Understanding liquidity - how to play the markets in games

I want to talk about liquidity. Liquidity in the economics sense means converting one item into another item easily. For example gold (real gold) can be sold for dollars and dollars can be traded for just about anything.

In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash in hand, is the most liquid asset, and can be used immediately to perform economic actions like buying, selling, or paying debt, meeting immediate wants and needs.

Source: wikipedia

When I started playing Eve I realised something that I still find utterly astonishing - almost everything in Eve is liquid in the financial sense. Your battleship = 100m isk = a Sovereignty Blockade Unit. Stuff isn't perfectly liquid, there are transaction fees, price fluctuations, issues of location and so forth. But pretty much everything is at least 90% liquid. If you have a spare battleship and need a SBU you can exchange them without significant loss of value. Of course in certain circumstances such as price gouging and other market manipulations you may lose value but these are exceptional.

In WoW most items are not liquid. Your bind on pickup epic may be worth 1000 gold but you can only vendor it for 20 gold or at best disenchant it for 50 gold's worth of mats.

Let's now have a look at Diablo 3 where we will see some astonishing factors of liquidity. Just about everything not only can be converted to gold but also to real money (unless you play hardcore). Understanding liquidity in the game could have a profound effect on the way you play it. I'll illustrate with examples.

Example 1: non-liquid inventory management.

Barb character - loot discovered = one Barb sword, one Wizard wand, 5000 gold, 20 junk blues and rares, 5 assorted gems.

Barb uses sword and the damage gem, stashes the Wand in case they want to roll a wizard one day, vendors the junk blues, saves the gold, stashes the spare gems.

Example 2: liquid inventory management.

Barb character - loot discovered = one Barb sword, one Wizard wand, 5000 gold, 20 junk blues and rares, 5 assorted gems.

Barb uses sword. Trades the unwanted gems for damage gems and cubes up to make a really strong damage gem. Sells the Wand and buys a second Barb sword for dual wielding. Spots that crafter mats are expensive on the RMAH, salvages the junk blues for crafter mats, buys extra crafter mats on the gold AH, sells all of these crafter mats for real money.

This Barb has an extra weapon, a better gem and has stored his surplus in a more mudflation-proof currency than the first player.

All because he sees that anything can become anything else. Alternatively he could have used his RMAH profits to outfit his Barb better without spending more real money than the guy who just casually slings it into his stash.

If you take this to the highest level you monitor values across a range of markets and play them. Gold is selling high? Vendor/auction everything you don't need and sell the gold. RMAH legendaries are cheap? Raise real money using other surplus stuff and buy an uber weapon to kick butt with.

In a game where everything is liquid there is huge advantage to be gained by trading, selling to expensive markets and buying from cheap markets. What you shouldn't do is sit on value. Let me give another example:

Example 3: Non-liquid Barb player discovers a Windforce, an uber elite legendary bow. It's the first Windforce in the game and will sell for £2000. However he decides he wants to make a Demon Hunter. He rolls a new character and spends the next 2 weeks leveling his Demon Hunter, finally reaching level 60 and equipping his magnificent bow.

Example 4: Liquid Barb player discovers a Windforce, an uber elite legendary bow. It's the first Windforce in the game and will sell for £2000. He decides he wants to make a Demon Hunter but knows he's best cashing in now. He sells the Windforce for £2000. He rolls a new character and spends the next 2 weeks leveling his Demon Hunter, finally reaching level 60 and buying a Windforce, (several of which have now been found) for £200 He equips his magnificent bow and ponders how to spend his £1800 remaining funds. Maybe he'll wallpaper his house in Blizzard T-shirts. (Warning: RL Blizzard T-shirts are probably not very liquid).