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The Price Signal: Understanding the MTGO Marketplace

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The MTGO market is the place where buyers and sellers of digital objects meet and interact. Each market participant, or agent, has their own reason for taking an action in the market. Understanding what they are doing and why they are doing it is critical for getting a better handle on effective investment strategies. The four types of agents that move the markets are players, dealers, the in-game store, and Wizards of The Coast.

Every digital object is created and destroyed (yes, destroyed) at the store. The store creates these objects through sales of boosters, special sets, and event tickets. For those unfamiliar with MTGO, event tickets, or tix, are the de facto currency online. You cannot purchase singles at the store, and so exploring the MTGO market means looking into the secondary market, where people are trading cards, tix, boosters, or anything at all that is tradeable.

Redemption: how digital cards are destroyed and then transmuted into physical copies

The in-game store sells sealed products and tix, but it also handles redemption. This is when full sets of digital cards are redeemed for full sets of physical cards. This is how digital objects are destroyed and provides an important link to real world secondary market prices. If prices online ever get too low in comparison to their real world analog, redemption will act as a valve to reduce supply and support prices. This will happen because agents will examine the discrepancy between real world and digital prices. Thus, they will decide that it's worthwhile to gather a complete digital set by purchasing singles, redeem the digital set for a physical set, and voila, a bit of work yields a profit.

Yes, there are people who finance their hobby simply by maintaining a table of the value of the MTGO sets and paper sets. They turn the former into the latter when the price is right and there are enough of them that this actually affects MTGO prices. It certainly beats gold-farming.

Now, redemption is not recommended for the casual speculator because securing cards cheaply is the most important aspect. Unless you have a bot to do this work for you, it's probably not worth the effort. Sets can only be redeemed for a certain period - so no redeeming Onslaught sets anymore. You can also redeem all-foil sets for truly great complete sets.  However, having said all that, redemption through the store matters to us because it acts to reduce supply of cards online, propping up prices.

Bots and Dealers: the market makers of MTGO

Next, we have the dealers, many of whom operate bots to complete their online transactions. There are various types of dealers to be found in the classifieds offering different services. Some have better prices, but worse selection. Some focus on having fast transactions and others don't seem to care. Some will have every card printed in stock and will charge a premium on harder to find, older cards. Dealers can be found in the classifieds, and this is where market transactions are facilitated.

The best dealers change their prices to match the market and are focused on collecting the spread, which is the difference in price between what the dealer is paying for a card and what the dealer is selling a card for. If you shop around or put up your own ad, you can usually secure what you want at a discount to the dealer prices. You can also sell a card at a slight premium to the dealer’s buy prices.

If you don’t have time to work the classifieds, use the reputable dealers to make your investments. They are usually well stocked, and you won't need to spend time scouring the classifieds and bots to save a few tix.

Players: how you and I influence the markets

Players can be described on two scales: casual vs competitive and limited vs constructed. Every player can be described as existing on one point of these two spectra. Some players split their time between limited and constructed, but always play competitively. Players who play exclusively commander would be described as casual constructed players. Drafters trying to go infinite are competitive limited players. Each type and mixture of types matters in different ways, but they all have an impact on the market.

To go infinite, drafters want to win enough packs to cover their next draft (or alternately, sell enough prize cards to cover entries). Drafting is fun and it puts a lot of cards into the market, which are typically gobbled up by dealers and bots. Constructed players, especially casual ones, make sure that obscure casual cards still hold value in Commander and Pauper games, among others.

 

WotC: The only entity that gets to print money on MTGO

Lastly, we come to WOTC. Although we don't interact with them directly in the market, they are the creators and stewards of this great game. Rarely is their impact on the market obvious, but when they are designing good sets and players are enjoying the game, this is a positive thing. Without a vibrant game, there is no market. Occasionally they will make a decision to ban or reprint cards, or sanction new formats, and all these actions matter to us because all of these events drive prices. Cards have been banned before, and there will be future bans announced, and the same is true for reprints.

 

How to Identify Value on MTGO

Identifying value is what Warren Buffet has done for a career - he is recognized as being the most successful investor of all time. His strategy is to take a close look at a company and determine what that company is worth - its underlying value. If the market agrees with his assessment, then there isn't a case to be made for an investment. But, if the market thinks the company is not worth much, then there might be a case to be made for an investment. If Buffet believes there is some value in a company, then over time, he also believes the market will come to recognize this and prices will change accordingly. For example, Buffet bought up McDonald's stock on the basis of how much sheer real estate they own. He felt that Disney was undervalued, since the songs and characters are universally recognized, and secured 6% of the company. In financial markets, this is called value investing or fundamental analysis. This strategy, applied with discipline, has been working in real world markets for a long time, and it also works in the MTGO market. Using our own knowledge of Magic, we can apply fundamental analysis to make investments on MTGO.

Let's take an example of a card that represents good value at the moment, Thrun, the Last Troll. Exposing yourself to different ideas and strategies is important because no single trader ever has it completely figured out. It’s great to listen to the opinion of others when they are speaking to a card’s potential, and often, a careful listener will identify a potential investment. At first glance, the value in Thrun comes from his current lack of attention. No one is talking about the card. That means that this card is overlooked and could have value as an investment going forward.

[Editor's note: all prices below are current as of July 23rd, 2011]

This card sells for around 4.5 tix. It appears to be a very playable card in the abstract. This card has some casual appeal. It's legendary. It's green. It's the Last Troll! Casual appeal has probably kept the price up in comparison to other mythics from the same set. The benefit of casual appeal is that demand is consistent and doesn’t fluctuate much over time. A year from now, all things being equal, Thrun will probably go for around the same price [5.3 tix as of July 2012 - Ed.]. That's a good start in identifying value. If you don't expect an investment to fall in price over the long term, it might be worth buying depending on the upside potential. But let's think about what has come before and try to get a handle on how the price of Thrun might look a year from now.

If we look at some comparable cards from Rise of the Eldrazi or Worldwake, we can get a sense for what the price range of Thrun could be at this time next year. At the low end, I'd consider Omnath, Locus of Mana to be about right - Legendary and Green, and that sells for around 3 tix. At the high end, we have Linvala, Keeper of Silence - flying White Angel Legend with god ability - at around 4 tix. This gives a guideline for potential risk. Over the course of a year, the potential loss might be between 1 and 2 tix per copy. Again, knowing and looking at what has come before is important. It gives you a perspective on what is possible for a given investment. In this case, it implies that the worst case scenario is a loss of 2 tix for each Thrun acquired at the current market price. That sounds a little risky, and Thrun is not a sure bet, but there are ways to mitigate the risk. We still need to assess the potential upside.

Now, what type of demand do we want to see for a card to be a good investment and to turn into a money maker? We want to see potential demand from the constructed crowd, because they drive the biggest volumes in card sales. So, is there going to be a competitive deck that features Thrun? It’s impossible to know for sure, but there will be three additional sets coming out in the next year, starting with Innistrad. Each new release will shake up the constructed environment, and when things are in flux, there is potential for making gains. Cards come in and out of favour, and prices follow. Powerful cards without a home are always worth monitoring when major changes happen.

Secondly, Garruk, Primal Hunter will be around, potentially putting a heavy green deck into focus. Green also features some of the best artifact removal, including the artifact 'wrath' effect of Creeping Corrosion. Finally, Zendikar block rotates out in the fall and then we'll get the first taste of Standard mostly comprised of Scars block cards. Artifacts will almost certainly be played, and therefore any colour that can deal with artifacts will have to be considered, and green fits the bill.

All of this adds up to one thing; it is almost inevitable that Thrun, a green mythic creature with decent stats and a reasonable cost, will see some Standard play in the next year. Going back to our comparison to Omnath and Linvala, this expectation reduces the chance of the worst case scenario. At some point, there will be interest from constructed players, and this will drive demand and push prices higher. At that point, it will be fine to sell a few copies to take modest gains. On the other hand, if something crazy happens and mono green becomes the best deck, selling Thrun for a massive profit would be easy.

This thought experiment describes the process of seeking out value and minimizing risk when making digital investments. Since Thrun looks like a good investment at 4.5, a downward trend represents a good opportunity to add to your position. Nothing about the analysis has changed, and a lower price minimizes risk even further.

The MTGO market is vast, it's lucrative, and it's predictable. I maintain an excellent collection online that pays for itself by shrewd value investing and speculating. You can "freeroll" your MTGO account, too, and all it requires is an understanding of how and when markets move. Take a look at my archives to understand more about investing in MTGO.

-Matthew Lewis

16 thoughts on “The Price Signal: Understanding the MTGO Marketplace

  1. Thank you Matthew for this article. Hope you write more as I've really appreciated you sharing your knowledge in the forums in regards to MTGO trading and all the nuances it entails.

  2. Great analysis: going back to basics, and explaining things from an economic viewpoint. I especially like how you go in-depth on ONE example – as opposed to briefly covering many different cards. There is a place for both, and what you did was refreshing.

    One piece of constructive criticism: you should define "rational agent" at the beginning of the article to set the tone, and to tie the economic angle in more tightly.

    1. Thanks! What you describe is exactly what I was trying to do.

      Going forward, I'll try to be aware when introducing economic concepts without a proper explanation. Economics is my background, and sometimes I have to remind myself that not every reader is an econ major.

  3. The best dealers change their prices to match the market and are focused on collecting the spread, which is the difference in price between what the dealer is paying for a card and what the dealer is selling a card for. If you shop around or put up your own ad, you can usually secure what you want at a discount to the dealer prices. You can also sell a card at a slight premium to the dealer’s buy prices.

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