Article Highlights

• Introduction to the CS2 skin market crash and its impact on players and traders.
• Explanation of how the skin market in CS2 works and Valve's role in it.
• Analysis of the reasons for the crash and its effects on various stakeholders.
• A look at the history of virtual economies in Valve's games and the role of economic experts.
• Conclusions about the future of the skin market in CS2 and its impact on the gaming industry.

Recently, posts about "accepting heartbroken male college students" have been circulating on social media, seemingly as a joke. However, upon closer inspection of QQ groups and online forums, it's clear that a significant number of college students are experiencing substantial losses. Many of them have faced their first investment defeat: not in A-shares or high-priced gold, but in the virtual skin trading market of the shooter game CS2. According to media reports, $2 billion (approximately 14.2 billion RMB) vanished from this market in just one day. Countless fortunes turned to ashes within a few hours.

It may seem strange, but how did a shooter game like CS2 transform into something resembling a stock market? It's a long story. CS skin speculators, facing their empty accounts, will remember Valve's (the developer of CS2) announcement of opening "skin alchemy" on that distant afternoon.

Valve announced a "routine" game update, which included a surprising clause. In short, rare weapon skins (knives and gloves) that were previously only obtainable by opening crates can now be crafted using lower-quality skins. This is akin to turning natural diamonds into manufactured diamonds from glass, leading to a significant price drop.

Impact of the New Update

This move shocked the long-established CS skin trading market. In CS2, opening a single crate costs approximately 17 RMB, with only a 0.26% chance of obtaining a rare skin. Knives and gloves are considered among the rarest cosmetics. Obviously, obtaining a knife or glove skin yourself is extremely difficult, so the best method is to buy directly from the market.

Due to scarcity, purchasing a high-quality knife or glove skin can cost a few thousand RMB, while exorbitant skins can reach hundreds of thousands. But now, under Valve's new policy, lower-quality red skins can be used to craft rare golden skins, which users are calling: "Red Skin Alchemy."

Many players quickly logged into their accounts, pulled out their old red skins, and embarked on a mission to craft knives: With a method for crafting knives, rare and expensive equipment was no longer as rare as before. The price of the popular Butterfly Knife dropped by half directly: The most affected were the "vendors" who had stockpiled large quantities of skins. Some lost 600,000 RMB in one night: Even a college student lost their living expenses. In groups, everyone was crying in despair: On social media, people were cursing Gabe Newell, the head of Valve.

Various Reactions

In addition to vendors, professional players who own a large number of skins also took a hit. Spinx from team MOUZ wrote a heartfelt message on Twitter after liquidating, saying that everyone has their own dreams. Although every snowflake is not innocent, there is always someone who can make their way through an avalanche. Sometimes, you do nothing and automatically win at the end of the match. Former professional player Niko escaped this crash because he never traded skins. He expressed sympathy for players who invested in cosmetic trading.

Many players believe that the vendors who suffered heavy losses got what they deserved. They see this as a game that was originally focused on entertainment and competition, but was tarnished by these skin-trading vendors, and that this opportunity is good to get them all out and get the CS world back on track: They see Gabe Newell's iron-fisted policy as a great benefit for ordinary players. Expensive skins that were previously out of reach are now accessible to everyone. Players who were wearing sandals the day before are now living in villas on the beach.

The Other Side of the Story

But, was Gabe Newell really a saint thinking of the players' interests? Perhaps it's not that simple. How was this multi-billion dollar e-market built? Making money by selling skins is a profit model for almost all online games. Adding crate-opening gameplay to online games is also common, and even the micro-transaction system in games is nothing unusual. But Valve's games are the only ones that have developed such a huge out-of-game market. This is no accident, but the result of careful design by Gabe Newell and Valve.

The "source of all evil" was Team Fortress 2, released by Valve in 2007. In this game, Valve introduced a hat system, where players could buy different hats for their characters, which did not affect the balance of the game, but were merely decorations. Some of these hats drop inside the game, some can be crafted, some require completing tasks... And of course, you can also spend money to open them from crates.

Due to differences in appearance, special effects, and drop rates, many rare and sought-after hats soon appeared in the game, and players who couldn't get them chose to buy them directly from others. Gabe Newell thought: since someone wants to make this money, why not him? So Valve launched an official trading platform, where everyone can buy and sell freely, Valve does not interfere, but charges a simple commission. It was unexpected that the players' enthusiasm was much greater than Gabe Newell imagined, and this trading system became increasingly popular, even starting to show inflation and deflation...

Gabe Newell realized that this should be treated as a serious matter. In 2012, Valve hired a real economist to help them design and improve their economic system, who is this man:

His name is Yanis Varoufakis, and he is a professor of economics at the University of Athens. During his time at Valve, his title was "internal economic advisor". There are now some articles he published on the official Valve website, anyway, I can't understand them very well:

In short, Valve has very seriously established a complex virtual economic system. According to Yanis Varoufakis, this system is more complex than the economic systems of many small countries in the world. He is certainly qualified to say this, because two years after leaving Valve, he became the Greek Minister of Finance.

The Pinnacle in CS:GO

CS:GO, released in 2013, was the culmination of this system. In CS:GO, players can obtain skins through opening crates and crafting, and skins are divided into different levels such as white, blue, purple, red, and gold; each skin has a wear rating, which affects the rarity, and the prices of the same skin can vary greatly depending on the wear rating; In addition to skins, there is an independent sticker system, which is divided into player signatures, team logos, and decorative patterns, and each category of stickers is divided into different levels; In addition to stickers, some skins have unique patterns, "StatTrak (counter)" and other different attributes; In short, CS skins can form thousands of different combinations, and each skin has a unique ID, and even traceable transaction records, several versions ahead of today's NFTs. You see, this thing is designed for trading. Therefore, shortly after its release, the market surrounding the skins quickly boomed. Live streaming of crate opening became a traffic password for many streamers. Once high-quality hard goods such as AWP Dragon Lore or Butterfly Knife are opened, a collective climax of streamers and comments is inevitable:

Various get-rich-quick stories began to appear in the market, such as opening a top-quality gun skin and exchanging it for a house, or a knife skin equivalent to four years of tuition. However, at this stage, the get-rich-quick stories were limited to opening crates. Around 2020 and 2021, a large number of speculators began to enter the market, and CS skins also began to be measured against cryptocurrencies and NFTs, and prices suddenly began to rise. Under the frenzied speculation, doubling was not just a big market, and an increase of 100 times was not rare. Many people began to promote that CS skins are the next Bitcoin, and those who missed out are in trouble:

CS has also gradually transformed from a competitive game into a huge platform for financial derivatives. At its highest, the market value of the entire CS skin market exceeded US$6 billion (approximately RMB 43 billion). The main users active in this market have also transformed from game players to speculators.

Until that crazy Thursday. As for why Valve wanted to destroy itself, the reason is very simple: this is not Valve's own Great Wall. According to Valve's rules, official trading not only deducts 15% as handling fees, but also subsequent withdrawals are difficult. Therefore, the main place for trading is currently third-party platforms, no matter what price is speculated, Valve does not receive a penny. These people not only do not pay taxes to Gabe Newell, but they don’t even log in to the game. Now that the new policy is out, players are not afraid of opening worthless red skins, and they can go directly to alchemy, and ordinary players have more incentive to open crates. The original cheap skins can now be sold for some money; and expensive skins that were out of reach are also affordable for ordinary players. The liquidity of the official market is also improving suddenly. The market will fluctuate, and there will always be losers, but Gabe Newell, or the gambler, will always win. There is nothing new under the sun.

The Continuing Controversy

The economic system designed by Valve has always faced considerable controversy. Just a month ago, a stunning slaughter scandal broke out in the CS community: the Black Egg incident. The Black Egg refers to a team sticker that was issued for a limited time during the 2021 Stockholm Championship:

This unremarkable sticker, from July to September of this year, in a short two months, the price of this sticker rose from 5 RMB to 3,000 RMB:

Many people were promoting that the Black Egg would become the next "Holo Titan". The Holo Titan was released in 2014 and is an exclusive sticker for the Titan team. Due to the disbandment of the Titan team, it has been rare ever since, and the price has risen from a few cents at the time of release to hundreds of thousands of RMB:

Those who feared missing the Holo Titan invested heavily in the Black Egg. But in reality, although this skin is rare, there is a large quantity of it, and there is no reason to sell it at such a high price. Sure enough, after reaching a high price of 3,000 RMB, the Black Egg fell to a few tens of RMB within two days.

Although prices will return to normal, money will not. As an investment product, CS skins have serious congenital defects: this market is unregulated, and everything is decided by Valve; T+7 market, if you are not careful, you will be buried in the ground; all products are non-standard, and there is no basis for pricing; You can mention 100 shortcomings, but as long as there are opportunities for arbitrage, people will rush forward. Team Fortress hats, Steam collectible cards, and Dota2 immortal decorations, similar "tulip" incidents are repeated repeatedly in Valve's games.

Of course Gabe Newell is not "the people's Gabe Newell”, he designed this active system full of arbitrage opportunities and risks, exploited the weaknesses of human nature, and obtained a lot of revenue: From the Steam wallet infrastructure, to the establishment of the community market, opening interfaces to third-party trading platforms, and then using the crate opening system to control the supply, Valve controls a huge virtual market and can interact directly with the real world. Today's Valve is more like a financial company than a game company. Therefore, like all financial derivatives, stories of getting rich and crashing are created here every day. There is nothing new under the sun, whether in the real world or virtual space, humans are repeating the same melody: the eternal melody of desire and greed intertwined.