csgo market crash
I have played “CSGO” since middle school and have always liked the skins they had in the game. If anyone isn’t familiar with CSGO, it is an “FPS” game, and more importantly, it has a market where users can sell skins for money.
A user could then go around and sell the 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”. Pricing skins is no different than the pricing of artworks or NFTs. It could be said they have 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 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 trade-up is harmless, like how a financial instrument is harmless. The problem is, the new trade-up feature did more than cause market preemption about the incoming supply shock. People stopped seeing these weapon skins as viable “investment opportunities”.
tulips
In researching and understanding what happened in the CSGO market, I was reminded of tulips and “tulip mania”. It made me question why economists don’t study it more to explain the phenomenon. Bubbles can form from items 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 private value. “Utility theory” says the price is an expression of how useful a thing is. Both of these theories of value drive real-world markets. A stock is priced by “customer utility” of the service + expectations of increasing customer utility1.
So how can economists explain speculative bubbles?
sentiment and price
“observed asset price = fundamental value + rational bubble (speculative value)”
The most interesting part of economics is how people generate expectations. A price is a price because you have information to believe the price is such. The information can be another person’s price signal, external factors, or even Mercury being in retrograde.
A price can express how you feel, how you think others feel, and how useful the thing is. I like a painting, so 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 the 1-5 scale you get after buying food from a delivery app. The only difference is how the monetary scale goes from 0-inf.
Economists are good at theorizing about prices in the abstract. They define what prices should be, what equilibria are at, how prices should move, and how you can understand price changes.
They haven’t settled on how to instantiate the price, “prima facie”. How value is priced is ultimately the most important question. How much is this painting worth X and why? How much is this company worth and why? Answers to the question of why isn’t abstract deduction. It’s simply stating 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”
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? What is a decent caloric ratio?.