if I was making a six-figure investment, I'd be pretty conservative with where I put it :)
posted by Mike1024 at 6:26 AM on August 13, 2008

It's a speculative environment. You're highly dependent on maintaining Linden's good will; it's possible for them to delete your account or change the rules in a way that wipes out your investment. On the other hand, if you guess correctly about changes to the world and demand patterns, it's possible to make a good rate of return. It's a high-risk environment; a lot of that risk may well be uncompensated.

Daniel Terdiman's Entrepreneur's Guide to Second Life is essential reading. Assume that anything in there is common knowledge. If you go in knowing less than what it says, you'll get creamed. If you go in knowing only what's in there, you're very unlikely to make significant money, since everyone else will be doing the same things. As with any business plan, unless you can come up with some good way to differentiate your offerings, don't expect to do all that well.

Keep in mind that not only has Linden banned banks, but also that most virtual world "banks" have been pyramid schemes or borderline scams. There's not a natural need for banking services in Second Life. There's generally no security need for people to us a bank rather than keeping their Lindens under the virtual mattress. Further, since in-world mechanisms for raising capital are inferior to out-of-world ones, there's no good role for banks to play in matching depositors and borrowers. Most other market-making schemes are similarly unnecessary, given the existence of Linden's official exchanges. It may be possible to come up with something, but simply imitating a real-life institution (Bank! Stock exchange! Insurance agent! Commodities futures!) isn't going to get you very far.
posted by grimmelm at 6:49 AM on August 13, 2008

No less sensible than investing in the stockmarket of a developing country, or in a class of highly speculative stocks in a developed country's stockmarket perhaps?

I'm not an expert on the SL economy, but if there are no contracts or legal system to rely on, that fact alone makes it more risky than 99% of investments in the real world. That doesn't necessarily mean that SL is not a good way to invest, but the returns would need to be astronomical in order to be sensible given the real world alternatives.
posted by burnmp3s at 7:00 AM on August 13, 2008

Hi, I'm from the Guiding Hand Social Club, and I'd like to manage your virtual portfolio.
posted by BitterOldPunk at 7:46 AM on August 13, 2008

>item 3 on your list, is it possible to buy land and then sell it an infinite number of times?

No. Land is strictly controlled.

I would be hesitant to put any real money into SL. There are no protections for you there. Its like playing monopoly with friends. The owner can stop the game anytime he likes or change the rules anytime he likes. "Land on parking, give me all your money."

This isnt far fetched as they shut down banks and lots of people lost real money. I mean they lost virtual experssions of non-currency that just happens to have a relationship with American dollars and can only be bought with real currency.

Linden has a wonderful scam going. My hat is off to them!
posted by damn dirty ape at 7:47 AM on August 13, 2008

Daniel Terdiman's Entrepreneur's Guide to Second Life is essential reading.

I'm glad you think so. I'm in that book and acted as the technical editor for the first half of that project. I think it's a good intro to the subject and a good overview of various economies.
posted by DarlingBri at 10:37 AM on August 13, 2008

No less sensible than investing in the stockmarket of a developing country, or in a class of highly speculative stocks in a developed country's stockmarket perhaps?

There are more dangers to investing virtually than the real world. Here are a couple:
- The laws of the universe can change on a whim. (See the changes in land value mentioned when people can freely teleport.) Someone can offer a highly profitable pay service that can be made obsolete in an instant. Or worse, they could remove the feature from the API that makes the service possible.
- Investing in a country at war. Virtual worlds that do real money transactions are constantly under attack from many different directions. From kids trying to scam a buck to large, tech oriented crime organizations. When (not if) one of these succeeds they will cause more damage than a civil war or a hurricane to a third world stock market.
- Outside legislation. In an internationally run virtual market game comes under many many different jurisdictions and they can cause unmanageable havoc if they think they can get a vote/dollar out of it.

You asked if it was "a sensible risk/reward on five or six figure investments". I would say only if you have that much to lose and have millions invested elsewhere. But shit, if I had that kind of money to spend on highly speculative ventures I would go into VC.

The best way to make money in this scene is to invest a few million in a company that builds the virtual world and controls the currency.
posted by Ookseer at 11:54 AM on August 13, 2008