Virtual currencies can have exchange rate crises, too

A student sent me a link to a very interesting article on a virtual currency crisis.

Massively multiplayer video games, such as World of Warcraft, allow millions of gamers to participate in a virtual world, complete with a virtual economy. These economies typically have their own currencies.

The biggest difference between virtual and real currencies is that players usually mint the virtual currencies, whereas that power is reserved by government in most offline currencies. In these online games, currency is often created from nothing whenever a player accomplishes a specific task, such as defeating an enemy. The currency is valued because many desirable in-game activities and purchases require its use. Hyperinflation is kept at bay by a planned system of leakages and money sinks.

There's a catch to all this, of course. Some players play for hours on end, others for much shorter periods of time. Money sinks must be scaled to the intensive players in order to avoid hyperinflation or, for in-game items with hard-coded prices, in order to maintain scarcity.

This puts casual players at a disadvantage, and creates the opportunity for a carry trade of sorts, exchanging real-world currency for in-game currency.

The article linked to above deals with an example of this 'Real Money Trading' (RMT), and its peculiar pitfalls.