The Video Game Portfolio

what if video games were an asset class?

The Video Game Market

Reddit user u/DeepFuckingValue turned a $53k YOLO into $11M.

Through GME call options.

Let me explain.

What happened with GameStop?

Let’s start from the beginning:

  1. Chewy CEO Ryan Cohen joined GameStop’s Board of Directors
  2. Upon this move, Citron Research predicted that the stock price would drop
  3. r/wallstreetbets decided otherwise

For a bit of historical context, r/wallstreetbets is a subreddit that is self-described as a

Community for making money and being amused while doing it. Or, realistically, a place to come and upvote memes when your portfolio is down.”

The users tend to place a lot of “YOLO trades”, primarily through options.

And recently, they decided to go into GameStop.

This movement brings up an interesting question: what are so fundamentally interesting about video games? What is the *potential* for video game resellers?

Could video game companies become payment companies? Can video games become currency?

Are video games the next Bitcoin?

Video Game Pre-Orders as Currency

This isn’t the first time that GameStop has been in currency discussions. It has been used as a ‘store of value’ in the past. In 2014, a user posted about their experience with the “First National Bank of GameStop”, explaining how they used the company as a bank.

The set-up of the First National Bank of GameStop:

Does anyone else use Gamestop as a bank?

I got really pissed off with US Bank because I kept overdrafting my account even though I opted out, and the same thing happened with my credit union when I got a debit card.

Now whenever I get paid I go preorder a whole shitload of games. Whenever I need money, I go to the nearest gamestop and ask for my money back on a game I don’t want and make a withdrawal. The lines are shorter at gamestop than at the bank and I can trade in old games and have money go straight to my savings account. Gamestops are just as prevalent as banks in my town and I work at a mall so it’s even more convenient than running an errand to the bank or using an ATM and getting charged.

The gamestop people are starting to catch on that I’m just moving money around and only buying one preordered game a year, if that, but there isn’t shit they can do about it. The best part is, since I always preorder every game coming out I’m still guaranteed to get all the exclusive content whether or not I’m sure I want a certain game. It’s like they’re rewarding me for banking with them.

More simply:

  1. Preorder games = deposit
  2. Cancel a preorder = withdrawal

The whole premise is that the user goes to GameStop, reserves X amount of games, and then collects upon the games before they release. At the time of posting, 2014, GameStop charged no cancellation fees.

There are apparent benefits to using GameStop as a store of value. It’s quicker and more efficient. However (of course), GameStop is not FDIC insured, is not open 24/7, is not governed by banking regulations, and is not an actual bank.

Obviously, the structure of the First National Bank of GameStop is all hypothetical.

But what if it wasn’t?

A Model: The Video Game Market

What if video game groups incorporated financial services into their current business models? (truly playing into the “Everything is Fintech” concept)

  • Digital currencies: A great way to get access to a digital payment instrument is by having a digital world already set up. Adding a universal currency across games and creating a transaction based environment could be a natural next step. The video game world could operate using its internal system, allowing for P2P transactions.
  • Investment in Creators: Indie game developers could easily become the next influencers, a trend that might conflate with Roblox’s rise. This would further the flywheel that exists within the games, as the digital currencies pay the developers. The Sandbox is another great example of this.
  • Video Games as Assets: They could use pre-orders and game credit as a way to leverage the Fed’s Term Asset-Backed Securities Loan program, as explained by Alex here.
  • Gaming Coins, Verified: Enjin , a game cryptocurrency, was whitelisted in Japan a few days ago. If this is replicated, it could give a lot of leverage to games.

Along the same lines, they could operate akin to Bitcoin, using the video games as a form of e-gold and as an investable financial asset. In fact, video games could go through all the phases that Bitcoin has: a form of payment, a potential store of wealth, and an uncorrelated financial asset.

In this (very) hypothetical world, video games are used as investments — you can buy and sell them on the market, using pre-orders as a way to take stake, based on how you expect the games to perform.

How Could the Video Game Market Work?

This chart below was developed by the team at OSAM Research.

GameStop made $12 on a new sale of video games, and $55 on the first re-sale. They make 4.6x on a first resale, netting $162 in sales versus the consumer’s total expenditure of $210.

And this dynamic creates a market.

A market that users could partake in.

The video game resale market is (somewhat) similar to the secondary market of stocks — it’s a mix of the objective and the subjective, based on company (or game) fundamentals as well as qualitative analysis (is this a *good* game?)

Investors could conduct research on different games, developing a price target for video games (similar to how investors build out valuation for stocks), and choosing to invest based on that metric.

Rather than building a portfolio of stocks, investors could build a portfolio of video games.

An Example of the Video Game Market

Using data from Kaggle, we can begin to build out the potential asset base of investable video games.

The below graph shows the relationship between critic score and user scores for most of the top video games. Most research shows that review scores are the most important variable in video game sales — higher scores serve as a proxy for quality, and thus “purchasing decisions of consumers are strongly influenced by review scores”.

Thus, these review scores are going to be very important in determining a video game investment opportunity.

The larger the discrepancy between critic score and user score, the lower the total sales, and thus, the worse an investment in the game would be. However, if you can capture the upside on a review score, it would be like capturing the upside of earnings and could allow you to resell it at a higher price (all purely hypothetical).

That creates an investment opportunity — capturing the dynamic between critics and users, as well as giving gamers a stake in the resale market.

Investment Techniques: An Example of the Video Game Market

So then the very hypothetical question becomes, what if you had invested in, say, the Legend of Zelda?

The Setup: The pre-order for the game is currently trading on the market at $30 — that’s the ‘stock’ price. Critics and Users Scores [earnings reports] are yet to be released.

  • Let’s say that the assumption was that Zelda was going to get ranked a 10 (max score is 10) by Users.
  • But the market is pricing that Critics will rank the game at 5.5
  • But you thought there was a chance that the Critics were going to rank the game at 10 [Zelda beats earnings]
  • So you buy a call on the video game price because you think that the game is going to price higher than expected

You think that this game is currently underpriced and it should be worth $40, not $30. You think that everyone is going to love the game and the market isn’t seeing the full potential of opportunity here (hang with me here).

You buy an out-of-the-money call at the $40 video-game strike price for a premium of $2, which would give you the option to purchase 100 video games at $40 each.

And you were right.

In this example, the Legend of Zelda completely beat all expectations. The critics rated it at 10, beating expectations by 4.5 whole points.

The price of the game rises to $50.

The call expires in-the-money, with 8 points of intrinsic value (Stock Price — Strike Price — Premium Paid), and you can invest at $40 per game, versus the current market price of $50 per game!

You make $10 x 100 = $1,000 off your trade, and can add Legend of Zelda to your “video game portfolio”.

Key Takeaways

Perhaps you choose to resell your Legend of Zelda holdings to another market participant and go back into the video game market to invest in another game.

Your core portfolio grows over time, and you can transfer the video games to dollars at any point if you need to withdraw.

You can invest in developers that you like (directly) and can support in-game universes by taking an equity stake in how they are built. Like a venture capitalist, you help build out different PvP games or different MMO games and are invested in their successes.

The digital environment becomes a flywheel — you invest in the virtual world around you, through the developers and gameplay, and the universe grows overtime. There is a connection and support in the growing metaverse, and an asset class that has been ignored for a long time (video games) becomes a genuinely great place to build a portfolio.

A Simple Conclusion

This is a complex illustration to what is a simple idea — there is a lot of potential for video game worlds to become something really interesting.

Trading video games is something that already happens — GameStop sort of (a big sort of) does what I described above, just not through calls and puts. They purchase games, resell them at a higher price, make a profit, etc.

From a digital payments perspective, we already see a shift with Roblox, Animal Crossing, etc., and there’s no reason why game-based investing couldn’t become another viable option for these universes.

The concept of “build(ing) a human co-experience platform that enables shared experience, from play to work, and learning among billions of users ” as the Roblox CEO stated, involves capturing our entire virtual experience.

One could imagine that it umbrellas some sort of digitized payment-investment-system.

Will it play out as illustrated (with an options market and all)? Probably not. But the concept of overlapping a digital world with a investing spin is pretty fascinating.

Disclaimer: Nothing contained in this article should be construed as investment advice. All information found here are for informational, entertainment or educational purposes only. This piece reflects my own views and ideas.

Special thanks to Louis, Lyle, and Yishi for helping me edit this piece!

Thinking. Los Angeles transplant via Kentucky. Passionate about educational equality, data science, and quantitative finance.

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