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Speconomics: Building a Framework

Written by LegitMTG Staff on . Posted in Finance, Magic Culture

Author’s Note: I will be writing this from the perspective of a Magic Online speculator. Some of what I write will be MTGO-specific and my examples will use tickets instead of dollars. A lot of the ideas will still be applicable to paper speculating. Some will not. Hopefully you still get value even if Magic Online isn’t your platform for speculating cup of tea. Enjoy.

Wading into the Deep End…Very Slowly

My goal with this series is to build a cohesive trading framework. Sometimes there will be flaws. All of that is important to acknowledge. A poorly executed or internally contradictory framework is worse than throwing darts. That said, do what makes sense to you. If what I explain sounds asinine, then ignore it. If you disagree with what I write, challenge me on it. I will openly engage in civilized debate about any topic I address. Sometimes that requires criticism. Sometimes it requires disagreement.

Introducing the Backdrop

The backdrop is a set of what might technically be considered “macroeconomic factors.” In other words, these are factors that affect broad swaths of cards at a time. They are a set of factors that affect entire sets or entire formats–sometimes even just a certain rarity within a set. But, they do not apply only to a single card. Also, they are not deck-specific. The backdrop acts much like a tide or a current. Much like a current, it will carry the things that are not actively fighting against it. Like a tide, it goes in, it goes out.

For speculating, a backdrop means that ceteris paribus (all things equal), we want to follow the direction of the backdrop. It means that when our actions would flow against the backdrop, we want to hold them to a higher standard of risk/reward payout. They have a trend they must overcome.

An important note about the backdrop: it is never an independent reason to act. Take, for instance, an imaginary upcoming Modern PTQ season. If we were to invest in Modern as a whole, this would involve purchasing every card that could be good in Modern. Remind you of anything? We saw this type of buying during the highly irrational Modern bubble where people were buying everything and anything Modern-related instead of differentiating between cards like Stillmoon Cavalier and Shocklands. Hint: only one of these was rational, even if the extremity of it was overblown.

Don’t get me wrong. Sometimes the backdrop is strong enough that we end up taking action primarily because of it. But, even in doing so we will choose to act upon only certain cards after going through some level of comparison. Because of the apparent “staple” nature of some cards, it appears that the backdrop is the sole reason to act on those cards. But, it is important to recognize that there has already been a determination of “staple” status in such reasoning that must be kept in mind (see: Tarmogoyf).

Starting from “Common” Knowledge

There is always a backdrop to consider. Some are more common than others, but they’re always worth noting. I have already mentioned the first.

Backdrop 1: PTQ Seasons

In general, cyclical formats like Modern (and Extended if it’s ever going to get support again, which nobody should hold their breath for) have a relatively firm set of staples. These are safe buys. Because of this, the requirement to act on these cards is pretty low. The backdrop is overwhelmingly straightforward in how the cards will move.

PTQ seasons are relevant even for the year-round, popular format Standard. Because there is always a group of people who buy and sell purely based on PTQ needs, Standard swings in price do exist even if they are less pronounced than the swings in a format like Modern. Note: during the Standard PTQ season, price rises tend to be commanded mostly by cards from the older block due to the current block being drafted regularly. We’ll discuss more on this later.

It is possible that you pick the wrong cards and they simply move sideways. Generally, moving sideways financially tends to be at odds with turning sideways in games, but I’ll leave that to someone more philosophical than I. Hopefully, the rest of this series helps you minimize risk associated with picking the sideways-moving cards.

Backdrop 2: Rotation

This is another common backdrop that most players think about in the months leading up to set changes. Not surprisingly, the cards from the block rotating out face significant downward pressure as Standard players unload their copies. Also not surprisingly, this can be a chance to pick up cards that have their value for non-Standard but still get caught in the “sell everything” pressure. Cards can get unjustly caught in a current and identifying ones that do so offer strong profit potential. As for the newer block, there are two real scenarios:

1. The block already dominated Standard, in which case prices will not change much because demand for them is expected to remain relatively constant.

2. The block has been oppressed by the previous one, in which case the Standard-only players will suddenly need copies of the cards that were previously bad for the format (see: Scars of Mirrodin block). It is likely that we will not see this level of previous-era domination as Wizards significantly scaled back the power level of Scars of Mirrodin and Innistrad does not appear to be a slouch by comparison. Speaking of past-block suppression, look at Jace, the Mind Sculptor being held back by the lovely Bloodbraid Elf.

We can also narrow this “suppression” to specific types of cards. For instance, during Zendikar/Scars Standard the Scarslands were overshadowed by fetchlands and manlands. Similarly, the enemy-colored “soft duals” from Innistrad are currently overshadowed by the Scarslands. Assuming we see more enemy support (i.e. enemy Guilds returning in Return to Ravnica), it is reasonable to think these dual lands have a lot of room to grow.

Also, it is relatively common that as rotation approaches people irrationally start speculating. This creates a short-term price bubble. But, bubbles will be a future topic. Let’s look at the third backdrop.

Backdrop 3: Spoiler Season

The last of the commonly mentioned backdrops is spoiler season. Spoiler season follows a relatively predictable pattern:

  1. Spoiler season starts and people begin by getting incredibly hyped on every possible interaction. For instance, if Burning Vengeance were a rare, I would expect a hype-induced price bump as more Flashback cards were revealed. Occasionally, something big happens (see: Deceiver Exarch) and a card goes from almost-bulk to pure value overnight. Barring these types of interactions, this is mostly unsustainable frenzy buying. There are some interactions that, while not quite as overpowering, do justify action. Take, for instance, the spoiling of the Undying mechanic. While not as insane as Deceiver Exarch/Splinter Twin, Birthing Pod + Undying has enough merit to be worth buying into early for two reasons:
    1. Other people in their spoiler season hype will see this interaction and jump on the bandwagon.
    2. It is possible that something amazing gets spoiled and what was revealed is only the tip of the iceberg (this works only for interactions of older cards with mechanics/themes, not individual cards).
  2. Spoiler season settles off and demand rises for the consensus “deck to beat” cards until the set is released (see: Sun Titan with the Solar Flare hype).
  3. People realize that they need the new cards and the money/tickets to get them. At this point, prices for Standard-legal cards fall temporarily across the board while people liquidate. This is an excellent time to be buying cards from sets other than the newest one.

I’m going to backtrack a little and discuss spoiler-season hype. In the case of a significant spoil, we want to act immediately as there will be enough time once the set is fully spoiled to decide how comfortable we are with holding our purchases. If the rest of the set’s interaction with Birthing Pod is deemed unimpressive, then the answer is to sell Birthing Pod while people are still starving to brew with it. Here, we are indeed making a judgment call about its playability. However, the safe option to avoid this in its entirety is to sell after the set has been spoiled and before the set is released. In doing so, we are guaranteed to capture the speculation-related buy and do not have to put faith in our own deck building genius. I will delve into these secrets ideas at a future point.

Depending on where you are in new set season–and which other backdrops are working concurrently–should change which way you should be hoping to move.

“Uncommon” Knowledge (aka, Hidden Value)

In this category, we have ever-present circumstances that you’ll see financial writers mention on occasion. People intuitively take lessons from them, but they rarely get attention. Interestingly, the time periods I want to cover flow into each other and they cover the release period of a new set.

Backdrop 4: Release Season (in Phases)

Phase 1: Prerelease

Foremost, we have prerelease week where everything playable is worth something because there just aren’t many of them and prereleases attendance is expensive.

Releases and prereleases follow a simple formula. First, prices start off insanely high while supply is extremely limited. For instance, I was able to sell a Liliana of the Veil from the second Innistrad prerelease sealed event to fire on Magic Online for a full 60 tix. Long story short, sell everything you can as quickly as possible unless you think it’s massively undervalued. Even then, you have time to buy it during release or even a day later when it will have fallen further.

Phase 2: Release Week(s)

Payouts for release events are at record highs. Swiss events pay out 13 packs for 4-0 and 8 packs for 3-1. These are incredibly easy to go infinite on–at least temporarily. Since these events only accept tickets, people going infinite on these need to constantly sell their cards/packs. Once releases get going, speculating on the both the new set and other sets in the block becomes ideal.  There are two reasons why this is an ideal time for speculation:

  1. Because release events are firing on all cylinders, there is a temporary shortage in the economy of other sets in the block that are facing a significant shortage of drafting.
  2. Because set redemption hasn’t yet started for the new set, there is a temporary flood of cards that do not have a home. Prior to set redemption start is an ideal time to buy from these sets.

Note: logging on immediately after downtime when release events have started isn’t going to work as the cards haven’t gotten into the system yet.

Phase 3: Set Redemption

Now for the last part of a release; once set redemption kicks in. Here we see a bump in MTGO prices as the paper prices and MTGO prices converge: MTGO rises, paper falls. Notably, this bump is often seen in things like garbage Mythics. For instance, Furyborn Hellkite moved to a 2-tix card briefly once Magic 2012 redemption started.

Mythic Knowledge

Now that we’ve laid out the fundamentals of the backdrop, it is important to extend it to all periods of times. There is always something happening in the world of Magic. Even in the off-seasons there is something for which to prepare. Foremost to the supply of Magic Online cards is drafting. People on MTGO do not crack packs. Because of this, it is necessary that we establish the “draft life” of a set.

Backdrop 5: Draft Lives

I like to think of a set’s draft life as its (remaining) time being drafted as the most common/popular draft format. In other words, Innistrad’s draft life is from its release until Avacyn Restored since Avacyn Restored is an independent draft format. We still consider Dark Ascension/Innistrad draft to be part of Innistrad’s draft life because Innistrad is still being drafted at this time.

Somewhat commonly, you hear about the discrepancy in value/rarity between Fall sets and Spring sets. More specifically, three packs of Innistrad have been drafted countless times since Innistrad’s release. Upon the release of Dark Ascension, barring the relatively insignificant time period of Dark Ascension-only drafts during release, the format will still only shift to 2 Innistrad and 1 Dark Ascension. Even during Dark Ascension’s life, it is only opened half as much as Innistrad. That does not include the Innistrad-only period.

Even if we were to assume equal drafting in each draft format, 5 Innistrad packs are opened for each Dark Ascension pack. This isn’t normally true since the spacing between the first, second, and third sets tends to be a 4-month, 3-month, and 2-month gap, respectively.

Likewise, packs from the third set only get opened as much as the first two sets during the last leg of the format. Thus, the disparity between Scars of Mirrodin and New Phyrexia is even greater than the disparity between Scars of Mirrodin and Mirrodin Beseiged. These dynamics change slightly when the third set is an independent draft format. But, the mechanics of a “draft life” remain nonetheless, making it necessary to consider at all points.

Since drafting adds a constant supply of cards to the market, any change in a card’s viability is going to be muted. Take, for instance, Geist of Saint Traft’s rise. Despite it becoming a multi-format player, it initially moved from 10 to 15 and slowly crept up further from there. Compare this to something like Garruk, Primal Hunter upon Wolf Run’s first showing. Garruk, despite being of comparable value at the time, quickly broke the 25-tix mark.

What was different in these two cards? The supply of Garruk, Primal Hunter was not rising as quickly because we were past the active draft life of Magic 2012. How does this translate into relevant information? We should be willing to act more decisively and expect more drastic swings on cards that are past their active draft lives. Not surprisingly, drafting is not the only thing that has a shelf life.

Backdrop 6: Format Development

Constructed formats, like their limited counterparts, follow a similarly relevant pattern. The start of a format does not actually begin with the first tournaments of the format. It begins with the initial brewing/preparation before the format goes live. Commonly, this is once a spoiler has been completely released or rotation is just around the corner. These starts often garner a lot of attention. Despite this, the format continues to evolve – it never ends at the beginning.

In a new format, we see extreme volatility. In this period, speculation is at its highest as people are afraid of missing the new Jace, the Mind Sculptor. People are also brewing to their hearts’ content. Because of this, our impetus to act is comparatively lower given that our velocity must be significantly higher. As this is a hype-induced period, cards that rise in value are best sold in the very short term. We can quickly buy and flip cards in this period. During this period, it is especially important not to get wrapped up in buying longer-term speculation targets at hype-inflated prices when they are due for a short-term fall before a long-term rise.

As an example, take Geist of Saint Traft once again. Early in new Standard, I bought into Geist of Saint Traft at 10 tix based on the strength of the card with Swords and Hexproof in a format that was shaping up to be very creature (and therefore removal)-centric. Was this a wise choice? Despite ultimately turning out well, the answer is no. The story of the time was Wolf Run. Because Wolf Run got so much attention, Geist fell to 7-tix as it fell out of favor. I bought into Geist of Saint Traft before allowing the current mood to set in. I front-ran myself. From this, we can take an important lesson: when a craze hits, let it hit and act. We do not need to jump in as the contrarian as soon as something happens. The best buying opportunities for speculative cards often reveal themselves once the format gives the first illusion of stabilizing (even if that illusion really is Illusions).

Once a format appears to have stabilized, our speculative targets demand some extremely strong argumentative support to act. Stable formats have a significant number of players who have found a deck that they like and have no need to move onto the newest deck. Because of this, even if a deck does well it faces a much larger barrier to widespread adoption. This does not mean we do not want to buy cards in stable formats, but that we don’t want to aggressively buy into speculative wishlists.

Of additional note, it is necessary to keep in mind the difference between a stable format and a dying format. A dying format should be of no interest in itself, but might provide insight into future formats. For reference, consider the Dungrove Green decks that began appearing toward the end of Zendikar-Scars Standard (including taking 2 of the Top 8 spots in the Magic Online Player of the Year tournament). Despite this deck clearly making a showing, the price of these cards never changed significantly. Nobody cared about the developments. If a new deck dominates Standard PTQs in the last two weeks of the season, do not expect those cards to move significantly. They will rise some and it may be possible to capture a quick profit, but the deck must be VERY interesting such that a lot of people want to jump on board in the last couple of weeks.

Some Foil Final Thoughts

Hopefully this article has convinced you to put Magic “events” into a timeline to always keep in mind. Before I go, I want to provide some thoughts on how to best keep these thoughts in mind. Get ahead of the backdrop when you can, but not so far ahead that you out-think yourself. For example, when is the best time to sell Modern staples? Not surprisingly, early in the PTQ season when demand is at its highest. Likewise, when is the best time to speculate on a Standard Rotation? Once the format stabilizes with the Core Set and before people look ahead to new Standard. Generally, this can just be summed up as “off-season buying.” More specifically, it is off-season buying before people realize the season will be on soon.

Until next time, when I talk about the goals of our speculations. I promise, it’s more interesting than just saying “make money.”

Joe Spanier

On Twitter @FoundOmega

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