Bitcoin has been in the news a lot lately. I've been trying to think about virtual money more broadly. What IS money? How does something become money? For more than a decade, I've been studying video game economies, where the first virtual currencies were born. This year I've released a book that explains how game economies spawned virtual currencies, and talks about what this means for daily life. As more of the economy goes virtual, governments are probably going to have to get by with less tax money, for better or worse. At the same time, the economy will get more chaotic. Money is a pretty big deal, and change is on the way. Well, that's what I'm working on these days. AMA!

All done now. Thanks for the comments!


Comments: 1751 • Responses: 38  • Date: 

Lokais574 karma

What game would you say has the most complex and vibrant economy?

EdwardCastronova1098 karma

I would say that EVE Online has the best economy. By far. It's an older game, but the economy in it is real in so many ways. Trading markets are so realistic, and the tools they give you to analyze trends are just amazing. If you're an econ geek, or a business nerd, you must play EVE.

Sleazed358 karma

What's your opinion on Dogecoin?

EdwardCastronova629 karma

Funny. I love it.

polalion298 karma

What do you think about people who say that any real money loss in the EVE Online Bloodbath of B-R5RB is essentially bullshit because none of it was real?

I don't play the game, but I'm curious.

EdwardCastronova694 karma

People who say that money loss in EVE isn't real, I would say, should reflect on how they would feel if they accidentally flushed a $20,000 diamond down the toilet. To them, perhaps, a diamond isn't worth anything. But the fact that other people value it, makes it necessarily valuable to us all. The fact is, players put incredible amounts of time and thought into their game assets. They enjoy those assets. Wiping them out is like destroying a diamond. It hurts; economic value is truly destroyed.

TheBoozeKing225 karma

What do you think about digital currencies like Microsoft points?

EdwardCastronova284 karma

Microsoft Points is an example of one of the broader trends I point out in the book. There's more to digital currency than bitcoin. These points systems tend to be expanding in scope and scale. They are part of a bigger trend toward informal currency and invisible purchasing power.

Merrizon198 karma

what's the funniest form of currency you've seen in a game? I remember there was this browser game once where the world currency was meat. Can't for the life of me remember the name of the game though.

EdwardCastronova452 karma

I think the funniest forms of currency aren't in games, they're in real life. On Yap, a Pacific Island, the money is in the form of these great big stones. Beaver pelts were once money in Finland. (And might still be money in Northern Michigan). (I can make that joke because my family is from there.)

slowlike_emu197 karma

How did you get into the whole virtual currencies thing? What caused you to take an interest in it?

EdwardCastronova360 karma

I got into virtual economies because I'm a gamer. Right around 2000 my career was in the dumps. I sort of gave up and started playing EverQuest, an online game. I thought it would be a funny research project to tally up the economy of that place and treat it like it was real. It turned out, there was a lot of economic value being traded around in there. I wrote the paper as a thought-provoking thing - not exactly a joke but kinda weird - and it took off. So I decided to study this for as long as it remained interesting. It's still pretty interesting.

daaniloviici174 karma

If you had 500$ to invest in a virtual currency if your choice, which one would it be and why?

EdwardCastronova485 karma

I would not invest in any coin at the moment. I don't like risky investments at all. All cryptocoins are risky at the moment and, from 60,000 feet, they do not show enough signs of better or worse right now. It's like social network software in 2005. Would you bet on MySpace, Friendster, or Orkutt? It turned out that Facebook was the winner.

sebicas-20 karma

A friend of mine didn't want to spend $50 on Bitcoin 2 years ago when I first talk him about it... and now to buy the same amount of coins he needs over $50.000.

My recommendation is spend those $500 on Bitcoin now, don't wait. Yes, is very risky but it could be a huge pay off as well.

If you can't afford to loss $500, invest $50. As I said is better $50 today than $5.000 in a year

EdwardCastronova40 karma

I really disagree with this logic, sorry.

Reddit-Mark150 karma

How do video game economies become so large when no physical items or assets are being purchased?

Is there ever a chance that the government might tax virtual currencies, if this is even possible?

From your research, which video game has the largest economy?

EdwardCastronova255 karma

Game economies get big even though nothing is tangible, that's true. But think about it. The color red on a car isn't tangible, but you pay for it. A URL isn't tangible, but you pay for it. Many intangible things are part of the economy. If people value something, and it is in short supply, it will have a positive economic value. That's how bitcoin's get value - people want them.

EdwardCastronova111 karma

Going back to an earlier Q: The government will certainly tax virtual currencies. The question is, which ones? I hope they don't tax currencies in games - that would be stupid, wouldn't it. But at the same time, they can't let all transactions in something like bitcoin go untaxed, because it would hurt the dollar and the "real" economy. Whether that's good or bad depends on your politics.

everythinghasfresnel39 karma

But at the same time, they can't let all transactions in something like bitcoin go untaxed,

How do you imagine governments will force taxation on bitcoin? I imagine they might attempt to tax the income of people who earn bitcoin for their labor, as well as forcing retailers to charge sales tax. But it seems like it would be nearly impossible for them to force people into compliance like they do today. Maybe they will just ask nicely?

EdwardCastronova105 karma

In the US, the IRS has declared bitcoin to be a commodity. There's is a tax on barter, that is, exchange of commodities. Thus, the US govt has declared that every transaction using bitcoin has to be report and taxed. Whether they will be able to enforce this is another matter.

Obsrv135107 karma

What are your thoughts about nearing a point where they process 51% of the Bitcoin transactions? How is this affecting the Bitcoin market right now?

EdwardCastronova121 karma

I think the 51% attack idea is pretty serious. It's one of a number of problems that bitcoin faces. This is normal for the tech that's first out of the box. Cryptos also have to solve usability problems, and value-stability problems, before they take off.

usrn33 karma

value-stability problems

As it depends on supply and demand, the number of participants and distribution of coins I would think that it's not something any crypto can solve.

Also, based on the historical bitcoin exchange rates, volatility improved a lot recently.

EdwardCastronova50 karma

Nautilus Coin seems to be trying to be Keynesian. It has a value-stability fund. Will it work? I don't know.

cent6653 karma

Has there ever been a virtual coin that has been inactive for some time (months or years) and suddenly becomes active for no apparent reason?

EdwardCastronova101 karma

There's a dead coin out there, mastiffcoin, I think, that's being used to launder other coins. I can certainly see this happening. I anticipate there being coins that live for only a few seconds.

Damnskipp46 karma

What do you think about the way EA runs its business?

EdwardCastronova284 karma

It is my considered opinion that they seem to make some people angry.

Yamogi42 karma

I had to do an assignment based on Bitcoin for my cryptography module last year. What are your thoughts on Zerocoin, the Bitcoin anonymity extension (if you've come across it before)? Do you believe we should expect complete anonymity when making transactions? I'd be interested to hear your thoughts.

EdwardCastronova77 karma

There will always be a demand for highly anonymous, invisible money. I have read that Bitcoin may not be the best in that regard. I see a really wide field of competition, with some coins offering one type of service, others another. Anonymity will always be in demand. Not for everyone, or every transaction. But enough to be really important. Expect more things like Zerocoin in the future.

ThePraetorian36 karma

So who, in your opinion, is doing the best for Free-to-Play game economics and implementation?

Do you think its possible to get it done right, should no F2P title meet your criteria?

Also; besides attaining a PhD, what experiences do you have within the gaming industry for economy creation and oversight?

EdwardCastronova66 karma

There are a number of games that do F2P well. I like the idea of a trial period for free, then pay if you want to move up in levels. I hate pay-to-win.

EdwardCastronova45 karma

I'm an ivory tower academic, with zero experience inside game companies. These thoughts come more from an understanding of the history of money and how it has worked in different cultures. And, from the POV of a player, inside games.

BobAlison29 karma

Mainstream economists often point to Bitcoin's controlled supply as a fundamental weakness, insisting that it discourages spending and will lead to "hoarding".

What are some good examples of virtual and game economies with a restricted money supply? How did this kind of monetary policy affect the desire of participants to spend or not spend the currency?

EdwardCastronova48 karma

There are no examples of any game building its economy around a fixed money supply like Bitcoin. Those economists are right, and the game economies are the proof. Game devs have tried everything, and failed many times. One thing they learned early was, if you want to get an economy going, you give out quite a bit of currency. This is the opposite of bitcoin's protocol. Game economies generally thrive with low, positive inflation, which means, a money supply that's growing a little bit faster than the economy. This is exactly what the real world economy does too. It's not a coincidence. It's the best way to go.

BobAlison17 karma

Game devs have tried everything, and failed many times.

What's the best example of a game that tried to restrict the money supply and failed?

EdwardCastronova30 karma

Game companies use "drains" to suck money out of the system when there's too much. They lose control when the drains are smaller than the faucets. Usually that's because of the faucets being too big, that is, it's too easy for players to mine up the gold they want. And that has happened many times.

BaurusdB3 karma

The primary use of Bitcoin is its use as a medium of exchange.

EdwardCastronova11 karma

That's fair. Then usability should be a key concern.

joolampshades28 karma

Do you have any thoughts on Huntercoin? Its a decentralized game that takes place on a blockchain and has its own currency. People mine the currency by collecting coins in the game. I find it fascinating. Still very early days though.

Here is a screenshot.

EdwardCastronova22 karma

Will take a look. Thanks for the tip! Sounds VERY intriguing.

Such_Account26 karma

This is a really cool subject, thanks for doing this AMA! You say that game-economies have a lot in common with "real" economies, and can indeed be associated with actual value, and I agree. But for many of these economies, "real life money" can be exchanged for in-game money, but not the other way around. Does this ever lead to inflation, and do you think games could benefit from allowing money to be traded both ways?

EdwardCastronova41 karma

I don't generally think that trading real dollars for game dollars is good for games. Typically, this trading is done to benefit somebody, the game owner or a third party. They generally are not in the game to make the game better. From a gamer's perspective, I would want to see a very thick wall between game economies and the real economy. As an economist, I also think that's a better move for the industry in the long run.

Otheuss24 karma

1.How would you recommend someone to get into virtual / in-game currencies (as a job)?

  1. Apart from your research what helped you to get work in that field?

EdwardCastronova57 karma

There is a tremendous need in the game industry for people who understand both statistics and games. Big-data analytics, combined with game design savvy, is a very real need. We're launching a new degree in game design at my university next fall, and systems thinking like this will be the core.

EdwardCastronova51 karma

It was just my research, I'm afraid. First I got a PhD in Economics. Then I spent ten years in the trenches, working on cost-benefit analysis of social programs. (Talk about virtual reality.) Then I decided to aim those tools at game economies. Basically: Go to college, learn all you can about economics, statistics, and games.

Otheuss14 karma

Thanks for answering!

Was there ever an in-game economy (Don't have to name) that made you cringe? Also, what is your view on people that play the trading post in-game?

EdwardCastronova48 karma

I like the idea of playing markets in games. It's a good place to learn economics. More academic economists should mess around in the Auction Houses!

I really did not like the Diablo3 real-money AH. I don't like anything that breaks immersion. It's like having ads scrolling along the bottom of a movie.

Nirad5722 karma

Thanks for the AMA, this seems quite interesting.

  1. What made you want to do this AMA?

  2. What game that you have seen has had the most poorly organized economic system?

EdwardCastronova71 karma

Well, I am an egomaniac with a desperate need to shout to the world about my many accomplishments and talents. AMA serves my inner beast!

Asheron's Call really messed up their currency. They had several currencies that each became worthless as people mined the **** out of it. At different points, the only store of value were iron keys, then scarabs, then notes. It went on and on.

course_you_do17 karma

I just want to say that I really enjoy your work. Synthetic Worlds was foundational to my academic understanding of online communities and economics.

Since you wrote that, what would you say is the biggest change in the lay of the land?

EdwardCastronova55 karma

At that time, I thought the world would move into virtual environments. Instead, the various affordances of virtual worlds have broken apart and moved out of those environments and into reality. Twitter is a gigantic Barrens Chat. Facebook is avatars + chat. MOBAs are the battlegrounds of MMOs, taken out and separated. And now money.

bobthebobd12 karma

As more of the economy goes virtual, governments are probably going to have to get by with less tax money

Unless I'm mistaking, this implies tax evasion. Do you think governments will crack down on virtual economy? Can they do so (I think they could regulate how hard it is to convert non-government-issues money to government-issued-money)?

EdwardCastronova45 karma

Well, "tax evasion" can take two forms. One is, I sell drugs and don't report my income. ANother is, me and my neighbor decide to exchange shirts. The second one is an informal tax evasion - we evade our tax burden because it doesn't occur to us that there's any tax to be paid. People don't naturally assume that everything they do in the economy creates a tax burden - even if, legally, it does. These millions of little currencies may create a situation where people transfer value around without really thinking that they should pay a tax. I think that's where governments will lose a lot of money.

redditorx1357910 karma

How long do you think it will be before Bitcoin completely crashes? How will it crash? Will it be because of a loss of faith in it's value or something economic like hyper-inflation? Can it come back from a huge crash? Just wondering how it's going to deal with the inevitable economic disasters that effect all currency when the fan boys go away and Bitcoin is just another currency.

EdwardCastronova23 karma

"Loss of faith" is the key phrase, you hit the nail on the head. With any of these currencies, with any currency period, its value depends on whether people think it has value. It is nothing more than shared faith that sustains money's value. Bitcoin will fail when (if) people think bitcoin will fail. As to what might bring that about, I would suggest that some other coin will come along that is better than bitcoin - more stable against the dollar, more user-friendly, more secure, more anonymous.

tinova5 karma

What about the network effect?

EdwardCastronova9 karma

Network effects are significant, but I am not sure they have to live at the level of the coin. What about the exchanges? Isn't it possible to have a universe of millions of coin-types that are transacted by centralized exchanges?

LinuxPoser4 karma

I have a question about what I should do with my video game holdings.

I have one of each of these items.

As you can see, they have been steadily increasing in value over the last few years, but I worry that someday there is going to be a bubble burst.

My main worry is that newer cosmetics are flashier and better looking, and will probably be cheaper and freely available. Does it's rarity mean it will translate into a steady growth in value?

I just want to know when to get out, I don't want a bitcoin situation on my hands.

EdwardCastronova15 karma

Sell now.

[deleted]1 karma


herpderpherpderp6 karma

Hi mate - you need to use the "reply" button when posting your replies. I've just approved you as a submitter so hopefully that should get you around any time-out issues and let you paste your replies into the reply boxes.

EdwardCastronova6 karma

Yeah yeah I know. Just forgot

EdwardCastronova8 karma

how to kill an AMA in one easy step

herpderpherpderp8 karma

I'll see if I can drum up come traffic for you.

EdwardCastronova6 karma

Oh thanks, but you know, don't bother. It is what it is. I appreciate the thought!