Crypto-Currencies and Virtual Economies

We live in a very interesting day and age.  We are seeing rise to a new disruptive market in the entertainment, communication, and e-commerce industries via virtual economies.  Video games such as Entropia, Second Life, and World of Warcraft are creating real-life value through virtual commodities.  These virtual economies have real-life exchange value.  For example: PED (Entropia currency) has an exchange rate of 10 PED : 1 USD.  Jon Jacobs, an English businessman/actor purchased a virtual space-station resort on Entropia for an astronomical $100,000 USD – he even had to mortgage his own house to do so!  Jacobs had the last laugh, however, as he transformed the property adding virtual malls, dance clubs, and stadiums in this highly lucrative business.  He then flipped his ‘virtual real-estate’ for $635,000 USD, a 550% return.  Talk about smart investing; were dealing with what is essentially virtual real-estate.

Virtual goods and commodities in the US grew from 1.6 billion in 2010 to 2.1 billion in 2011.  It is on pace to double every 2 years.  Sound familiar?  It should: see Moore’s Law.  Video games aren’t the only industry profiting off of this new emerging market.  Facebook accounted for $750 million through sales of virtual goods through things such as birthday cake icons.

This initially appeals as a laughable point of interest and may commonly be disregarded as nerds with too much money than they know what to do with, but the repercussions and implications of what this could mean for our future market is astounding.  One might be tempted to argue “why are they so enthralled by these virtual goods?  they aren’t even real!”  By that same logic, one could apply virtual forms of socializing (the Facebooks, Twitters, LinkedIn and MySpaces) are not ‘real’ socialization.  They are, after all, performed over a virtual infrastructure at the seat of your desktop.

It’s almost as if we are creating new demographics and new countries.  If you counted all the users of World of Warcraft as a country, it would have a greater population than 70% of ‘real-life’ countries.  This doesn’t even begin to scratch at the purchasing power parity of these emerging economies.  Can you imagine if a virtual world had a competitive , or even surpassing, PPP and GDP in comparison to other countries?

This leads way to crypto-currencies, with the most famous example being Bitcoin.  Bitcoin is a digital currency performed over a peer-to-peer network.  Each Bitcoin has a string of 33 characters any two cryptographic key pairs, one public and one private.   When an exchange is made, the public key pair has to be matched with the private.  It is then checked in relativity to the rest of the Bicoins, to ensure a fair trade has been made.  The pros are that this prevents against double-spending, all transactions are verified amongst the system, and it eliminates country biasness (no inflation or defaulting!).    The cons are that it is still in development and subjective to online hackers trying to exploit the system.  This is essentially a means at avoiding paying a country’s taxes.  If successful instituted, this could lead to the demise of governments as we know it.

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