Hello everyone! We are back again today with another edition of Splinterland Economics - a series in which we introduce a basic economic concept and then apply it to Splinterlands. If this is your first time reading, just to tell you a little bit about myself: my day job is in an unrelated area but I consider myself a little bit of economics nerd - I read a little (or maybe way, way) more news than I should, double majored in econ, and am obsessed with optimization. I love the way Splinterlands is equal parts card game and resource allocation game. My goal with these articles is to share a little bit of what I know with you all.
Our subject today shares a similar name with a simple machine, but it is anything but simple. While THIS concept may not move the world, it can potentially increase your profits or purchasing ability - but at a significant price. Understanding this topic can help you to make more responsible decisions with your money and finances. Today, we will be talking about Leverage!
What is Leverage?
Leverage is when you borrow money or capital in order to increase your amount of investment in something. For example, let's suppose that you have $10,000 to spend and feel strongly that a particular investment is highly likely to increase in value. One way to invest in this situation would be to simply put your $10,000 into that investment. Another way to invest would be to use leverage - you could borrow some other amount, perhaps another $10,000, and instead spend $20,000 in order to purchase twice as much of that investment. Leverage is used by many individual investors, as well as larger firms, in order to increase the amount of assets they may trade.
The benefits of using leverage are pretty clear - when or if the price of an asset increases, then anyone who is using leverage to invest in that asset will see their gains multiplied. Leverage also allows an investor to obtain much more of an asset than their amount of owned capital could otherwise buy. Leverage may be used to increase your profits in a bull market, start your own business, or even purchase a home. In our hypothetical $10,000 example, if the asset price increases by 20% after you purchase it then you will see a $2,000 profit. However, if you used leverage and borrowed an additional $10,000 then you would see double the profit, or $4,000!
In economics we often say that "there is no such thing as free lunch", and the benefits you can take advantage of using leverage certainly come with a price. An investor or buyer who uses leverage is borrowing money, and borrowing money nearly always will come with a cost which must be paid regardless of how the asset price performs - interest, fees, or some other type of future obligation. If asset prices decrease, many lenders will have conditions on the loans they give out to investors using leverage. Borrowers (the investor, in this case) may even be forced to liquidate assets or forfeit collateral if asset prices drop too far. So while leverage may help to increase your gains in a bull market, it can be very dangerous when that bull turns into a bear.
How do we apply it to Splinterlands?
Splinterlands exists on the blockchain, and is connected with a wide range of exchanges and marketplaces. And while there are few opportunities for leverage directly in the game, leverage may be used in many connected exchanges, and there are certainly Splinterlands players who participate in the game and use leverage elsewhere. Leverage acts as a multiplier, and this means that many events or market movements outside of the game can have an outsize effect on the game economy. Anyone who has been around for the dramatic cryptocurrency market swings this past year should have noticed large changes to Splinterlands asset prices at the same time. Those swings were in part in part due to contagion, and the fact that investors using leverage may have had to liquidate some of their assets in order to cover their needs for funds in other areas.
One final thing to note about Splinterlands is the rental system. Renting is NOT an example of financial leverage because there is no change in asset ownership and the renter's profits will therefore not be affected by and changes in card prices during the rental period. However, renting is similar in that it allows a renter (or investor, depending on your viewpoint) to gain access to larger amounts of capital (cards) than their amount of owned funds may otherwise be able to obtain for a cost (rental fees). This is a useful option that allows skilled players to quickly and (relatively) cheaply increase their ranked play rewards, and helps new players to try out new cards without having to make an enormous financial commitment.
Why should we care?
Leverage is a double edged sword - when used responsibly it can potentially magnify your gains, but when used recklessly it can easily result in a total loss. Personally, I find the costs of using leverage a little too risky for my tastes in most cases and avoid using it whenever possible - but I DO make use of low risk alternatives, such as Splinterlands card rentals. Whether you are a fan of it or not, leverage is a powerful tool in the financial world and it is important to both keep it in mind as an option and to be aware of its effects on the markets and other investors.
Thank you so much for reading all the way to the end. Interested in seeing some more of my writing in the future? Be sure to give me a follow! In the meantime, if you'd like to see some of my recent posts:
Too Hot to Handle - Using Molten Ash Golem in Battle! - Last week's battle challenge, featuring Ash Golem!
Splinterlands Economics: First Mover Advantage - An introduction to the concept of first mover advantage, and how we can apply it to Splinterlands!
Splinterlands Economics: Equity - An overview of the concept of equity, and how we can apply it to Splinterlands!
Thinking about giving Splinterlands a try but haven't signed up yet? Feel free to use my referral link: https://splinterlands.com?ref=bteim, and be sure to reach out to me if you have any questions!
All images used in this article are open source and obtained from Pixabay or Unsplash. Thumbnails borrowed with permission from the Splinterlands team or made in Canva.