csgo market crash
I have played “csgo” since middle school and have always liked the skins they had in the game, though I never had enough money to buy one.
If anyone isn’t familiar with CSGO, it is an FPS game, and more importantly, it has a market where users can sell unboxed skins for weapons. The “unboxing” here comes from dropped cases while playing the game, which you have to pay $2.50 to unlock.
A user could then go around and sell that skin on a marketplace at whatever price another person was willing to pay. The price reflects how much the user valued a certain skin, which is a combination of psychological/social factors + “rarity”. Which is no different than the pricing of artworks or NFTs, although in this, there is some “utility” from them being “playskins”.
So how did the market crash?
an overview of a trade-up
In the most recent update, Valve allowed players to trade 5 “covert-grade” skins for a “knife”. Previously, you could only trade up to covert-grades or “reds” by trading 10 “pinks”.
Trade-ups have the interesting pricing effect of setting a pricing floor for the lower grade, expressed as: EV(HigherGrade) = NUMBER_REQUIRED_FOR_TRADE * LowerGrade. Any positive deviation from this equality allows for arbitrage by performing a trade-up.
the bomb
“The CSGO skin market is more stable than crypto.”
someone before the event
The trade-up itself is harmless, just as any financial instrument is harmless. But it did more than cause market pre-emption about the incoming supply shock; people stopped seeing these weapon skins as viable “investment opportunities”.
There is scarcity and there is demand, i.e., the growing player-base, so there is infinite growth of the price! There is always a “greater fool”.
The problem is that the music has stopped and will now repeat what has already happened in the NFT space. But at least for NFTs, they couldn’t just mint more; for the CSGO market, they have to deal with both a supply and demand shock.
Amidst the crash, a rug was found.
tulips
In researching and understanding what happened in the CSGO market, I was reminded of tulips and “tulip mania”. Not that it was any more enlightening than I already know it, but it made me question why economists don’t study it more to explain it.
Let’s not pretend bubbles can’t form out of things without “intrinsic value”. The NFTs were the most memorable ones, CSGO is the most recent one, and the paintings are the oldest ones.
This is a discussion of what makes a price “a price”. The “subjective value theory” says price is an expression of some visceral value. A “utility theory” prescribes the price as an expression of how useful a thing is. Both of these drive real-world markets because a stock is fundamentally priced by “customer utility” of the service + expectations of increasing customer utility, therefore price or cheaper costs1.
So how can economists explain speculative bubbles?
- Behavioral Economics: the psychology + sociology of markets?
- Game Theory: strategic interactions, mainly arbitrage of price floor?
- SVT: prices communicate preference.
sentiment and price
“observed asset price = fundamental value + rational bubble (speculative value)”
The most interesting part to me is how people generate expectations. A price is a price because you have information to believe the price is such. The information can even be another person’s price signal, but other contextual factors that contribute to the future expectation of the price, like Mercury being in retrograde.
A price can express how you feel, how you think others feel, and how useful the thing is. I really like a painting so that I will buy it for X price. I see other people having unfulfilled buy orders at X price, so if I can buy it at Y price, I can sell it at X price, or I can use the painting to get me into exclusive events.
The number itself is not too different than and can be interpreted similarly to the 1-5 scale you get after an experience, instead the monetary scale goes from 0-inf.
Economists are very good at theorizing about prices in the abstract. They define what prices should be, what equilibria are at, how prices can move deterministically, how you can think about price movements and so on. EVs are a summation of beliefs, and prices are variables.
But the instantiation of the price variable to a certain number is ultimately the most important question. Instantiation is the interesting question to ask for me. How much is this painting worth and why? How much is this company worth and why? How much is this apple worth, and why? And answering the question of why isn’t some abstract deduction, it’s simply stating evidence or an explanation.
Although, in some cases like how much a company worth, you can get their earnings and plug that into a formula to derive an “accurate price”, but any extra “value” or any thing past it’s P/E “cough AMD” has added value due to belief of usually hopeful future earnings based on price assumptions. And at the base level, people have to believe in the value of the product the company produces and if it is “worth the price”.
example price formulas
- labor theory of value: “Price = Labor Cost + Margin”
- caloric view: “Price = Calories / Caloric Ratio”2
- art: “Price = Experience + Meaning + Provenance + Scarcity + Market Sentiment”
- stocks: “Price = Present Value of Future Cash Flows + Speculative Premium”
I think most prices combine “fundamental” and “speculative” value or aspects in the price. Again, there is the problem of instantiating the value, i.e., what should profit margins be at?3 What is a decent caloric ratio?4.
It gets even more speculative for artworks where most of the variables become increasingly subjective, in the sense that the range of values and interpretations often do not get anchored by other instantiations of those variables. The same can be said for the speculative premium of stocks.