“This note is legal tender for all debts, public and private” reads the fine print on all of the paper currency printed by the U.S. Treasury Department, and to the chagrin of Libertarians everywhere, it is a fiat currency. For decades the dollar has not been backed by quantities of a precious metal like gold or silver, but by the confidence that its issuing government would accept such notes for such things as payment for taxes.
Money earned from work, or from other sources, would just be slips of ‘paper’ if it wasn’t for the consumer’s confidence that it could be used to facilitate transactions. Confidence in large part keeps the world’s economy moving and it’s that same kind of confidence that is ushering in innovations in gaming and online entertainment with the use of virtual currencies. Some of that confidence may be misplaced, as well, as people seek to maximize their funds in a still struggling economy.
The virtual currency concept got off to a very poor start. Independent internet-based currencies such as Flooz and Beenz collapsed with the dot-com bubble as young companies backed only by venture capital and lacking in business plans or reasonable profit projections were revealed as pipe dreams. Millions of real dollars were lost, driving consumers back to direct on-line transaction.
The new virtual currencies such as Microsoft or Nintendo Points have shown to work in large part thanks to consumer confidence that real money converted will retain its value. Users, conscious of it or not, understand that these on-line services that hold their money will continue to exist into the foreseeable future. We expect that Microsoft, Sony, Nintendo and even companies like Apple, with its iTunes store accounts, will be around to fulfill their part in current and future transactions.
It is this confidence that gives these corporate-backed currencies more staying power than the previous tries at virtual money.
Stored credit in these systems, just as carrying any amount of cash on hand, or having a pile of change sitting in a pickle jar in the laundry room, will not be doing for you all that it could.
“I’m not going to use [those points] now for two months and I could have that money in a bank account earning interest, then I’d be ahead by the interest I’ve earned.” Warns George Heyman, Professor of Accounting at Roosevelt University, about the drawback of ‘change’ leftover after purchases using virtual currency, “the goal is to buy the card/points as close as you can to your purchase.” Since even a handful of points or a monetary credit stored in an online account is a free loan to the credit’s holder.
Spending that “change” becomes crucial to ensuring that you are getting your maximum value out of your initial currency conversion. Goods such as Avatar items, while ultimately ethereal, nonetheless represent a real investment on the part of the seller. For instance, designing and animating a small RC Warthog from the Halo series and programming an Avatar to pretend to control and react to it requires the effort of programmers and artists, all of whom are paid for their skills. A payment that the developer hopes to recoup and profit from via sales in the online marketplace, like other ventures.
Heyman explains that saving these leftover points, hoping to collect enough to buy something larger can be considered wasteful, “By the time I get around to using [the points], I could have been using the money for other things...this is the time value of money. Money today is worth more then money is tomorrow.”
The trick to negotiating this new and growing form of money is timing. Heyman likens it to the US Post Office’s issuing of “forever” stamps that will always be sufficient postage no matter when or if the postal rate goes up. “People with the money [to] are going to buy as many Forever Stamps as they can, thinking prices are going to go up. If I buy the stamps now and the price doesn’t go up for years, I’ve lost.”