Rise of the Crypto Kitties – Profit from gaming?

In early December of 2017 cryptocurrency was on a hot streak, seemingly doubling in price in a week. Media outlets were abuzz with stories of the future of electronic currencies and the Reddit crypto “day-traders”, feeling pumped after attending a party at Chuck E. Cheese, were labelling everyone who hadn’t yet invested in crypto “ignorant” and sounded the horn as the hype train left the platform, on schedule for the usual daily service.

So now that the scene has been set we can head to our hero story, an article found on the popular technology website, TechCrunch. Yes, it was yet another crypto story, but there was something different about this one. This was a game. A game which centred around virtual cats, or kitties. The game was CryptoKitties.

Fair enough, a game revolving around pet cats isn’t particularly interesting, however this one had a catch, or more like a fishing lure that came out of the screen and attached to my lip, reeling me in with gusto. The best of these CryptoKitties were selling on the open marketplace for upwards of $100,000 USD.Yes, you have read that dollar figure correctly, these virtual items are selling for the same price as a luxury car. What in the fuck? Even with one billion dollars I wouldn’t want to buy one. That was my first thought …but it was very quickly replaced with …how do you make money on this?

So …what the hell are CryptoKitties?

CryptoKitties is a web-based game where you can buy, sell and breed virtual kittens. This may sound pretty appealing to many gamers, maybe you love Neopets, Pokemon or were hot for a Tamagotchi back in the day. We have talked on Profit Pants before about profiting from gaming, take a look at Roblox and their $70m payouts to developers, but CryptoKitties is very different.

You picture yourself walking your virtual kitten through a highly rendered, simply stunning 3d virtual world, meeting other people’s pets and maybe interacting using some sort of voice chat. But none of this is the case with this game.

Instead what you get is a static page with a photo and a stat breakdown of your pet. There isn’t even a dice to roll to determine if your kitten has slayed a dragon or gained 5XP. The kitten just sits there. It is a static image. It is boring.

The game also allows you to breed your own kittens, all you need is two fertile kittens to begin with. Generation 0 kittens are those released by the developer. Each time two kittens breed they are then classified as one higher generation. For example, breed from two Gen 0 kittens and the result will be a Gen 1. Breed from Gen 8 kittens and the result will be a Gen 9.

What makes the game unique is that it utilises the Ethereum blockchain. Ethereum is the second largest of the cryptocurrencies, behind Bitcoin.

There are the two extreme camps in the cryptocurrency discussion right now and it seems as though they are both trying to force your hand into picking a side:

1. There are those that say crypto will never work, that it is a scam. That it will free fall fast and take down everyone along the way. In their eyes there is absolutely no possibility that cryptocurrencies could be a success. This camp, for better or worse, often holds traditional assets including stocks and property.
2. The other side of the debate are balls-deep in the crypto game and can’t see any downside. As part of a heated keyboard warrior moment earlier in the week I mentioned to my opponent that I thought Bitcoin may currently be in a bubble. I was then promptly directed by my opponent to view a YouTube video that provided the definition of what a bubble was. The rules that this video used to define a bubble were worded so that Bitcoin could never meet the definition, no matter what happened to prices over a period of time. My opponent failed to appreciate this when it was pointed out, so I put down my jousting stick and walked away. There is no point arguing with some people.

If you are on either of the extremes then you probably aren’t seeing the full picture. Take a step back for a moment to objectively review the arguments on both sides of the fence. Anyway, let’s get on with talking about adorable bits and bytes.

The game has been built to utilise the Smart Contract functionality available in Ethereum, which allow for two strangers to agree upon and execute a written contract with essentially no risk of being scammed. In this situation the kitten is a built into a contract and is transferred to the new owner in exchange for the Ethereum cryptocurrency. As part of this exchange the ownership records of the smart contract (kitten) are updated in a publicly managed ledger. It is this public ledger which details all transactions that happen using Ethereum. Anyone in the world can validate the true owner of your unique kitten. The Ethereum ledger captures the transactions of all of those Ethereum day-traders turning their noses up at the ignorant rest of the world, but there is now a sprinkling of virtual kitten contracts mixed amongst them.

Each time a virtual contract is exchanged, whether it be to trade a kitten or give birth to a new one, that activity must replicate on the Ethereum network. For that replication on the network to happen there will be several computers around the world who perform the process known as “mining”, which is essentially people just helping to keep the electronic transaction statements up to date. As a reward they earn a fraction of the Ethereum currency.

In the last two weeks the number of transactions processed on Ethereum each day has jumped from 620,000 to over 900,000 (source: www.bitinfocharts.com), one of the results of which has been the slowing down of transaction processing. How much of this volume increase can be attributed to CryptoKitties is unknown, as the buzz around cryptocurrencies has heated up over this period too which is sure to have driven part of this increase. Either way we can 100% say that the processing of virtual pet contracts is contributing to wasteful CPU usage worldwide. The whole concept of CryptoKitties utilising the blockchain technology is pretty cool, but there is no technical reason why the trading of virtual animals needs to, or should be, performed over blockchain …if this is only a game.

I quickly scrolled through the marketplace, where all prices are listed in Ethereum. I start by doing the first thing I always do when I am shopping for an item, whether it be a pair of underpants on eBay or a new car, I sort by the cheapest price.

At the bottom end of the marketplace you can pick yourself up a red-eyed mongoloid for as little as 0.0057 ETH, which translates to around $3.95 USD at the time of writing. A photo of this fine example, proving that Darwin’s Theory is not in action, can be seen below. Cryptocurrency prices are extremely volatile, so expect these prices to move around a fair bit in the near future.

But something strange happens as you look beyond the cheapest runts on the market, each of the kittens starts to look better. Suddenly it is like watching the Olympics on television, where it doesn’t matter if you have never watched the high tower diving before in your life, you start to become an armchair expert and know a 5.5 score from a 6.0 score when you see it. “Oh, poor entry on that one, too much splash”. For as little as the $10 USD price point you can move up to your semi-premium crypto-kitty and feel less worried about looking like a cheapskate if people find a photo of your fur-child. Instead, your friends will be forced to judge you on one of the other numerous flaws you may have. Victory.

Are we catching Pokemon again?

One can quickly draw comparisons between CryptoKitties and the 2016 worldwide smash hit, Pokemon Go. Both have created a virtual buzz. Both are based on subjectively cute, small, virtual creatures. Both have made a lot of money, Pokemon Go one hell of a lot of money. However this is about where the similarities between the two end. Let’s head back in the Profit Pants time machine and take a look at Pokemon Go.

Pokemon Go was released on 6 July, 2016 as a collaboration between Niantic, and more importantly, Nintendo. The hook that the Pokemon Go release was counting on, in addition to the fact that they could use the Pokemon branding which anyone under about age 30 would have at least be aware of on a basic level, was that Pokemon Go was the first major release of an augmented reality game. Augmented reality is when the real world blends with the virtual. With Pokemon Go this was a case of looking at your phone screen and being able to see the real world using the camera, but also visible were virtual Pokemon elements.

The difference between the technological hook used by Cryptokitties (Ethereum blockchain) and that used by Pokemon Go (augmented reality) is that augmented reality added to the unique in-game user experience, it made the game better. Pokemon Go also forced people outside to play for the best results, which although was a shock to pale skinned introverts everywhere, was yet another technological hook that made the gameplay unique.

Pokemon Go took off in schoolyards and workplaces across the globe. In large cities it wasn’t unusual to see children and strange adults aimlessly walking into stationary objects as they hunted for Pidgey, Caterpie or Weedle. Although there were in-app purchases and money changed hands, people genuinely loved playing the game. Unlike python hunting in the Everglades, millions of people found Pokemon hunting to be a fun game.

When virtual items have real world value

Back in the late 1990s I was playing the game Ultima Online. “Ultima”, or even just “UO” for those in the know, was one of the first Massively Multiplayer Online Role Playing Games (MMORPG), even though that term wouldn’t really be used until almost 10 years later. Imagine the game World of Warcraft, but 10 years earlier where you had to kick your parents off the phone line so that you could connect to the Internet using your 56k modem, because a 28.8 modem was just ridiculously slow. The graphics were sub-par, but the virtual world interactions with other players and the ability to build up your character were unparalleled. Ultima Online was all about grinding for skills and gold. The game built a cult following, with hundreds of thousands of greasy teens, and a few creepy adults too, paying their $10-20 per month to play. People payed an ongoing fee just to experience the game.

I was an accomplished in-game miner. This is not to be confused with cryptocurrency mining, there were actual mines inside the UO world. I would spend my entire summer holidays chipping away in the mines just to acquire that sweet sweet gold which I could later use to purchase in game items. And you know what, I loved doing it. You see, Ultima Online was very unique for the time, you were able to purchase land and items in the game. You could then even construct a property on your land, whether it be a single room small house or something as large as a multi-storey keep. This property would then be permanently in the game for all to see and as long as you visited your newly acquired property every now and then it would in theory last forever.

It wasn’t long before UO accounts and items began popping up for sale on an emerging auction site known as eBay. I didn’t know how I felt about this, the fact that for the somewhat princely sum of $100 someone could purchase a UO account and skip the hundreds of hours of grinding that made the game enjoyable. But for that $100 you were purchasing hundreds of hours of labour, avoiding the backbreaking work and poor working conditions that the mines of the time had to offer. Purchasing in cold hard cash also gave you the option of being able to utilise the account to jump right into the depths of the game and experience the good life that the mysterious fictional towns of Moonglow, Trinsic and New Haven had to offer. You didn’t have to first live the life of a newbie.

But if you did choose to purchase an account you were purchasing it because you wanted to play with it, it had utility. It wasn’t purchased because you expected that the value of a 4x Grandmaster Tank character would go to the moon in the next 24 hours and that you could then resell the account for a profit. And when you did eventually sell your account it was most likely because after loving the game for a long period of time you simply got sick of it.

There were always the rumours of outlier low wage workers in China grinding out the gold using macros to gain gold for resale on eBay. Even if the rumours were true, these workers would still have been active, live, characters in the game. You would have seen them around town hauling their wares from the mines. You could have killed them in cold blood as they made their exit from the mine with a full days haul and looted their corpse. They still added some level of value to the gameplay and community.

Those trading CryptoKitties purely for profit aren’t adding any value to the gameplay, not there there is even really any gameplay to enjoy from the outset.

A tale of Pimps and Johns

Who are the buyers and who are the sellers in the CryptoKitties marketplace? While we can’t answer that exact question we can make some educated guesses, and if there is one thing that Profit Pants is good at, it is making far-fetched guesses look like facts. At this early stage of the game, remember that it has only been going for a few weeks, there are two main sellers on the marketplace:

1. The developers themselves: At certain intervals (15min intervals at the time of typing with my somewhat speedy but delicate typing fingers), the developers of CryptoKitties release a new “Generation 0” Crypto Kitty out to the brave new world. This release ensures a constant increase in supply and a fantastic revenue stream for the company. Who wouldn’t want to be the proud new mother or father of a Gen 0 kitty? The price that the Gen 0’s are listed on the market for is based on the average sale price of the last 5 that they have sold, plus 50%. The list price then slowly ticks down from this 50% premium until there is a purchaser, not a bad money maker for the developers when the sales prices of these look to be $1000 or more each. I’m sure that there are additional factors to this pricing that I haven’t seen, but also that I have likely missed a handful of the more expensive offerings. Even at the price of $1000 having four of these an hour gives the developer the best part of $100,000 a day.
2. Speculators: Those who have purchased a crypto kitty purely for the aim of resale. 3-4 weeks into a game you aren’t a hardcore fan of the game who has had countless sleepless nights playing with bleary eyes and suddenly decides that your days of running the cat version of a puppy-farm are over and you choose to sell your assets. These people got into the game because they planned on selling from the beginning.

Importantly for the future of the game, there is nobody in the high end of the marketplace who is there because they have the view that this is an enjoyable game. They aren’t addicted to mining for that sweet sweet gold and they haven’t spent whole summers waiting for potential mining victims to exit the protected mine from their 12 hour shift. We know this for sure as the game hasn’t even existed through a summer and there is no in-game gold. The marketplace is purely driven by speculation.

So who would be a purchaser in the marketplace? I believe that there are a few groups at play here:

1. Speculators: Potential idiots like me who are trying to learn how to make money from CryptoKitties.
2. Gamers: Although this is just pure speculation, I am assuming that there is a minority who have been lured in to the CryptoKitties world and are purchasing because they love the idea of owning a virtual pet. Maybe they missed out on the Tamagotchi craze of the 1990s, or maybe they were living it and have never grown up. I can appreciate that some people believe that the kitties are cute, and good for them.
3. Nerds / Geeks: The game is revolutionary from the perspective that it has been built from the outset with the direct tie-in to Smart Contracts using Ethereum blockchain. There are sure to be more than a handful of people out there who are beginning to feel a tingling sensation as a raging technology hard-on is approaching. Being able to buy your way in to the first major crypto-game for the price of a beer is tempting.
4. Hipsters: These gourmet toast-loving neckbeards will buy their way in just so that they can tell others that they were there.

Now because we have already made many wild assumptions about CryptoKitties we may as well not stop now, so let’s make some more. Out of the 4 groups above the speculators are the only ones in the high-end market. You will always find a few crazy obsessive gamers who will pay premium prices for a product, but all but maybe 0.1% of these will be under the $500 price point. The nerds just want to try it out to see how everything works at a reasonable price point. The hipsters will pay enough so that they don’t look like complete cheapskates when they post screenshots to social media, unless of course a new trend starts where it is suddenly cool to adopt the reject-looking kitties, a bit like how smashed iPhone screens became a thing for a while …or maybe smashed iPhone screens are still a thing? Enough of the hipster-bashing for a while Profit Pants!

Can this ever work as a game?

I asked myself which gamer segment would a CryptoKitties style of game generally appeal to, if you forget about the ties to Ethereum and blockchain? My guess would be that the audience is along the lines of that who played Pokemon Go. Young people under, and let’s be very generous, age 20. We aren’t talking about an audience in the billions like there is for the FIFA World Cup.

CryptoKitties is available only as a web browser based game at present. What do you think is the preferred Internet connectivity device for under 20’s? What device do under 20’s take to school, out to friends houses and to the mall? They don’t lug around big heavy CRT monitors to LAN parties anymore, it’s all mobile. Sure, they could load up Safari or Chrome on their mobile and browse to the website, but it isn’t the same as a standalone mobile app experience. It will be extremely hard to get these power gamers onboard without a mobile app.

But there is still time to create a mobile app, right? Well, sort of. Pokemon Go went viral worldwide in the flash of a …um, sports game streaker? It was only a matter of weeks. Below you will see the daily active users for Pokemon Go from launch.

What is interesting is that after the initial upsweep, an upsweep that would have any developer moist, or terrified, a game as big as Pokemon Go, with the support of the multi-billion dollar Nintendo, with huge marketing budgets, only managed to remain at that peak for 2-3 weeks before things started to look like an uncoordinated fat kid attempting a hill descent on a hover board.

Ethereum is the biggest hook that Cryptokitties has, it is whole reason that TechCrunch and other media outlets started writing about the game. The technology is also the biggest reason why Cryptokitties, in my opinion, will never be a success, as a game. Now, wait and hear me out all of you crypto-loving bastards.

Let’s imagine that Cryptokitties gets their mobile app up and running. Let’s imagine that the most popular kid in the schoolyard has the app, they have kittens, they have the admiration of all of their peers. Let’s also imagine that every other single kid in that school now wants to join in on the fun. Little Timmy is one of these followers and heads home after school where he begs his parents for his own set of breeding kittens.

Let’s imagine Timmy’s father is a lawyer and his mother is a doctor, they have money. They can even afford to avoid the red-eyed mongoloids and pay for Little Timmy to get straight into some premium fur. After getting over the initial hurdle where he asked his father for some “virtual pussy” his parents agree to the purchase without asking any more questions. They are too busy to spend any quality time with Timmy and gain his affection with money instead …the ultimate consumer. Little Timmy is jumping up and down with anticipation. Timmy’s father pulls $200 from his wallet and hands it over. Timmy’s joy suddenly fades, the blood drains from his face as his skin reaches a ghostly white. How does he explain to his father that he needs to set up an Ethereum account to make a purchase when Little Timmy doesn’t even know what Ethereum is to begin with?

These aren’t fidget spinners. You can’t go down to the mall and pick one up from any one of a dozen stores. It is too difficult for the whole school to jump onboard the craze in only a day or two. By the time that Little Timmy’s parents have had the time to figure out Ethereum the CryptoKitties peak will be near over. Even fidget spinners, with a $5-10 price point and available at a store within a 5 minute drive of almost anywhere, only lasted at their peak for 1-2 months.

So here is my big call, and I will wear my flame suit, we are too early into the adoption of cryptocurrencies for a crypto-powered game to be a viral success amongst under 20’s. Therefore, as I believe this game requires the under 20’s segment of users in order to be a success, CryptoKitties will not reach mass adoption as a game. This position is critical from a kitty demand perspective if you are an “investor”, or “day-trader” as some are calling themselves in this space.

A look at some CryptoKitties sales data

There is a website (https://kittysales.herokuapp.com) that tracks the sale of CryptoKitties and as at 16-December 2017 there are pretty amazing stats covering the transactions that have taken plus thus far:

• Total Sales: 175,998
• Total Unique Kittens Sold: 140,450
• Total Ether Sold: 33,463.42 ether
• Total USD Sold: $15,841,295.65
• Average Sale Price: $90.01
• Median Sale Price: $17.37
• Highest Sale Price: $110,707.16

Sales volumes are up by somewhere in the vicinity of 100,000 kittens since I last looked a week ago.

Even if this game was able to capture the levels of mass-hysteria that Pokemon Go saw in 2016 we are already 2-3 weeks into the release of this game. Just keep in the back of your mind that Pokemon Go daily usage started dropping from the peak not long after this period. “Who cares, there will still be plenty of people on the platform” you say? Once the rate of daily users drops the high end speculation will begin to fall too. Just like any good pyramid scheme you need to keep up the demand for the product in order for the returns to keep coming to those who are peddling their wares. The media articles about CryptoKitties will begin drying up once this happens. Less greedy Profit Pants style readers will be aware of the product.

But what about right now if you are quick? You see, my original thought was that I could simply buy a couple of average kitties and get them breeding, selling off their children with no thought as to who the new owner was or what sort of living conditions they would be going to. It was all about making money. But it isn’t quite as simple as putting a dollar bill into a photocopier and watching the money print out. The developers of CryptoKitties take a cut each time you give birth, a bit like a maternity ward fee.

At present this “birthing fee” is 0.008 Ethereum (ETH) which translates to roughly $5. Taking into consideration that many of the latest kitten sales at the time of writing are between $3.50 and $6.50 you may actually be taking a loss when you give birth. As stats, and therefore the value of the kitten, are effectively a dice roll at the time of birth, you have no control over how much you will win or lose in the process. Some may win big out of pure luck, but it is just gambling. Considering that the supply of kittens for sale on the marketplace is increasing, and you have no way of making yours stand out amongst the thousands of other comparable mongoloid kitties, you are stuck with whatever price the market dictates.

So what should you do?

Cryptocurrency prices by themselves are currently highly volatile, with large swings of 20% or more in a day not bring viewed as uncommon. Take this cryptocurrency volatility risk and then add on top a game which from a gameplay perspective is simply not even at a level that anyone would rate even as high as “average”.

The game is unlikely to spawn a tribe of loyal players who play just because they love the gameplay. The product as it stands today won’t reach mass adoption in the under 20’s market, which I believe is critical for a game in this category.

When you are compounding game-specific speculative investing on top of the existing levels of speculation that go along with investing in crypto that is a massive speculative sandwich.

Some people have already made a fortune as kitten traders, some more probably still will. With high risk comes high reward. But where will you be when the music stops playing? Who the fuck knows.

But would I be happy with how this has all played out if I were the developer? HELL YES!

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