Searching for the "real" value of L$

Why the L$-$ exchange rate has been way overinflated in the past and still is today:

Abstract:
This post tries to estimate the long-term stable market value objective of the L$ currency from flaky economic figures and dubious calculations then asserts stupid reasons why the current exchange rate is vastly different from this number, then makes bold claims about the future trends of this exchange rate.

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Following Jsecure Hanks' posts about what backs the L$, I set myself to establish what exactly backs it, and what is the value of this backing, to see whether or not the perceived value of L$ is way off. Just a word of warning: I will be asserting minimum values for everything out of the principle that, in the long-term, growth of SL and free competition will bring all margins down (using a programming analogy, this is like calculating the complexity of an algorithm, where we disregard constants and go for the proportionalities instead).

The value residents give to their L$ is the perceived value of what they can buy with those L$. This establishes a direct link between the quality of content in SL and the exchange rate between $ and L$ for buyers of L$.

Part of the value of SL's content depends on features of SL, in other words: the better SL feels to residents, the more they value L$. This means that LL's efforts to improve SL improve the value of the currency as well. So this means that, in a sense, the money LL spends on SL makes its way into the L$ pool. Here I assume LL reinvests all or almost all the money it earns from subscriptions and tier fees into SL.

(This is to explain the nature of the calculations I'm about to make)

A Premium account resident pays at least $6 a month and gets 3 things in return:

1) access to SL. The value of this I establish at 0$ (for one-time and monthly costs), because you can get this access alone for $0 right now with a new Basic account.

2) a 512 sqm allotment: to establish the value of this, I use the lowest tier-per-sqm rate that is found in SL (because ultimately, the price of land will have to align on this, one way or another), giving: $195*512/65536 = $1.52 per month.

3) a stipend of L$500/week, which is 2143L$/month.

So there we have cornered the "true" value of L$ down: the value of 2143L$ is approximately the monthly cost of a premium account minus the value of the 512 sqm allotment and the value of access to SL: L$2143 = $6 - $1.52 - $0 = $4.48

There you have it: L$1000 = 1000*$4.48/2143 = $2.09, a 1k block is worth $2.09 of LL backing. I know that a Basic account can get L$ while spending $0 with LL, but this only affects the L$ lightly, I assume. Let's say it makes the value of a L$1000 block go down to $2, for example. There are also other reasons that pull this rate up anyway, from the novelty factor to the convenience of the exchange to whatever weird fetish someone might have with L$. In any case it does not change the fact that LL has been issuing more fiat money than it can back, and it's starting to show (I personnaly have no problem with this ! Central banks used to lend about 9 times more money than they really have, and a free market is self-correcting, as it shows here too. Issuing more money is necessary to follow economic growth in terms of products and services, the problem with SL is, IMO, a drop in perceived value from the residents' point of view.)

Oh, and the value of SL's content does not exactly grow with the money LL invests in it, unfortunately. So these calculations are meaningless, one way or another

Mandatory statement: The sky is falling, time to buy/sell your L$, SL will close in 6 months.

Post your disagreements below this line:
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Value for fiat currency only exists in the minds of those that use it as a medium of exchange. I see where you are coming from on the L$/Land bits, but that can change easily too, making it hard to peg absolutely.

What is the L$ worth?

Exactly what the market thinks it is, at this second.

That formula is completely arbitrary. You may as well divide the number of prims in a welcome area fountain by the number of avatars allowed in a sim and use that number.

lol definitely a worthy effort, but I don't think it flies either. Hopefully I didn't scan it too fast, but you can't take LL's pricing and then build it into your model as if it's a market-efficient number. For one thing, they are sacrificing short term revenue for longer-term exit multiples (i.e. how much will they be worth by a buyer or in the public markets if they successfully get this off the ground).

it's simply your standard supply/demand tug of war.

What's the 'real' value of the US$, EUR, YEN etc...?

The value of money is basically relative and in the eye of the beholder. The only way to put a 'price' on it, is to compare it with other currencies. This is what L$-US$ exchange rate does/did.

I value my time. I spend time in SL. The value of $L is directly proportional to the amount of time I spend in SL. The worth of my time cannot be quantified. Therefore, 1$L is priceless.

That's not technically true as different currencies can hold value for entirely different reasons. If you compair prices of similar, or identical goods in US and UK, then convert the currency, the prices do not match.

Actually currency is merely a barter substitute. You have food, I need food. You want an axe in return, I don't have an axe.. but my friend does. I'll give you these glass beads for the food, you give the beads to my friend and he'll give you the axe.. The value of the beads is instantly obvious. But take the beads elsewhere and they're just beads.

The only way you can value any currency is by what you can purchase with it. If you have a common item available in all countries, then you can compaire the purchasing power of each currency using that item.

what if LL backed it for that value? is that really a bad idea? would it work if the reimbursed players for that amount for L$?

HAHAHAH so true.

That's why differentiated between the value and the 'price' of the currency.

Exactly what Maxx said, amended slightly to say that virtually all currency is valued by fiat, even if it is based on material commodities such as gold and silver, and not just on the dynamics of commerce and faith.

In this case, a good indicator of the value of L$ is the milieu of the forums and the tone of those who speculate about the value of L$.

A currency can only be a 'real' currency and have a 'real' value if it is widely recognized as such...
I mean, nobody stops you from selling Monopoly money, it has some value for a very narrow subset of the world's population.
Namely, those interested in collecting different kinds of Monopoly money from various incarnations of Monopoly, or those who want to replace damaged Monopoly notes with new ones.
The L$ is not a real currency, since it only has value for a very narrow range of SL enthusiasts. The SL 'economy' is also not a real micropayment system.
Noone of any import recognizes the L$ or the 'economy' as 'real'.
Linden Lab explicitly disclaims it having any value in their Terms of Service, and indeed they have no problem creating L$ out of thin air to support their silly contests without spending any amount of 'real' currency to lend them 'real' value.
Unless that attitude changes, you should not rely on L$ for anything major, and indeed you should feel lucky that you can even get ANY 'real' money for it.

It's a matter of petty semantics, but I don't think you can define "real currency" in terms of the number of people it has value for. We could argue over wether enough people are interested in baseball cards to make them "currency", but I don't think that makes sense.

Look up currency in the dictionary (http://dictionary.reference.com/search?q=currency) and it is defined in terms of money. Ok, so look up money. (http://dictionary.reference.com/search?q=currency)

By the dictionary definition, I think it is hard to prove that the $L doesn't fit the definition. I think the question becomes whether the things you can spend $L on in-world are "goods and services". I think they are, so I think it is reasonable to say L$ is a real currency if you live by the dictionary.

Despite what dictionary.com might say, I think most people associate the word "currency" with government issue. That's one reason nobody would think monopoly money is currency. So by everyday use, I think most people would not consider something like $L "currency".

Anyway, its a technicality. But if people argue about whether SL is a "game", they can argue about whether the $L is "money".

Nobody can dispute that it is "virtual money" and a "virtual currency". Does it really matter?

Buster