09 April 2007

Arbitrage Opportunities in Second Life?

Second Life (SL) is gaining momentum in popular awareness as well as gaining mind- and wallet-share of first life emigrees. If you believe all/most/some of the hype, there are riches to be made in SL. Gold in dem th'ar hills, as it were. This begs the question: "Are there any arbitrage opportunities for clever investors as well?"

The Linden dollar (L$) value is indexed for the most part against the US dollar (USD), with some volatility based on supply and demand. Linden Lab has this official blurb regarding currency exchange:

"Several online resources allow residents to convert Linden Dollars into US Dollars and vice-versa. Rates fluctuate based on supply and demand, but over the last few years they have remained fairly stable at approximately 250 Linden Dollars (L$) to the US Dollar."

I was truly hoping to learn the Yahoo! Currency Converter would supply conversions, but alas, my hopes were dashed; SL economic statistics and market statistics for currency trading was the best I could hope for.

L$ exchange rates are determined by an in-life market (LindenX) where residents are able to buy and sell currency. There exist other markets, however, external to LindenX where L$ can be bought and sold against some other "real currency". What is needed then is, at minimum, two distinct markets where a pricing difference between L$ and another currency can be identified and taken advantage of in such a way where L$ are purchased at market price lower in one market than the price they can be sold for in another market.

If the fees could be compensated for and the timing issues resolved, at first consideration I would think this could be accomplished via numerous eBay auctions of L$, where each unique eBay auction is itself a distinct market. In fact, if creative individual figures out how to short sell L$ in one market while buying long in another, they will have just hedged L$ currency trades!

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