L$ Outlook Revised - New Recommendation: Sell

For reasons unknown to me, the L$ has been falling from its nice little perch of L$250 = $1.00 USD.

Now its down to almost $260 = $1.00 USD.

Does anybody know why the reversal in fortune? Its not obvious to me, but in light of this trend, I recommend you sell out all your L$ and wait for the price to stabilize.

Sell? Trying to push the price down even more, eh?

There are those who say it's the P2P teleport announcement, I think it's just Christmas. Fewer buyers (they need their real world currency for prezzies) and more sellers (They want more real world currency for prezzies).

Really.

Yep, I think the holidays are to blame, that along with 1.7's initial instability (which is still affecting a lot of users), my bet is that it is temporary.

The exchange rate has to drop until it reaches the point at which it is not advantageous to register premium accounts for their stipends. This is a fundamental principle of mathematical finance and market efficiency -- in an efficient market, the price of an asset will move to eliminate any arbitrage opportunities that exist. In this case, I can get L$26,000 in a year by paying LL $72, or I can get L$26,000 by buying it on Lindex over the course of a year. If the L$ market is efficient, then the Lindex price should move to equal the price I can get by buying directly from LL (through registering a second premium account).

This analysis shows the trend clearly, and this post explains more of the reasoning and assumptions behind the analysis. The only reason the exchange rate has stayed close to the divinely decreed value of L$250/US$ is because the Lindex has a high degree of market friction, and is only slowly approaching equilibrium -- i.e. it is not a particularly efficient market. That has the effect of slowing, but not stopping, the decline to an arbitrage-free exchange rate (which I've demonstrated in the other thread should be close to $2.88/L$1,000 (~L$345/US$)). Unless a fundamental change is made in some combination of account pricing and stipend levels, the exchange rate will continue to slide toward this value. It's just a question of how quickly.

Ricky, thanks for the links. Its always refreshing when someone backs up their opinion with some reference or data.

if your analysis is correct, then panic selling could drive the price below the rational price, to where a free market equilibrium is reached. That might be the time for rational market theorists to be accumulating Lindens, against the day when demand drives it about the rational value? That might also be the time when panicked sellers might be afraid that there is no bottom to the market.

Very interesting comparisons to the stock market swings of RL>

Frank

OK, I'm trying to learn some basic concepts here.

Would the PayPal transfer fees (the lowering of which which obviously lowered the casual/impulse and small-trader cashout thresholds) be considered a part of this "market friction?"

Thanks!

-- jj

Partly, yes. However in my opinion the major contributor to the market friction is the absence of a "buy side" in Lindex. The inability of users to instantly convert L$ -> USD via a "Wanted" column (which would be mostly used by the casual/impulse and small-traders you mentioned) eliminates a significant avenue of liquidity and prevents the market from testing resistance to downward price moves. This artifically buoys the exchange rate.

As Jamie observed in the original post, the price is still going down, but at a much slower rate than it otherwise would.

I'm curious if you took into account the increased value of money attained instantly through the currency exchange verses money paid out gradually over a yearly period. If I can make 20,000 $L out of a limited chance 10,000 $L land purchase I have to make now, then that 10,000$L is worth more to me than what it would cost for a stipend. I also think the growth rate of Second Life can offset things a bit. The heavy amount of US$ being brought in by new users who want large amounts of $L before their stipend pays out could raise the natural value of the $L as the growth of new buying residents continued. There is also the problem that stipends are limited in amount of payout. If someone wants more $L than what they can get from 5 stipends, then the $L beyond that amount is no longer directly connected to what can be obtained from stipends.

I think these three things combined can make the actual value of the $L on the currency market worth more than what it costs to get a stipend if the circumstances are right. The problem is it is difficult to take the three things I mentioned into account with the information that is publicly available.

Ricky, while no one questions your calculations (you don't need Excel to see that a premium account with yearly payment supplies you with L$ at less than 3$/1,000L$) I am not sure of the effects this has on the long term exchange rate between the L$ and the US$, though. Just saying: "You can get Lindens at this rate, so this is the fair - and finally effective - value" seems a little oversimplification to me.

For one thing: in any system like a stock exchange or currency exchange, it is dangerous to underestimate the psychological factors. A resource usually is worth what people are willing to pay for it (or what they deem they can resell it for). And that is obviously more than 3$/1,000L$

Important for this consideration is the subjective scareceness of this resource. For most residents it is physically not possible to aquire all of the L$ they need for their lifestyle in SL through stipend farming. I don't know how to spend my 500L$ per week but there are obviously others with different shopping habits.

And when the demand side is strong the price usually is higher (sometimes much higher) than the intrinsic value of a service or product. With the data the Lindens are giving us currently in their statistics sheets it is hard to judge the demand side of the market. But it is obviously higher than the pressure on the supply side. Or we would see the rate falling down to the limit you are describing - or below.

Little sidenote: If the value of the L$ would be determined just by the cost of aquisition through the cheapest channel, then the L$ is worth 0. You get 50L$/week with a basic account (2,600L$ per year) for a basic account. And that costs you nothing.

Wow. You're making sell recommendations based upon "reasons unknown" to you.

Quite the business expert!

shes a capitalist!

Follow the trend my friend.

Watch me and you'll learn much about business and making money.

Making money means having some understanding of how it works. All you have ever done is post wildly hysterical threads every time the L$ sneezes.

Either substantiate your claims with something more than the hair on the back of your neck or don't expect to be taken seriously. Every real business pundit has facts to back up their buy and sell recommendations.

You blithely declare your ignorance in the same breath that you give dramatic and sweeping advice. Enough.

Good luck with your "business." I'll take my business guidance from people who know how to qualify their remarks.

Enabran, folks like Jamie inevitably appear in any free market economy. They speculate on market moves, often on intuition or proprietary information. "Following the trend" or "The trend is your friend" is a common watchword among some speculators. In the financial markets, "momentum investing" and chartists are disdained by many, while their methods attract a wide following.

In retail, speculators are folks who buy merch cheap (wholesale or distressed) and then move it where they hope to sell it dear and promotes it ("We overbought from our foreign factory! Everything must go at bargain prices! Limited supply! Sale ends Friday at midnight! Don't miss out, this won't last forever!"

Folks who try to talk markets down by selling short and then urging others to do likewise are simply acting rationally. Whether they know anything or not, once they sell a currency or stock "short" against the market, they have a financial interest in it going down. Like any rational marketer, they will talk up the behavior that supports their "bet" on market direction.

Rather than be angry with them, I try to recognize them as a sign of a marketplace that is functioning. If there were no speculators and "flacks" in the marketspace, it would indicate absence of the complex mix of interests that makes it behave like a complex system.

Frank

I looked at your analysis. It mostly made my head spin. I didn't see where it took into account that you can have 5 alts max though which limits the amount of money you can receive that way. It seems like chump change as far as really big traders go.

I'll take facts over hunches any day of the week, thanks. People are free to follow the angels and demons on their shoulders as much as they like, but I'm really not impressed by such public displays any longer.

Might it just be that GOM closed, and there are more people willing to use a sight hosted by LL than a 3rd party?


Naw, couldn't be, too simple

camping chairs and Ginko.

The "max alts" will affect the amount of stipend conversion done, which should alter the speed with which the exchange rate approaches the long-term average. e.g., if anyone could register as many accounts as they liked and could quickly convert their stipends to cash, the exchange rate would approach $2.88/L$1,000 very quickly. The difficulty in doing that (combined with a few other factors) causes the rate to equilibriate more slowly.

actually i have a feeling between 2-3 million was pulled out of ginko in the last couple of days, and a good extra fraction of that was put on the market to sell (just people i know i can account for about 1.5m or so)

You're putting too much weight on account farming when it is only small potatoes. I think the L value is more heavily influenced by the differences in interest rates. If you got people like anshe who can get like 100% return in SL while only being able to get a 5% return in real life then she is going to demand more L until the sl return matches the rl return. There are probably 1000's of people who are making higher sl returns then rl returns who are driving up the L. Its not until sl returns match rl returns will account farming weight heavily on the value of the L.

Also 2.88 would not be the long term price if account farming were the main factor. Investing $72 in a premium account is not riskless, you are not guaranteed 26k L at current prices in 1 year therefore 4% riskless return is too low to use. You also forot to factor in the trading expenses. If you traded at 2.88 you would actually end up losing money. (26 x 2.88 x .965) - 5 = 67.25, roughly a $5 lose. The real value for US citizens without considering any sort of return would be closer to $3.07 and for non US people $3.22(due to cc charging extra for currency exchange). Now factor in a return higher then 4% depending how risky you see account farming is.

honestly the whole notion farming really affects the market at all is a fools' errand.. with a max cap now of 2-3 accounts per card/address its essentially a non issue. For every person never buying anything and selling every 500 linden they get, you probably have 100 people who go premium just to buy things, and often will even dip in above that to the lindex.

and pretty much *anyone* at the non premium member level (probably somewhere between 80-95% of SL's userbase, is pretty much going to HAVE to buy currency to be able to buy much in world, that puts a massive increase pressure on the value of $L, as evidenced by the lindex's direct recovery in 30 days of almost everything GOM lost in the last year, because those people *have* access to the lindex where as few to none of them would go to all the bother of messing with IGE/GOM for just a few hundred linden here or there

Good observation there eltee. Wonder if there are informants within Ginko leaking info out.... anywho.

not really, just the few of us who bother to run the numbers, panic, and then tell our friends to pull the heck outta that mess