Non-traditional investing: Magic the Gathering
1. Non-traditional investing: Magic the Gathering
In this lesson, we'll talk about non-traditional investing.2. What is a non-traditional market?
In traditional markets, there are established regulations, information, and governance ensuring standard practices. In contrast, non-traditional markets, lack transparency and regulations. Non-traditional markets can be high risk but also high reward. Let's examine how data helps quantify non-traditional market risk.3. Introducing Magic The Gathering
Magic the Gathering was created in 1993 as a trading card game. There are 8 to 12 million players worldwide. The cards themselves have varying power levels in the game, and varying printing rarities. Usually, the most powerful cards are rare and can be expensive. Further, new cards are printed in expansion sets which are released in booster packs. A booster pack is a sealed package of cards for a player's deck. New sets and cards can be worthless or worth hundreds of dollars. This makes Magic a non-traditional market.4. The need for more power
As new cards come out, older cards may become more or less powerful in combination or rare cards could be reprinted. As a result, the market for these cards changes often and speculation occurs particularly for the older cards.5. Many places to purchase cards
Many online communities support the buying and selling of Magic cards. Here you can see some examples of booster packs.6. Booster packs
Each booster pack has known probabilities of getting the rare and powerful cards. If a player needs a specific card they can pay the premium of getting it directly from someone that opened it from a booster pack. Or they may purchase a pack in the hopes of obtaining the card. However, that comes with a risk since the pack could have all worthless cards.7. Buy an individual card or take your chances opening a pack?
To understand this market, we should define the risk versus reward. There is a risk that a pack has no expensive cards. On the other hand, the reward is that a $3 booster pack could have a $50 card inside.8. Using data to assess risk vs. reward
But remember, you're data-driven. Since you know the cards in a set, the current prices, and the probabilities of getting specific cards, you can simulate pack openings. You can sample by probabilities from a list of cards and prices to understand the return. Just like a VR headset simulates reality, sampling booster pack probability will simulate opening countless packs.9. What is a simulation?
A simulation imitates an operation over time. Given some characteristics of the operation, a sample is taken and recorded. Another random sample would give you this distribution. Sampling occurs many times and each each one is slightly different as seen in these distributions.10. Aggregating all the simulated samples
In the end, samples are combined explaining the operation's behavior. Here, the average and mostly likely outcome is 0. Often investment simulations have a distribution of returns. The highest point is the most likely return. In a financial simulation, any price to the left of the peak would be less than average returns and to the right would be above the simulated average.11. Simulating Magic The Gathering
A simulation was used to sample from a Magic set according to rarity. Each sample represents a simulated pack opening with mythics, rares, uncommons and commons according to their published likelihood. Then based on the sampled cards prices are appended.12. A simple example
The simulation's histogram represents the likely prices from opening packs. For example, one simulated pack of cards may only be worth $2 while two other simulated packs are worth $5 each. The average outcome is (2 + 5 + 5) / 3 or $4. Thus on average the simulation would suggest buying packs below $4 is a good investment because the average simulated income would be higher. Here is an example distribution from this small simulation.13. Account for all additional expenses.
There is still one more step. Once all the packs are opened, you have to organize, put them online and sell them. The online marketplace charges a fee which reduces your profit. These types of fees are called "friction costs" because they add friction to the smooth operation of a market. First, calculate the expected return, which is the simulation average. Then subtract any costs such as online listing or trading fees. The profit margin, net profit divided by revenue, measures the efficiency of an activities regarding its ability to make money.14. Let's practice!
Next, you'll see the actual output of a simulation indicating a profitable opportunity. One where 100 boxes were actually purchased and 54000 cards were sorted and sold!Create Your Free Account
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