Financial Analyst Calls Second Life a Pyramid Scheme 334
Petey_Alchemist writes "Silicon Valley gossip rag Valleywag is carrying a story about Second Life being a new spin on the old pyramid scheme.
The article, which consists mostly of selections from the report of financial consultant Randolph Harrison, suggests that not only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it. It says 'Like the paid promotion infomercials that run on CNBC, sadly SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money or lives to such scam in exactly the same way that real estate investor seminars convince divorcees with low FICO scores to buy houses sight unseen with no money down.'"
You mean like First Life? (Score:3, Informative)
Re:Can't the same be said about the stockmarket? (Score:4, Informative)
What happened to fun? (Score:1, Informative)
Re:Can't the same be said about the stockmarket? (Score:5, Informative)
Except that if you rely on luck for your stock picking, you really need to get out of the market. No, really. Day traders and the ignorant make the jobs of real investors much more difficult. Not impossible, and really not even less profitable, just more difficult.
On the other hand, if you do your research, long term investing in well run businesses with good financials has far less risk and higher return than almost anything else you can do with your money.
Bullshit (Score:5, Informative)
SL is simply an environment capable of connecting buyer to seller. You provide a service: drawing a custom picture, making a custom script, building something, the buyer provides the cash. This way of doing things simply CAN'T be a pyramid scheme.
Banking in SL is stupid - that I can agree with. People in SL simply aren't patient enough to handle a sane interest rate. Most people work with amounts like $5 USD, which they consider significant. Only maybe 1% of all people in SL works with amounts of money where a 5% interest would amount to something. So SL banks offer really insane interests, possibly operating as a Ponzi scheme. I haven't used any SL banks, but my feeling is that they're very unreliable.
Calling all of the SL economy a pyramid scheme is bullshit though. If you act as a scripter/artist/builder for hire you can make some money without problems. Build something pretty, put it on sale, and if people buy it, you get cash.
Now, indeed, you won't get rich in SL very easily. Earning say, $10 or $20 in SL is easy. Earning something approaching a real income is very, very hard. It'll take dedication, an impressive quality (there's tons of competition), selling things much below what they'd cost in the real world (meaning, what you get per hour of scripting is probably noticeably below what you can get per hour of coding in your country). Through all of it, you'll have to be your own programmer, marketing department and businessman, because involving any more people makes it even less profitable. Through all of that you have to contend with that everything in SL is intangible. With no materials other than perhaps hosting costs for things that require external servers, anything you offer for cash, somebody else could offer for free.
Now, despite all this, I'll say that selling things in SL can be a very nice experience, despite the low income you get from it. At least for me personally having something I made byself get used by several hundred people and personally hearing feedback gives a much nicer feeling than being a faceless drone in a corporation, even though the corporation pays a lot better.
Re:Can't the same be said about the stockmarket? (Score:5, Informative)
Okay, I realize that you are simply making snide comments about the value of traditional investment vehicles, and that I might be feeding a troll here, but I am simply explaining the argument the analyst takes in the article, which you seem to not have read or are ignoring altogether. It does not matter what you think of the stock market, etcetera. The analyst has stated clear, identifiable criteria that differentiate the stock market and what they regard as a market in Second Life. You can dismiss the value of trading ownership in a company, but that doesn't change the fact that it is different than what the analyst claims is happening in Second Life.
Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in order to lure investors. Once they have some investors coming in, they begin to pay back the earliest investors in order to create hype and garner more investors. People make money in ponzi schemes, but only by being at the top of the pyramid. What separates a Ponzi scheme from an actual market is that in an actual market, the items being traded have value outside of the system itself, and that access to liquidity is therefore available at levels other than the top. The article claims that because cash exchanges and the corresponding exchange rates are controlled by the people at the 'top', they are the only people with the ability to achieve substantial liquidity, and therefore, to make any money. This is why they say it resembles a Ponzi scheme more than an actual market.
Differences in valuation and perception are what make the stock market work, and why people make and loose money speculating in the market (and in other markets and industries as well). You can pay too much for anything, be it a stock, a pig, a bushel of corn, or necklace with fake diamonds you find on ebay. That doesn't make the market a pyramid, because those things have value outside of the market itself, and can be transfered independently of the market place. On the other hand, in a pyramind scheme, the items traded generally have all of their value because of the scheme itself, not because of their value to the outside world, and access to liquidity is not independent of the people who sold you the item.
This is simply false. Shareholders not only control the company, determine who gets serves on the board, and other items of fiscal policy, but they have very well-defined avenues of legal recourse. Not only that, but the company itself has no control over the valuation of its stock other than how it presents its performance to the outside world. Which once again, is strictly regulated. Once again, you may have issue with the way that the stock market works, but it is clearly different than the way that a pyramid scheme operates. TFA claims that all access to valuation is controlled (and manipulated) by the people at the top to their financial gain, and the detriment of others, and you can make snide comments about how the stock market operates, but it does clearly operate in a manner different than that of a Ponzi scheme.
Re:Can't the same be said about the stockmarket? (Score:5, Informative)
Actually, that's about as wasteful as day trading. Don't bother figuring out which company is good or bad. Other people are already doing that in an attempt to appropriate value the stocks. It's not enough to know which businesses are good; you have to know which ones are good relative to the price their stock is selling for, which is a much, much, much more difficult problem.
The alternative? Buy an index fund. They simply track the relevant broad market (large cap, small cap, foreign, bond, whatever). They don't have to pay for research and they don't rely on a manager's hunches.
No, this isn't sarcasm. Anyone not trying to sell you on a manager's stock picking ability will tell you the exact same thing. Slate has a great series going on now detailing this: see here [slate.com].
Re:Can't the same be said about the stockmarket? (Score:4, Informative)
You are correct in at least one respect: if you ask anyone why they accept dollars as payment, they answer is always: "because other people will take it as payment". But isn't this fundamentally a house of cards? ("I thought you were watching the kids." "But I thought you were watching the kids!") With no *separate* reason to value them, we're forever exposed to the risk of the value quickly evaporating (cf. hyperinflation).
However, based on what I've learned about the Fed, large financial institutions expect it to sell its assets for dollars if the dollar drops too low, in effect, propping it up that way. It's like this: let's say I get investors to give me 100 silver ounces and I issue them 100 notes redeemable for a silver ounce (ozAg). But then, let's assume I suspend convertibility on demand. Can the notes still have value? Yes, if people expect me to buy them back. Let's say on the market, merchants start demanding more than one note for an ozAg. Well, then I can dump my ozAg's on the market at the prevailing price. If the price of an ozAg on the market stubbornly refuses to return to exactly one note, then I can buy back all the notes, and keep the extra silver as a profit. And merchants won't let that happen.
So yes, it's possible for dollars to have value, even if they're "unbacked" like in the above, as long as people expect the central bank to do what's necessary to keep its value up. Once that stops
Re:Can't the same be said about the stockmarket? (Score:3, Informative)
Warning: small novelette ahead (Score:2, Informative)
The problem is that they are "investing money" into lindens and hoping the exchange rate changes. Linden Labs as specifically "pegged" the linden to the dollar. I track it and it usually has been consist to about 1000L for abojut $4/US. Lindens are strictly controlled, it is not easy to just make large amounts of linens, ( I know I have tried :) ). Most of this is planned, they hired an economist to help control the economy. Linden labs makes $.30 US on each buy and about 3.5% on each sale. Sales of lindens tend to act as stocks, meaning you put in a sell order and wait for some to bid on the lindens. buys are typically much faster though.
There is one example of linden dumping to control linden prices, quote: "In the second half of September we sold L$20,117,994 to prevent rapid appreciation of the L$. " . http://blog.secondlife.com/2006/10/03/linden-dolla r-economy-update-2/ [secondlife.com] it is on there blogs.
From the website (https://secure-web4.secondlife.com/currency/descr ibe-transaction-fees.php): Fees for Buying L$ You will be charged a fixed fee of $0.30 per transaction regardless of the amount of L$ you purchase.
Fees for Selling L$ Sellers of currency pay a fee of 3.5% per transaction. Proceeds will be credited to your US$ account balance.
Yes there are limits to trading, unless you apply for higher limits:
https://secure-web4.secondlife.com/currency/descri be-limits.php [secondlife.com]
So if you read the article, he was trying to do currency trading on a pegged currency, not the greatest idea. He got the same amount going in as going out minus the trasnaction fees, gee go figure.
And if you want to look at the economic statistics: http://secondlife.com/whatis/economy_stats.php [secondlife.com] Which also lists the sources and sinks, most of the money made by linden labs is from transaction fees, tier fees (fees for owning land or islands), and membership fees.
Linen exchange market data: http://secondlife.com/whatis/economy-market.php [secondlife.com] More useful economic statistics: http://secondlife.com/whatis/economy-graphs.php [secondlife.com]
Another interesting thing is that lindens are not produced, except by "allowances" given to residents and non-residents weekly. In WOW (world of warcraft) the server producers more gold when creatures are killed. Hence the lindens in Sl are an artifical scarcity, which is what all real world currencies are.
Not everything is sunshine and roses though:
There are some problems with the economy though:
Yes, you can get equivilent work much cheaper in SL by paying in lindens. Although the prices needed for contracted services have been going up steadily. I have had several friends in SL quit doing contracting because it does not pay enough for the effort even corporate sponsorship. I do know of some contracting companies that make enough to survive on though.
Problems with stability during the updates, this can be especially painful as shops cannot sell when SL is down, and sometimes products break during updates or on rare occassions inventory disappears during updates.
Land values going down or becoming unusable due
Legitimate profit from Second Life (Score:2, Informative)
Her company is paid by e.g. bands or designer clothing brands to create a "Second Life Presence" for them inside "the grid". It's a lot like hiring a web designer to build a web site - you hire a Second Life design company to build you a virtual tropical island, or whatever. People come to your virtual island, maybe you have virtual examples of your virtual products there, they like them, they buy them in real life... profit!
This seems like an entirely legitimate and mutually beneficial arrangement for all concerned; Second Life definitely can be used to make real money without scamming anyone. That's not to say it's not ALSO scamming people, of course.
Re:What people don't know about the US Dollar... (Score:3, Informative)
Re:Other Pyramid Schemes (Score:3, Informative)
The article's point is not that the economy within SL is a pyramid scheme itself, but rather that "withdrawing money from the Benchmark-backed virtual world is about as hard as cashing out of a pyramid scheme". In particular, he's referring to the alleged $220m "GDP" of SL, most of which is almost certainly not convertible to real dollars.