Virtual Economy Research Network

Last month I blogged about how the virtual Q Coins are being traded for real money and used as an online payment system in China, and how the Chinese government has reacted to this. In the comments section, one Boaz Rottenberg provided some additional details and also offered some disagreeing views. In particular, he wrote:

There is no secondary trade going on in Q Coins in the open market. The currency itself is not transferable through QQ's platform and definitely not cashable by QQ. [...] From my findings, I believe all real money trade in virtual currencies in China is in gaming currencies - mainly WoW gold.

In this posting, I describe how Q Coin secondary market trading (or one facet of it) works in practice, and illustrate the process with some screenshots. I also provide some figures from a trading site. Many people have seen the news articles about QQ, but for most non-Chinese speakers, this is probably the first glimpse of the actual Q Coin market.

Taobao: the eBay of China

First, I will address another part of Mr. Rottenberg's comment:

Regarding the sale of Q Coins on Taobao: From a look at the listings on the site (over 10,000 last time I looked) it appears that the vast majority of the listings are in fact Q Coin top-up cards (or top-up card numbers and passwords) sold at a discount by top-up card vendors or by other QQ users who have extra top-up card credits on their card that they choose not to use themselves.

Taobao is a popular Chinese auction site, similar to eBay, that is a favorite marketplace for Q Coin trading. While eBay no longer tolerates unsanctioned virtual currency trading, Taobao even has special sorting options to support such transactions. There are three types of Q Coin listings:

1. Actual Q Coins
2. QQ prepaid (i.e. top-up) card number and password
3. QQ accounts with Q coins included.

On April 9, 11:04, Taobao reported 26415 Q Coin listings. Their distribution was as follows:

Q Coins	20638 entries
QQ prepaid card	4191 entries
QQ accounts with Q Coins	1586 entries

At least on this day, it thus looks like the vast majority of listings are in fact not prepaid (top-up) cards, but actual Q Coins.

Sorting the offers

To understand the trading process, it is useful to note that the listings can be sorted on three other dimensions: price interval, transfer speed and block size. Block size is familiar from eBay or IGE transactions, but the speed at which the transfer can be executed is not normally an explicit dimension in Western virtual currency marketplaces. There are two categories:

Fast transfer (usually within 12 hours)	17724 entries
Slow transfer (within 1 day or longer)	2940 entries

In theory, the slow transfers enable sellers to “sell short” if they believe the overall price will go down within the next few days. Slow transfers naturally tend to be cheaper. Sorting by block size yields the following results:

5 coins	8745
10 coins	7868
20 coins	5121
40 coins	1545
60 coins	3136

After the recent announcements by Chinese government bodies, Tencent instituted a 120 Q Coin limit for the amount each account holder can purchase within one calendar month.

Sorting by price interval, we get the following distribution of listings:

The approximate average price is:
(1122*0.55+1222*0.65+1577*0.75+1590*0.85+0.95*4423) / (1122+1222+1577+1590 +4423) = 0.82 Yuan / Q coin

Purchasing Q Coins: illustrated edition

To illustrate the process of purchasing Q Coins for real money, I carried out an actual transaction and took some screenshots. Taobao is not the only marketplace for Q Coins and within Taobao there are many options, but the following describes one typical way.

Let's say I want to buy 10 Q Coins that are transferred to my personal QQ account quickly. First I need to choose the listing type. I don't want a prepaid card or a new account, so I choose what we above referred to as actual Q coins:

There are 20638 such listings at this time. Next I choose the price interval I am willing to pay: 0.7 - 0.8 Yuan per Q Coin. There are 1545 matching listings:

I would like to buy a block of 10 Q Coins. There are 310 such blocks for sale:

Finally, I choose a fast transfer, and select one seller at random out of several who match my criteria:

I click on the listing to see information about the seller and detailed transaction instructions. I can see the seller's trading history, reputation in the view of other users, and contact information. Like most sellers on Taobao, the one I chose accepts three types of payment methods:

Basically, the types are 1) Alipay (Zhifubao); 2) online bank transfer; and 3) post office remittance. Alipay is very similar to and the main competitor of Paypal in China. Alipay and Taobao belong to the same Alibaba group, so a Taobao account can be linked with an Alipay account for easy purchases. An Alipay account can be funded from a Chinese bank account, a debit card or a credit card.

Since I don't have an Alipay account (actually a card you have to pick up at a Chinese bank) and currently live in Finland, none of the payment options are readily available to me. I therefore had to ask a friend with an Alipay account to help. She carried out the payment and indicated my QQ account number to the seller.

On the same day, an unfamiliar QQ account number added me to his friend list, and I received 10 Q coins from him as a "gift". These transfers can be executed using the transfer feature available on Tencent QQ's website:

Using this interface you can either send coins or request the other party to send you coins. It only works between "friends", but there is no limit to whom you can add to your friends list.

I also contacted the person who sold me the coins to ask more about Q Coin transfers. He said he could offer me a QQ account number and password, containing the exact number QQ coins I bought, and I could get the Q coins out myself after I paid the money within some limited time. He also told me that after the government regulations, QQ game coins (a currency different from Q Coins) that players won or had stored in Tencent's game platform could be no longer redeemed for Q Coins after the beginning of May.

Conclusions

While I agree with Boaz Rottenberger in that Q Coins are not redeemable by Tencent itself, he seems to have mistaken in the proposition that Q Coins are not transferable through QQ's platform. They are, as demonstrated above, and this enables a secondary market for the currency to emerge (the primary market being sales of Q Coins by Tencent to users).

Another take-away from the observations of this post could be on market efficiency. Virtual currencies are supposed to be a perfect commodity, so why is there such a large spread of prices on the market? Why doesn’t arbitrage force the prices to converge? This is a complicated topic, but one possible explanation suggested by the observations above is that while the currency itself is a perfect commodity, the complete good of purchasing a coin and having it delivered to you involve a lot of differences in quality. One coin is actually not as good as the other. A related possibility is that some QQ accounts and Q Coins are actually stolen property, obtained by hacking someone's account. The sellers want to get them out of their hands as soon as possible, thus offering bargain prices.

Another always pertinent cause for market inefficiency is of course transaction costs, which we also witnessed in various forms.

Vili Lehdonvirta also contributed to this article.