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Second Life's booming economy merely a pyramid scheme
Second Life's economy is said to be worth $200m a year, based on the goods that change hands inside the virtual avatar paradise.
But the economy is largely a pyramid scheme that is based on new players pumping in addition funds and thereby driving up overall prices. But as soon as players try to cash in, they quickly find out that their virtual profits are all hype, alleges a Randolph Harrison on his Capitalism 2.0 blog.
Second Life has its own online currency, called Linden Dollars that can be openly exchanged for US Dollars. Players claim to have made real world billions trading virtual properties – mostly land, but also from selling clothing and other accessories as well as virtual prostitution (phone sex for the 21st century) and gambling.
But don’t try investing in some virtual property, sell it for a profit after several months and cash in your Linden Dollars for some real world green. Harrison claims that trying to exchange those funds without facing a severe loss is in practically impossible.
The official exchange run by the game developer functions as an open auction that brings buyers and sellers together. But that also makes it impossible to do large transactions there.
That leaves private exchanges that lack any volume. As a result, any attempt to trade a large amount of Linden Dollars will result in an instant drop in the exchange rate.
Example: mid July 2006 SLL/USD was 293.0/279.2 bid/ask on the primary open exchange. Our attempts to trade L$650,000 resulted in settlement bids of 350-450. Interestingly, these trades tended to net returns of right around 4%, which was the prevailing dollar deposit rate.
As we scratched our heads trying to figure out if there weren’t a more clever way of disguising our trades, or perhaps creating our own in-game banks and exchanges in order to arbitrage the other direction, it suddenly dawned upon me.
This game was just a pyramid scheme.
Second Life may offer some great entertainment. But anyone waiting to invest their hard earned cash to start up a flourishing business in the booming economy is dearly mistaken.
"Diva" makeup: virtual paint for sale
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Have you been reading too much ValleyWag nonsense? Do a little reading and you'll see a host of people debunking their anti-SL anti-hype. They simply don't get it.
As for your specific claim:
I'm not sure how it's even possible to sell 600,000L at "settlement" rates... The system is set up so that you set your sale price, and it waits until it has a buyer. You could intentionally undervalue your L$, I suppose... but, seriously, how is it even possible that you managed to do that?
As for investing real money in SL, you missed the point entirely. SL is not a game. You don't invest money in the virtual world itself. You invest in the infrastructure. You spend your money to pay someone to start a business, and yes, as you point out, it's mainly entertainment. But you don't invest real money into L$ hoping to spend your L$ on some sort of grande investment ... that's silly.
Posted by: Hiro Pendragon | January 25, 2007 5:44 PM
OK pardon me on this but how do you even figure its a pyramid scheme pre tell? I'd really like to hear your take on this as some of the people that start up businesses in SL dont even use any real world start up capital to start. For instance one can work out an agreement with a land owner to give them a little cut of the sales or pay rent on land and use no start up capital what so ever to do so.
The only real investment a good deal of people are putting in is Time for the most part. Say someone owns 1536 square meters of Land they then are paying about 18 buck a month or whatever it is. Now if their store becomes popular and they can cash out say 200+ a month then they are making money. Now if they can save up enough to get an island and their store remains popular and they invest more time they can cash out to get the island then pay off the island with their cash out fee's and if they are making enough to make a profit at the same time they are still making money.
Its far from a pyramid scheme you need to invest time to learn how SL works and be patient to sell your L.
Posted by: Lina | January 25, 2007 6:27 PM