Virtual Currency - Temporary Hype Or Real Promise?

Virtual economies are growing at a tremendous pace. In 2009, it was estimated that 12% of Americans had purchased virtual goods. The industry for virtual currency and goods is expected to generate a whopping $1.8 billion in the year of 2010. Obviously, users are responding to the phenomena, but is this a short term fad or an emerging long term business model?

The concept of a virtual economy was first developed in the world of massively multi-player online role playing games like EverQuest and World of Warcraft. Users discovered that various artifacts from the game, like skills, potions, and weapons represented a real monetary value and began selling characters, virtual currency and virtual items on sites like eBay.

Facebook's stellar rise to popularity has been a huge boon to the virtual currency business. Various games and applications on the Facebook platform allow users to purchase rare items or give gifts using virtual cash. This has resulted in explosive growth of virtual marketplace and trading systems. This growth has been so dramatic that Facebook has announced their own virtual currency for applications to use. While Facebook purports to be doing this as a benefit to their users and to allow easier detection of fraud, most analysts suspect that it has more to do with the hefty 30% fee that Facebook will collect on virtual purchases that are driving this latest move.

Facebook is not the only company realizing that virtual cash is a potential new way to monetize web sites and web applications. For some time, the prevailing paradigm has been to monetize web sites through advertising. Recent surveys suggest that 70% of users ignore those ads. The Internet is in great need of a new monetary model. Virtual currency seems to be fitting the bill nicely, and as web sites continue to need financial support, it is likely that this form of payment will become a long-term strategy for monetizing web applications.

One of the reasons that virtual currency has grown in popularity - and why it is likely to be here for the long haul - is that it addresses changes to our society as a whole. The recent recession has changed the way people view consumption. Collecting a large amount of material things has become less of a priority as consumers look for ways to boost their savings. Buying virtual items using a virtual currency has allowed many consumers to still enjoy shopping without breaking their budget. Many virtual items carry much of the same prestige as their physical counterparts once did. It is believed by many that the recession may have a long term effect on how Americans consume. As a result, spending with virtual money is likely to remain popular for some time.

The Internet has also allowed us to have many more meaningful relationships that are not as deep as those we built in the past based on physical proximity. One example is gift giving for special events, like birthdays. Many of us have online friends that we chat with frequently, follow on Facebook or otherwise know well online, but have never met in person. What is the appropriate way to recognize their birthday? Virtual currency systems have created a solution by allowing us to purchase virtual gifts for our online friends. As the Internet continues to affect how society interacts and the types of social situations we must face, virtual currencies will continue to play a strong role.

While it may be easy to dismiss virtual currencies as a passing fad, it would be a mistake to do so. The need for virtual goods has created a new model to monetize web sites and has addressed changes in how we interact with people that we only know online. By filling these gaps, virtual currency is set to be a long term business model.