Virtual currency


What is Virtual Currency?

virtual_currency.jpgVirtual currency is currency used in online games and communities to purchase virtual goods or services.1 Virtual goods come in a variety of shapes and sizes, ranging from gifts of virtual flowers and cards to tools and weapons like Elvin swords and war-hammers. These virtual commodities are intangible as they are purchased and accessed solely online.2 Since 2009 there have been an increase in currencies, such as Bitcoin, that are virtual but not tied to any particular online community and are not restricted to purchasing virtual goods.

What is Virtual Currency Used for?

Four main types of online interfaces use virtual currency:

All of these interfaces use virtual currency for different purposes. In games, players may use virtual currency to buy new weapons, increase their avatar’s abilities, or unlock new levels or gaming options. Users in virtual worlds may use virtual currency to subscribe to games, buy clothes and other accessories for their avatar, or gifts for friends. Online communities and social networks use virtual currency for similar reasons.

How do Users Obtain Virtual Currency?

Online users may acquire virtual currency in any number of ways. Websites will oftentimes offer new users virtual currency just for signing up or subscribing to their network, virtual world, or game. Users may also obtain virtual currency by winning games, beating levels, fulfilling special assignments, and completing company advertising offers.4 Most often, users simply pay for their virtual currency with credit cards. Websites, networks, and games offer a set amount of their unique virtual currency per dollar, such as Facebook which offers 10 credits per $1 US dollar.

What Types of Virtual Currency are There?

There is no universal virtual currency. Social networks, games, and online communities maintain their own distinct currency, such as:

Virtual Currency and Goods: A Business

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Market Motives

 

Though online communities, social networks, and online games provide opportunities to connect with others, enjoy oneself, and engage in intriguing virtual situations, gamers and non-gamers alike should understand that these opportunities are services, designed to make money.

Since game developing companies and social networks always seek new ways of bringing in revenue, virtual currency has become a marketable product for both providers of virtual currency, as well as for vendors of virtual goods. Jeremy Liew, a venture capitalist, remarks that “It’s a fantastic business…because it’s digital, the marginal cost for every [good] you sell is zero, so you have 100 percent margins.”5

In particular, game developing companies seek to make a profit through virtual currency and virtual goods because MMORPGs (Massive Multi-player Online Role Playing Games) require multimillion dollar investments. Investing in MMORPGs is risky because a company’s return relies almost entirely on the popularity of a game and amount of user traffic.6 Reflecting about online games and virtual currency as a means of business revenue, Tiago Reis Alves from the Center of Informatics and Systems of the University of Coimbra, Portugal writes that, “The game producer wants to minimize the risks of failure, which means that every game has to be a great success. The game producer translates his wish to generate income into the game design…Currently, to design a game is to design the business model."7

Methods Companies Employ to Encourage Players to Use Virtual Currency

Since generating revenue is a primary motive for game developers and social networks in creating virtual currency and virtual goods, users should be aware of how companies encourage their customers to use virtual currency to purchase virtual goods and services.

  • Subscription and Pay-per-Credit. Online games and communities will usually implement a subscription or a pay-per-credit fee in order to generate revenue. Subscription based games and communities require users to pay a fee, set at fixed intervals (usually monthly), to play or participate. Pay-per-credit, also known as Freemium, games or virtual worlds create levels, accessories, tools, weapons, or other functions which may only be accessed by paying with virtual currency. Though initial sign-up may be free for these types of games or communities, continuing play or even full participation relies on access to “buyable” levels or accessories, impelling users to continue putting more money into the game or virtual community.

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  • Human Psychology. Online games and communities rely on basic human motivations to encourage users to buy virtual currency, goods, and services. Fundamental human emotions like greed, ambition, curiosity, and sense of belonging impel users to continue exchanging money for virtual currency in order to impress others, own the most up-to-date items, or seek out new levels accessed only by purchase.8 For example Wendy Pickering of Columbus Ohio, who plays the online game Sorority Life, found herself paying money to dress up her sorority in the most fashionable clothes, in order to guarantee her beating and impressing other online players.9

 

  • Inclusion and Attachment. Game developers and online communities strive to create an atmosphere where users will feel included and attached to a community. Companies and networks do so by creating specific games, levels, or communities geared towards different types of people, such as achievers, explorers, socializers or “killers”.911

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  • Attractive Goods and Gifts. Games and virtual communities continually create exciting and novel items, accessories, and gifts in order to attract more customers and encourage spending. Items are often rotated to keep a company’s virtual inventory new and “fresh”.12

 

  • Virtual Goods—Essential for Success. In order to ensure users participation and create a constant cash flow, game developers create virtual goods that gamers need to participate or succeed in the game. Also, virtual items may “decay” (meaning overtime virtual goods may disappear), which requires users to continue paying to keep the good from disappearing. Commenting on players need for virtual goods to succeed, BBC news reports that “Many players of massively multiplayer online games such as World of Warcraft, spend real money on virtual currency to ensure their in-game avatars have the best gear.” 13

Profitability of the Virtual Industry

Virtual currency and goods provide companies with an incredible amount of revenue. Zynga, a virtual goods provider, projected in 2009 that the “direct purchases of virtual currency and goods account[ed] for most of its more than $100 million in revenue…”14 In-stat, a market research firm, reported that the entire virtual good industry generated revenues of approximately $7.3 billion dollars in 2010.15

Benefits and Risks of Virtual Currency and Goods

Though virtual currency and goods are intangible, they do result in actual benefits, as well as risks and consequences for online users.

Benefits

 

  • Definition of Self. Many people feel that their virtual lives define personal character. Online games, communities, and worlds allow users to dress, equip, or accessorize their avatars' personally, in such a way that their avatar becomes a means of self-expression. Virtual currency allows users to purchase the virtual goods necessary for such online self-expression.16

 

  • Relationships. Virtual currency and products provide ways for people to form and maintain relationships. Virtual commodities allow users to not only define who they are, but also trade and interact with others. Oftentimes users will create groups and make friends in order to perform better in a game or create and sell virtual goods.17
  • Theft Protection. Buying virtual currency allows users to make online transactions without using credit card or bank account numbers multiple times. Once users have transferred real money into virtual currency, their virtual currency is no longer associated with bank accounts or credits cards, making it arguably less vulnerable to hacking and theft.18
  • Profit. Virtual currency and virtual goods provide businesses a great deal of profit for providing low-cost goods and services.19 Such profit not only stimulates nations' economy, but also provides hundreds of people with jobs.

Risks

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  • Addiction. Virtual currency and virtual goods may contribute to individuals becoming addicted to online games. The New York Times reports that, “Game creators talk openly about their strategies to make people pay for virtual goods: get them addicted, then steer them to purchases that speed up the pace of the game and help them succeed.”20 Game developing companies rely on attracting and maintaining large numbers of players in order to generate revenue. In order to do so, they continually enhance games by creating new goods or other gaming options to encourage players to continue investing money in the game. Tom Hale, Chief Product Officer of Second Life, suggests that one way online games become more alluring is through virtual goods, describing them as being “incredibly sticky.”21 Because of some online games’ prerequisite for real money to play, users invest their personal reputation and themselves into an online community.22 This personal investment may fuel individuals’ addictive “need” to be online, buying the latest and greatest utilities, interacting with members of their community, or accruing more credits to progress further in the game.

 

  • Spending More Money than Planned. Virtual currency may provide more opportunities for children and adults alike to spend money on accident or more money than they planned. Because companies convert normal currencies into dollars, users become detached from the real-life cost of their virtual consumption.23 wallet.jpgVili Lehdonvirta, a researcher in virtual goods, currencies and economies at the Helsinki Institute for Information Technology, suggests that, “The benefit [of virtual currency] to the company is in the psychology of consumption…When you replace national currency with credits, it makes it more difficult for consumers to understand prices and the value of goods.”24 FoxNews reports that this disassociation of virtual currency from real money led one boy to spend over $1,500 from his own savings and his mother’s credit card account.25
  • Legality. As virtual currencies become more popular, governments and financial institutions struggle to determine how exactly to deal with these business made currencies. Legal issues include:
    • money laundering 27
    • gambling 28
    • international transactions and trading 29
    • redeeming virtual currency and credit for real money 30
    • fraud 31

How Can I Keep My Child Safe?

  • Speak with your child about virtual buying. Speak with your child about your rules for spending money online and set parameters for how much money you may want to give your child, if any at all. You may also want to address the difference between virtual and real currency.
  • Be aware of what games your child is playing. Keep communication open and know what your child is playing on the web. Do some research online (our wiki is a great place to start, as we feature articles on many of today's most popular games) and decide if your child's games are appropriate.
  • Keep your computer in a public, high-traffic area. Pulling computers from the privacy of bedrooms and offices to somewhere open will help keep your kid safe. If your child knows that you can both see and hear anything that is happening in the game, the tendency to explore games that may be violent or sexual will greatly decrease.

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  • Train your children to follow Internet safety guidelines when talking to other gamers. Keeping personal info personal and following all the rules of Netiquette will reduce your child's risk of being abused by cyberbullies or online predators.

 

  • Teach your child to "block" or "boot" users who say or do inappropriate things in a game. Safe games allow users to block, boot, ignore, or report users who aren't following Internet safety rules. Your children should never hesitate to block or report any user who makes them feel uncomfortable in any way.
  • Be sure your child doesn't click on pop-ups or banner ads. Gaming sites are notorious for infecting computers with malware, and clicking on these ads put you at risk for picking up viruses, spyware, and other harmful programs.
  • Set time limits. Enforce time limitations if the time spent on gaming becomes a problem. Gaming addiction is real, and it's easier to prevent than it is to fix later down the road. Computer timers and monitors--which are often included free in the parental controls package that came with your operating system--make this easy. Rather than having to physically drag your child away from the screen, the computer itself won't let your child play anymore once the time runs out.
  • Block games. If you don't want your children to play certain online games from any computer in your home network, you can block them using Access Restrictions in the Router settings. This can be done by blocking certain ports that the game used. For example, you can block World of Warcraft by blocking TCP port numbers 1119, 3724, 6112, 6113, 6114, and 4000 (source: Blizzard Support website 32). Some firmwares for routers allow you to block these ports only on certain times and days, which might allow you to control when and how long your kids play.

Where can I learn more?

  • Visit this article to learn about how parents can better understand websites and games their children visit often
  • Read this article to learn more about how your children can play MMORPGs safely
  • Listen to this interview to learn more about virtual worlds, second life, and online communities.