Was Bitcoin just the beginning?
The economies established inside of video games have been laying the groundwork for a revolution in money. For proof, we look no further than Mt. Gox, which, for much of 2013, was the center of media attention thanks to its involvement with Bitcoin.
The hacking, the search warrants and the scandal of $450 million worth of Bitcoins that vanished without a trace would come later.
Before the boom and bankruptcy of the world’s largest cryptocurrency exchange, Mt. Gox, or Magic: The Gathering Online Exchange, was a website where Magic players could buy and sell cards for the game at the going rate.
Five years later, in 2011, Mt. Gox’s founder Jed McCaleb decided to repurpose his by-then defunct trading hub into a Bitcoin exchange.
He sold the domain to Mark Karpelès, a French expat who, under the pseudonym MagicalTux, cultivated it into a thriving money market from his computer in Shibuya, Japan — although the physical whereabouts are unimportant, since the virtual currency is largely unregulated and independent of any government.
What is important, however, is how online games have shaken up the future of the world economy like a can of Fanta riding a mechanical bull. It turns out that the big ideas underlying Bitcoin originated in the history of video games.
“Virtual currencies in game worlds created the cultural testing place. It was the proof of concept, the demo,” said Edward Castronova, the author of a number of books on synthetic worlds and virtual economies, including his latest, Wildcat Currency: How the Virtual Money Revolution is Transforming the Economy.
Apparently, the insurgents are numerous and quite volatile. Right now, a high number of Bitcoin competitors — including Dogecoin, Mastercoin, BBQCoin, ValutaCoin, Peercoin and many more — are vying to become the stable virtual currency everyone uses.
None of the contenders seem particularly well suited to last. This is troublesome for governments that traditionally earn revenue from taxing a single, non-virtual currency, like the dollar.
In a sense, the governments have wizards and ogres to blame. Long before the coin rush atop Mt. Gox, Magic: The Gathering players were among the first to pay hard-earned money for particularly rare cards that granted them an advantage when playing the game.
This, in turn, instilled the idea that virtual stuff could be exchanged for real funds.
A few years later, in 1997, Ultima Online ushered in large-scale virtual economies — although it was kind of a disaster, with hyperinflation and one player hoarding 10,000 identical shirts.
Sony’s EverQuest, which came next, was significant because it let players wheel-and-deal their merchandise, hawking it in an online bazaar. Here we see an important, potentially threatening, shift: two parties could exchange virtual currency for something of value totally independent of a central bank.
This is why real-world governments get concerned. Traditional economies are based around the dollar, or the yen or the peso.
Today, if you go to the coffee shop and buy an espresso shot, you’re going to pay in dollars and cents. But in five to 10 years, according to Castronova, you’ll have a digital wallet on your smartphone, similar to the peer-to-peer payment interface in an MMO.
“You’ll wave your phone at a cash register and it will say: ‘We accept Bitcoin,'” he said. The two computers will do their thing and the transaction will be completed, but it won’t get reported for sales tax because Bitcoin transactions are anonymous.
Right now, this amounts to pocket change for Uncle Sam, but eventually it could add up to a huge drain on the economy.
“Either they’re going to have to put software on all our computers, or …” explained Castronova, his voice trailing off. “It’s a real clash of civil liberties and monetary innovation. It could get scary.”
Unlike credit cards and paper money, cryptocurrencies never tie into the dollar machine that is the Federal Reserve. So where do they come from?
Surprisingly, Bitcoin has its roots in Chinese gold farming, where unskilled laborers would spend all day playing World of Warcraft, mining gold in-game. Then they’d sell the gold for real money to players looking for shortcuts.
Likewise, mining is at the rock-bottom heart of cryptocurrencies. Essentially, if you log into the Bitcoin network and let your laptop crunch numbers for long enough, you’ll be compensated in Bitcoins.
“The whole idea that you create something that has value by making it hard to mine — that comes from games,” said Castronova.
And not just any games, but the most time-intensive, online role-playing games, which require a huge level of investment for players to enter.
Cryptocurrencies have a reputation as being outlier currencies for those who distrust the government, but their arrival could signal a larger trend: people simply aren’t participating in the economy as much these days.
“Rather than buying big cars and big houses, more and more people are leaving the real world and going into the world of imagination, in some sense,” said Castronova. “Into the world of information and digital and virtual.”
It would only take a small shift away from big object consumption to create long-running stagnation in the economy, he theorized, though there aren’t enough economists currently studying the virtual currency trend to say with much certainty.