What is crypto gaming? Beginner's guide by Digimagg

In 2021, the worldwide video game industry exceeded $195 billion. With an increasing number of players deeply engaged in online gaming, the integration of cryptocurrency is becoming more prevalent. Some games have already incorporated crypto into their economies, offering rewards through "play to earn" (P2E) models where players receive cryptocurrency or digital tokens based on their gaming performance. While this allows gamers to profit from their skills or passion, it's essential for players to weigh the advantages and disadvantages of crypto gaming before diving in.

Understanding crypto gaming

Though virtual video game currency isn't novel, blockchain's emergence has empowered crypto gaming developers to infuse real-world economics into their games. Players earn NFTs or cryptocurrency through gameplay, effectively owning these digital assets. Often, in-game tokens can be swapped for stablecoins on centralized or decentralized crypto exchanges, enabling their sale or trade on online platforms or conversion to fiat currency.

Unlocking the mechanics of crypto gaming

Crypto gaming encompasses various business models, according to Adrian Krion, CEO of Spielworks. In P2E games, users can earn or purchase gaming tokens, potentially profiting by investing early and anticipating increased player participation. Some crypto games generate revenue through advertising or sales of in-game items like weapons, skins, or virtual real estate. Developers incentivize players with crypto or NFT rewards for completing quests, typically involving game interactions like defeating enemies or gathering resources. Additionally, certain platforms enable crypto investors to gamble their currency on casino games and other chance-based activities, with popular options including BitStarz, 7bitcasino, and mBitcasino.

Prominent gaming tokens

Data from CoinMarketCap indicates that the global market for gaming tokens exceeds $12.8 billion. While these tokens may be limited to use within specific games or gaming ecosystems, the leading tokens hold substantial real-world value. Below are the top three tokens based on market capitalization.

Decentraland (MANA)

Decentraland (MANA) serves as the primary token for Decentraland, an Ethereum (ETH) blockchain-based virtual realm. Within Decentraland, users can engage in activities such as buying and selling virtual properties, interacting with fellow users, and participating in games. MANA is utilized by players to acquire Decentraland NFTs representing virtual land parcels or to facilitate transactions for various in-game commodities and services. MANA currently boasts a market capitalization exceeding $1.8 billion.

ApeCoin (APE)

ApeCoin (APE) holds the top position as the most valuable gaming token, boasting a market capitalization of $2.23 billion.

Functioning as the native currency of the Bored Ape Yacht Club, a series of non-fungible tokens established on the Ethereum (ETH) blockchain, ApeCoin has been integrated into various third-party games. For instance, in the P2E mobile game Benji Bananas, players accumulate unique tokens that can be conveniently exchanged for ApeCoin.

Sandbox (SAND)

The Sandbox is another metaverse, or digital world, running on the Ethereum blockchain. The Sandbox (SAND) tokens facilitate different gameplay transactions, including purchasing plots of digital land called LAND.

SAND has a market cap of around $1.6 billion.

Generating income through crypto gaming

Crypto gamers can view in-game rewards as akin to regular paychecks earned for completing quests or meeting specific criteria.

According to Harry Turner, a former hedge fund manager and founder of The Sovereign Investor, in-game items like weapons, armor, skins, and other gear can possess substantial real-world value.

"By fulfilling quests and acquiring NFTs, investors can generate profits by selling these items," Turner explains.

DMarket serves as a prime example of an online marketplace for NFTs and virtual in-game items, many of which fetch millions of dollars.

Zain Jaffer, founder and CEO of Zain Ventures, suggests that similar to investors purchasing stocks, crypto gamers who invest early in a successful game stand to be the biggest beneficiaries.

In 2001, RuneScape players were given digital Party Hats as part of the game's Christmas promotion. Jaffer notes that these party hats, now sought after, are valued in billions of in-game gold pieces. The most coveted color of party hat sold for 57 billion gold pieces (approximately $6,700), as per RuneScape.

"It wouldn't be surprising if history repeats itself, and early investors in crypto gaming platforms and currencies emerge as the primary beneficiaries," Jaffer remarks.

Crypto gaming risks

Unfortunately, crypto gamers face numerous risks associated with crypto games and tokens in their current stage of development.

A significant risk lies in the supply and demand dynamics tied to the popularity of crypto gaming tokens. When players abandon a game, the demand for its in-game currency can plummet, rendering the tokens worthless.

As Zain Jaffer notes, due to the novelty of these games and their unproven longevity, there's no assurance that their assets will maintain value over extended periods.

Moreover, Harry Turner highlights the substantial risks associated with holding in-game currency, emphasizing how market volatility can directly impact the value of these assets. For instance, a sudden drop in value could significantly diminish purchasing power overnight.

Given the relative novelty and lack of regulation surrounding cryptocurrency, criminals often exploit crypto gamers through hacks and scams. Despite the underlying blockchain's security, the game's engine or marketplace may remain vulnerable. Furthermore, digital wallets storing crypto gaming tokens are susceptible to hacking or mismanagement.

A poignant example is the $617 million Ethereum and USD Coin (USDC) stolen by hackers earlier this year from users of the popular crypto game Axie Infinity. Despite being one of the most popular play-to-earn games, with a peak monthly active user base exceeding 2.7 million players before the hack, Axie Infinity developer Sky Mavis announced in June that it would only reimburse approximately one-third of the lost crypto to its users.

Axie Infinity stands as a prime illustration of the risks associated with crypto gaming.