Bubbles In Space

Bubbles come in diverse forms and as such we don’t have a universal definition to follow. The economic definition, and one that I broadly agree with, states that Ex post asset prices are viewed as having been over-valued and not based on fundamentals. Between the South Sea, Wall Street and the Dot-Com bubbles economists have an unfortunately large amount of data to study. We can also find evidence of bubbles in virtual economies, in this case Eve Online.

The asset being traded in the image below is Helium Isotopes. In Eve players use Isotopes as fuel for stations which are used to operate extraction or production facilities. Helium is just one type of isotope but the other three isotopes endured price bubbles similar to the one below over the same period.

The price moved from around 500 ISK (Interstellar Credits) to approximately 1300 ISK over two and a half months before collapsing to 400 ISK over the next two months. These are wild fluctuations with the price doubling and then more than halving over a period of a little under 6 months. The motivation seems to have come from a reaction to announcements of new ships being added to the game. People reacted to this by raising expectations of the value of the materials used in production which is a rational step to take. However, Eve has an active array of investors and speculators who engage in trading. It seems that these players attempted to ride the wave of the bubble and many of the more established traders did indeed profit. Eventually though as understanding about the true impact of the new technology (new ships) grew people could reset their expectations and the price returned to reflect the fundamentals.

One of the common queries that surround bubbles is whether we should or are capable of bursting bubbles. Eyjolfur Guomundsson, head economist with CCP the company behind Eve Online, is attributed with taking action against another in-game asset experiencing a bubble. It is possible to buy a subscription for a month using the in-game currency. CCP was worried that this price was rising too fast and was being affected by speculation and so they offered a sale on the cost of subscription with real currency, effectively reducing the value of the in-game subscription. This method has been attempted repeatedly now with increasingly marginal impact and price appears to be much stickier than Eco 101 would suggest.

With America in 1929 there were attempts to head off the bubble and reduce the build-up of problems. Like most questions worth asking in economics and finance though we don’t have a conclusive answer. Perhaps through testing virtual environments we can see whether Friedman and Schwartz and their views on monetary policy were accurate in explaining the great depression.

For those interested in the wider Eve economy there is a 45 minute presentation delivered at the last Eve-Con from Eyjolfur Guomundsson describing the changes in 2012.