Bubbles can happen anywhere, from virtual worlds in video games to real-world financial markets. It may seem like these two have nothing in common, but they both follow the same pattern of rapid price increases followed by a crash. By understanding how these economic bubbles form in games, we can learn about the broader world of finance.
Virtual Economies in Games: What is it?
Many online games have virtual currencies and in-game items that players can buy, sell, and trade. These currencies have no real world value but can be very valuable in game. Over time these virtual economies can experience what’s called an economic bubble – where the price of certain items or currencies rise to unsustainable levels before crashing down. Developers heavily control in-game economies but can still exhibit similar characteristics to real world financial markets. For example in games like World of Warcraft, Counter-Strike: Global Offensive, or EVE Online players trade virtual goods. When demand for a specific item increases or a new game update introduces rare, highly sought after items prices can go through the roof.
How These Bubbles Form
- Inflated Demand: Players chase after rare or limited edition items, thinking they can sell them later for a profit.
- Speculation: Just like when you learn market strategies, some players speculate on items or currencies, hoping their value will increase.
- Lack of Regulation: In many games, developers rarely intervene in the virtual economy. Without regulation, the market can get out of control.
- Sudden Crash: When developers patch the game, change item availability, or the player base drops, the bubble bursts, and prices crash.
Real World Markets and How Games Can Predict Crashes
In real-world finance, economic bubbles are often triggered by over-optimism in something that has no foundation. The 2008 stock market crash was caused by a housing bubble inflated by speculative investments in mortgage-backed securities. Similarly, in video games, virtual currencies or rare items can quickly rise in value due to hype or speculation, but if the demand doesn’t match reality, the bubble bursts.
Game economies are great practice grounds for understanding real-world crashes. Players see the patterns forming before prices drop and developers sometimes cause these crashes by limiting access to certain items just like how government intervention can change the course of a market.
Historical Examples in Games
Take EVE Online for example. Players in this game create virtual corporations and engage in large scale economic activities. Over the years there have been several economic crashes including one in 2014 when a single item’s price went through the roof and then crashed. This was due to speculation and the introduction of new game mechanics that affected the demand.
Game and Real World Similarities
Both games and real life can have:
- Speculation: Whether it’s guessing the price of an in game item or a currency pair, speculation increases demand.
- Artificial Value: In both cases, the value of assets (virtual or real) is driven by perception and belief, not worth.
- Market Manipulation: Players can manipulate prices by controlling the supply of rare items, big traders and central banks can manipulate currency markets.
How to Spot and Avoid Bubbles
Knowing the patterns that create bubbles can help you avoid getting caught in one whether you’re playing a game or investing in real markets.
- Look for Sudden Price Spikes: In both games and real-life, big, unexpected price jumps are usually unsustainable.
- Don’t Get Caught in FOMO (Fear of Missing Out): It’s easy to get caught up in the hype, but staying grounded and asking if the value is backed by something real will help.
- Watch for Changes in Supply and Demand: In games this might mean watching what developers are changing or updating. In real life economic policies or global events might signal changes in supply and demand.
Conclusion
Both virtual economies in games and real-world markets offer lessons on how bubbles form and burst. The difference is one is controlled and regulated by developers and the other is at the mercy of global economic forces. By watching how prices move in virtual worlds, we can better understand the mechanics of economic crashes and avoid making the same mistakes in real life. Knowing this helps you make better decisions in games and also teaches you lessons for the real world. Just don’t get caught up in the hype.
