Where does money go when the digital age has given rise to virtual currencies? Where does money go when fiscal policy forces investors towards high-risk asset classes?
Introduction
The current stock market reflects the rise of speculative assets as a way for investors to find yield in an ever-lower interest rate environment across the world. Just look at the steep increase in the valuation of stocks; cryptocurrencies like Bitcoin (BTC-USD), Ethereum (ETH-USD), and Dogecoin (DOGE-USD); or extremely speculative assets like NFTs and collectable physical items. In this article, I will discuss how forces like supply & demand, fiscal policies, and economic indicators influence the valuation of in-game items in the pioneering E-Sport and in-game skin platform, Counter-Strike: Global Offensive. In 2013, the developers of this game began a catalyst of digital currencies and markets, and is a long-term case study of the staying power of digital currencies. By the end of the article, I will reflect on whether there are viable lessons that can be learned from this unique asset class for other parts of the market, and what the future expectations are.
Disclaimer: Investing in skins is an unregulated market, and decisions made by the Valve Corporation, government regulation, or the gaming population can readily influence the value of these assets. While the market cap for skins and other in-game items is upwards of $1.0 billion in value, there is far more risk involved and investors must acknowledge this.
Image 1: Source. The median price of the CS:GO Weapon Case One, rising from a low of $0.05 to a current price of over $60. Where else has there been a 1200x increase in the price of an asset over less than 8 years?
History of Counter-Strike Skins and Cases
Counter-Strike is a First-Person Shooter ("FPS") video game series created by Valve Corporation in 1999. It soon became the premier competitive FPS in the world, with a large and devout following. While paid-for skins are common across most gaming systems, developers, or genres, CS:GO is unique in that there is a marketplace that is controlled by player supply and demand, rather than prices set by the developers. Skins are obtained by players either through drops in-game due to level ups or through the purchase of keys to open cases. There are currently 35 cases and an additional 30+ unique collections in the game, with about 2-3 new cases and collections per year.
There are currently over 1300 unique skin patterns, coming out to over 640 million unique in-game skins across different variations of each skin pattern. For example, each skin has a range of wear depending on a float value, and lower values equate to a usually better looking, and more expensive, skin. Then, every skin can be traded on the Steam Marketplace, and this is where a game such as Fortnite, while containing popular skins, is far different as there is no player to player trading or marketplace capability. The ability for anyone to buy or sell their skins allows for supply and demand to influence the price of the skins, depending on what is popular, common, or speculated upon. Perhaps the success of CS:GO skins has helped usher in a new age of digital currencies, as NFTs and blockchain technologies enter the public spotlight.
Image 2: Source. A picture showing some of the original skins released with the first skin update back in 2014. Current prices for some of these skins include $500-$1,000 for the purple lightning strike AWP (up from ~$10 in the early days after release), $100-$700 for the AK-47 Case Hardened (up from ~$5-$10), and $10 for the MP7 with the skills on it (up from $0.10).
Image 3: In-game screenshot. This skin, the AK-47 Case Hardened in a rare “scar” pattern, is almost one of a kind. The price is further increased by the addition of four Titan Holo stickers that are also worth tens of thousand dollars each. When combined, this skin was sold for $150,000, the most expensive ever in CS:GO history.
Current prices range from a few cents for the very common and low grade skins that are commonly dropped in-game, to a skin that recently sold for over $150,000 USD as the pinnacle of visual effect, prestige, and rarity. Going by average prices and skin number databases, I estimate that the total market cap of CS:GO skins is well in excess of $1.0 billion. However, the skins themselves are often an afterthought to most avid investors, as the most significant returns can be found with the cases and other high-volume commodity items. As shown in Image 4 below, the player count increased rapidly across 2014 and 2015, but then leveled out between 2016 and 2020 as controversy mired the outlook of the game and skin market. However, as Valve has countered negative press and has continued to provide new skin updates, the pandemic has allowed for a significant climb in players during worldwide lockdowns. This has also led to steep climbs of the item prices as players became savvy of the possibilities of making profits through buying skins then selling at a later date.
Image 4: Source. CS:GO is the most popular game played on Steam, the leading PC gaming platform. The average and peak player base has slowly risen over the years, reaching the most recent highs in April 2020 due to worldwide lockdowns.
Image 5: Source. The price history for a Bayonet Doppler in a ruby pattern since 2018. There have been no direct changes to the skin at all, and only outside forces have influenced the price.
The Rise of Yield Seekers to Alternative Risk Assets
Risk investors from around the world have now flocked to a video game in order to find yield in a yield-starved economy, and as the stock market reaches all-time high valuations. Based upon the sheer number of skins in existence, the accumulation of wealth has led to accounts that hold $500,000 or more, with some even reaching over $1,000,000. However, this wealth has led to abuse by numerous parties, and this has risked this unique asset class as one quick change by Valve may reduce the value of the items to nothing in a flash. This risk reflects the current stock market, as valuations reach unseen levels and cryptocurrencies are based on no intrinsic value, yet are worth trillions. Across various asset classes, digital currencies have continued to rise, even when facing the tangible risk of governmental intervention or changing fiscal climates.
Image 6: Source. The eight-year price history of one of the most popular guns in the game, the AK-47 Redline, in Field Tested wear. As time wears on, the number of these skins decrease, naturally increasing the price as supply decreases. Quite a non-volatile trendline for a digital currency on a video game marketplace.
There are numerous risks that cryptocurrencies face, but the enduring strength of the Steam Market may provide a bullish outlook. For example, while the recent crackdown on crypto in China has coincided with a steep decline in the value of Bitcoin and other currencies, there has been an opposite inflow into CS:GO over the past month in nearly perfect correlation. Digital currencies all provide a hedging effect to the entire digital ecosystem, and this allows for reduced influence by a singular party. It also highlights that a time is approaching for Bitcoin where adoption is so entrenched into world society that regulation will be unable to prevent continued use due to a vocal user base. One must consider the ethical considerations of regulations and the loss of capital that may face millions of digital currency users across the world.
Digital currency is not limited to crypto, as the NFT craze that has led to the extreme value of one-off items across the internet culture highlights a similar asset class to CS:GO skins. The importance of these assets is in the ability to transfer crypto value into a different form, as a potential hedge against risk. If users value this hedge effect, then the value of alternative digital currencies will remain. This search for alternative currency is exacerbated by current fiscal policy as yields remain close to 0% in Europe and 1.6% in the US.
Just look to the recent ultra-high risk GameStop (GME) and AMC (AMC) short-squeezes that are the epitome of this yield-starvation effect as hedge funds look to short struggling companies and retail investors take advantage of that short interest. However, in my opinion, an investment in CS:GO skins will provide far more long-term capital growth than a respective investment in GameStop or AMC. Both investments are speculative plays based on fundamental economic theories - supply & demand vs. short-squeezing - yet CS:GO remains far more tangible as the skin ecosystem has obtained fans beyond the in-game player base, and this will help grow demand for the cases and skin assets.
The demand effect remains strong as evidenced by the most recent update to the game that now significantly limited the supply of multiple popular cases, leading to an instant jump in price. Without demand for these cases, the prices would not have risen as they have and I remain bullish long term.
Chart 1: The short-squeeze driven GME and AMC, exhibiting a similar look to CS:GO case prices, but with entirely different causations.
Image 7: Source. A collection of how older CSGO skins have seen an immense increase in price as of the most recent update, with 100% or more return in just a day.
Viable Investments in CS:GO
By now, I have listed the supporting theories behind my long-term bullish outlook on a digital currency like CS:GO, and you may be wondering what viable assets exist. There are two paths one can take to obtain returns, but the most conducive to a long-position are the cases. CS:GO cases are the required material in the skin creation process, yet can be traded like a commodity. This leads to a set number of cases to be listed on the market to be opened by players that wish for the constituent skins within the case. While opening cases may provide for the chance to get a rare object worth thousands, the odds are stacked against you as it is odds-based gambling. However, many others love to try their luck, and so those who hold on to the material these gamblers require will lead to a steep increase in price as the supply of the cases ends. That is why many cases have increased in price as of late, and there will be more to come in the future.
Unfortunately, most cases used to be obtainable for $0.03 when they were in the active duty pool, but not even the actively dropped cases now range between $0.09 to over a dollar for the newest case. With that, the current best choices for long-term buys are the Prisma Case, Prisma 2 Case, and Danger Zone Case. The reason to purchase these cases is due to the current high amount of supply for these assets creating the lowest prices at the moment. While other cases may have limited supply or more valuable skins, in my research, I find that the most important long-term growth will be found by investing in the lowest price commodity. However, this is on a multi-year outlook, and I will discuss short-term assets next. Just like in the regular market, diversification is important as well, and owning a range of cases may pay off long-term as trends ebb and flow.
Image 8: Source. Viable long-term hold cases, with the older cases being most likely to see an end in supply and increase in price.
The cases shown below are the cases most likely to see short-term demand and price appreciation as gamblers look to find the last of the rare skins within at a low price. Further, other investors will also be looking to buy at the lowest cost, leading to a dual source of price appreciation over time. While the overall rate of return will be lower, they are most likely to see price growth over the next year or more. The most popular of these cases are the Spectrum 2 and Gamma 2 case, due to the knives within, and will likely see the highest long-term demand, while the revolver case is the least popular and not see as strong long-term demand. Doing research in the community will provide insight into the popular and not-popular skins, although all discontinued cases are bound to see ample growth.
Image 9: Source. Viable short-term options, as these cases recently got their supply cut, and gamblers and investors will begin opening the limited amounts of cases that are left (~150,000 per case).
To buy skins or cases, one must create a Steam account and purchase the base game for $15 USD. Then if you play the game, you may obtain cases and skin drops over time, but you may also go straight to buying and selling items. Simply go to the market, and you can create a buy order to bulk order cases. One consideration you must make is the 15% Steam Tax that occurs when selling on the marketplace and is more extreme on lower priced skins. Further, your money is stuck as Steam Cash, and is not withdrawable to your personal bank account. Another viable option is trading between other players to evade the tax and using a third-party website to sell skins and withdraw cash, but this comes with inherent risks. Thus, there is much research that must be done prior to deciding to invest in the CS:GO skins. Another point to note is that investing in cases is no longer a hidden secret, and so there will be steep competition between other investors in both collecting cases and selling them at a later point. It will be interesting to see how the ecosystem plays out over time.
Conclusion
Pulling back now to the broader picture, one can see how there are strong similarities between the growth of the CS:GO market to the broader market. As government-backed securities see falling yields across the world, investors have increasingly looked towards far riskier assets for capital growth. 2020 has been an extreme example of this sentiment, and can be seen across multiple speculative asset classes. One could say that alternative digital currencies act as a hedge to mainstream cryptocurrency risk as a quick place to transfer wealth. One may also say this is merely an example of inflation and excess stimulus in practice, yet the timing for multiple price catalysts in the CS:GO ecosystem have coincided key cryptocurrency and economic events. Others may say that it is merely the influence of supply & demand plus juveniles looking to waste money, but as soon as investors became involved, the market also became an indication of the current investing climate across the board. By looking at the historical price movement of nearly all skins in the game, one can say without a doubt that skin prices in CS:GO exhibit the power of supply and demand, the support for blockchain-like or digital currencies currency, and the fiscal policy effects around the world in today's economy that are driving investors towards these types of assets.
Image 10: Source. I would like to thank Ciovacco Capital Management for the creation of this informational chart that shows the similarities between the 2009-10 inflationary scare to now. Perhaps an effective time to buy is arriving soon?
Through this analysis, I believe there can be a bullish case made for limited supply commodities or collectables, cryptocurrencies, and speculative investments as the current fiscal status quo remains positive for these assets. These forces can also be backed up in other economic indicators. Gold (XAUUSD:CUR) is trending upwards of late as the population sees steep price hikes, regardless of what the Fed may say about deflationary technological advancements. Also, as shown in Image 9 above, TIPS has been outperforming treasuries at a quick rate, and when looking historically, the market also performs well looking out from a similar-looking time period. Good returns may be probable to come, as 2009-2010 was the beginning of one of the strongest bull markets in history.
Thus, I feel investors can also remain confident in speculative, high yield, and anti-inflationary investments, and maintain confidence in the current market even with the short-term volatility that is likely. Then, as volatility remains in these assets, alternative digital currencies like CS:GO items will continue to grow as a natural hedge against risk, as strong supply and demand forces provide incredible stability to the assets. With that, I have great expectations for the future of the digital currency industry.
Thanks for reading.
This article was written by
Another Mountain's Rock Investing
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Hello, I am an individual investor with an interest in bringing diversification of viewpoints to stock analysis and investing. This brings to point the Japanese proverb 他山之石 -ta-zan-no-ishi- which translates to "another-mountain's-rock" and denotes the importance of diversifying the sources of your knowledge in order to gain the advantage of multiple perspectives. Further, a rock represents the foundational aspects of the world a mountain supports, signifying the importance of understanding the simple fundamentals in order to succeed. As such, I cover a wide range of assets in order to find the best of every type of investing. Please consider following so we can continue down this path of knowledge together, and hopefully, I am able to provide some novel insights for you with every article. Thanks for reading.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am long various CS:GO items, including most cases. However, this article is not an endorsem*nt or advocation of investing in these items, and is merely educational. One must conduct their own due diligence if considering an asset class such as this.
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