Volume of Trade does not equal supply

One thing I see as a repeated mistake in alot of threads right now is the assumption that the volume of trade acts the same as supply does on the $L price. You can go to www.gamingopenmarket.com right now and see a volume of trade chart right below the price chart. You will see that volume of trade does not connect directly with whether the price will go up or down. You can have a large volume of trade that sees the price raise just as easily as you see a large volume of trade that sees the price drop.

Volume of trade is only a measure of how many people have come together to agree upon a price. A higher volume of trade normally accompanies a price change positive or neagative, because it normally happens when large amounts of buys or sells change the price of $L quickly. If a bunch of people come along and suddenly fill off 1000 blocks on the sell side, the price will go down quickly. If a bunch of people come along and suddenly fill off 1000 blocks on the buy side, the price will rise quickly. You have the same volume and different results.

There is a predictable change about to happen based off of supply and demand. The rating bonus has been cut, which will decrease the supply of some sellers on the market. There will also be more people that demand $L they no longer recieve from their ratings. For those that don't know economics well, this normally means a rise in price. Even if this does not eventually lead to a raise in price, it will at least lead to the $L falling in price slower. LL introducing its own market is a much less predictable thing. There will be more volume of trade as people who refuse to use third party sites begin trading. The problem is you don't know whether the demanding traders will increase more than the supplying traders. Don't lose faith in the market from something that doesn't even let you predict an outcome. Look at the fact that LL has made a statement that they are looking for ways of increasing demand and decreasing supply. In other words LL has publicly stated that at this moment in time they are working to raise or level out the price of the $L.

For some discussion on a possible reason no result is yet apparent (rate is going on down) see this post:
/130/e6/61377/1.html#post641112
And on the relationship between confidence effects and money supply effects:
/130/e6/61377/1.html#post641071

On the "volume of trade" question you are of course exactly right. I hadn't noticed there were people who thought otherwise, Dark. The opportunities for misunderstandings in this field are legion, arent they ?

I interpret the higher volume and reduced price as a sign that the people have spoken. Your silly virtual items aren't worth that much.
The L$ will be getting cheaper as long as people think it, and SL content, is way overpriced.

Good, concise summary, Dark. However, I think you have a logical fallacy in one of your key assertions:

A. "The rating bonus has been cut, which will decrease the supply of some sellers on the market."

B. "There will also be more people that demand $L they no longer recieve from their ratings."

Therefore,

C. "There is a predictable change about to happen based off of supply and demand." and "For those that don't know economics well, this normally means a rise in price."

Your conclusions in C are logically sound if assertions A and B are both true.

But I'll put forth my opinion that B is not necessarily true. When an economy becomes more poor or unstable, and people's incomes are lowered, many people tend to hunker down and conserve their lowered income. In other words, they tend to spend less, not more.

In order to demand $L they no longer receive as part of their weekly "income", those people have to pay RL cash to make up the difference. It's a false assumption that everyone will just decide to spend RL cash to make up the difference. It could instead be the case that some people, or many people, will simply decide to spend less on in-game items. Therefore, your conclusions in C that "there is a predictable change" is not necessary a logical conclusion.

I have seen one argument repeated several times that a higher amount of trading of $L will result in a falling $L price. I have also seen the argument that the greater amount of spending in SL, the lower the price of the $L will become. My view is that both arguments are a way of stating that the greater the volume of trade, the less the price of the $L. That is why I give my argument.



You are commenting on the demand for SL content in $US. The demand for SL content in $US does not neccisarily effect the value of $L in $US in a comparable way. If the demand for content in $US goes down, the creators could always lower their prices in $L. If they do this correctly, there does not have to be a drop in the price of the $L in $US. If they are stubborn, then yes the price of $L will drop. If they over shoot it then the price of $L goes up. In a free market, overpriced or underpriced are never a permanent thing. The demand of SL content to $US in the end is just as hard to connect with the trend in the price of the $L as volume of trade is. It can be used as an indicator of changes about to come, but it is hard to say what direction the overall change will be. Oddly enough, the two markets do not change at the same time in comparable ways.



Well, I do agree in a way. Before people were using free money to buy with. It is possible that they were already spending all the RL money they saw fit to spend on Second Life. They could simply spend the same amount of RL money on the game causing them to buy less now that they have less to spend. These people don't make matters worse, because they aren't demanding $L for less $US than before.

There is still the possibility that some are spending less than they would be willing to, because they don't have to spend real life money at all. If a member could get all the $L they needed before with a combined stipend and rating bonus, then they were not compelled to ever buy $L for RL money. I think you can see in the forums plenty of people that are suddenly saying, "I didn't have to spend RL money before, how will I get what I want." Some of these people will start spending $US rather than end their consumption. Even if these people spend only US$50 more in the year than they would prior, the demand has at least gone up some from US$0 for that person to US$50 per year. It is impossible to know how much of an effect this will have, but the nature of the effect is predictable as a flattening or rising of the $L price.

Now assuming that everyone is already spending as much RL money as they would possibly be willing to spend on SL, there still is the effect on the supply side. With the ending of rating bonuses, there will be less $L on the market that cost US$0 to obtain. In a way the rating bonus recievers are getting an amazing advantage on the competition. People like sim owners that had to spend 1000's of US$ a year in teir fees, upload fees and work time to recieve their $L had to compete with suppliers that could of just been a rating party attendee before ratings cost money and now gets paid $L for something they did not work to achieve. That means the supply of $L for sale will now come from people that have something to lose by selling cheaper. Someone that has US$0 at stake has nothing to lose. If $L sellers put a greater value on their $L, they can have just as much of a change on the $L price as the buyers.

Even if only one side ends up being true, the price of the $L should either fall slower or rise. If it doesn't, you at least know Linden Labs is prepared to make further changes that eventually will have an effect on the average rate of change of the $L. At some point, something will have an effect. It may not be next week that things change. There is still alot of $L in the market that have nothing but profit for their sellers at any price. In the long run, the fate of the $L is doubtfully a continual sprial downward.