Arbitrage experiment: the inefficient loot box market allows unboxing profits

Kids gamble on loot boxes, spending money for the chance to get something valuable, like a new knife skin for Counter-Strike 2 or a weapon camo for Rust. More often than not, they end up disappointed and unload lackluster loot at bargain prices. Suspecting an inefficient market, I saw an opportunity to profit.

There are many depressing-to-watch videos on YouTube where gamers open dozens, even hundreds or thousands of loot boxes, hoping to get rich quickly.

It's obvious that the actual in-game loot carries little value to them. The first thing they check after the roll of dice is the price – how much they can sell the newly unboxed item for.

Most of the time, the expensive loot box opens something less valuable than the loot box itself. Screams, anticipation, belief in luck, and tears of disappointment, it’s like Las Vegas.

I tried to exploit the inefficiencies in the gamer-gambler's behavior by doing something completely opposite. While it turned out to be boring and calculated, it made profits.

Instead of buying loot boxes and selling the loot, I bought loot and sold a loot box.

Inefficient market brings opportunities for arbitrage

In financial markets, arbitrage is the practice of taking advantage of a difference in prices. By simultaneously buying and selling the same or similar asset, with little risk, you earn the price difference minus taxes.

However, to exploit that, there have to be inefficiencies in the market.

Loot boxes are in high demand. And the loot from them is often sold immediately, adding pressure to supply.

Many computer games have incorporated some sort of item recycling systems that allow a gamer to trade or recycle low-tier items by upgrading them into one better or crafting something else.

If you have ten same tear skins in Counter-Strike 2 – you can roll the dice to obtain one item of a higher tier. This is the most active market with many players, but also, there are so many lootboxes, items, tiers, wear levels, etc., that it’s impossible to track all the prices and chances without specialized automated algorithms. Those do exist ­– there are subscribed services that offer information on how to trade skins for profit.

For my experiment, I found another game, Rust, to be more manageable. It only has four tiers of loot boxes, which can be crafted from only three in-game items.

Collect underpants, craft loot box, profit

Some skins may cost thousands of dollars, yet most of them are worth mere cents. In Rust, all skins break down into just three components used for crafting new lootboxes: cloth, wood, and metal. All those items are traded on the Steam Marketplace.

I created a little Excel file where I compared all the prices and quickly found out that some crafts are actually profitable at current market prices.

The loot box called “High-Quality Crate” was selling at around €2.70 at the time. To craft it in-game, you need five pieces of “cloth” and ten pieces of “wood,” which were selling for 10 and 20 cents, respectively, or €2.5 in total. While it already seems profitable, when trying to sell, you have to add fees.

Instead of buying those components directly, I could also buy five clothing skins and ten skins for furniture even cheaper, break them down into cloth and wood, then craft the loot box and sell it.

Here’s how it all went:

Someone may have purchased a loot box only to receive a “red beenie hat,” which left the player very sad. I bought five red beanie hats for 9 cents each. The sellers only received 7 cents each due to a 2-cent fee deduction from the Steam Marketplace and the developer (a 22% cut).

Then I needed some wood. I found many items that could be recycled into wood and placed some buy orders. Ten “XXL Picture Frame” for 19 cents matched my ambitions. Again, the seller only got 17 cents due to a minimum two-cent or 15% fee.

In total, I spent €2.35. Then, you need to open the Rust game, break down the skins into cloth and wood, and craft a High-Quality Crate. I did that.

To break even after the fees, I needed to sell the crate for at least €2.69, and the market price at the time was €2.70.

But I couldn’t sell it immediately. It turns out that Steam Marketplace has a one-week waiting time before trading a newly acquired item. With prices free-floating, there was suddenly a risk that I may endure a loss.

The week passed, but the prices remained similar. I tried selling it again. This time, my order was held for 15 additional days. It turns out that there’s also a “protection” measure for those who have not used a Mobile Authenticator for at least seven days. Steam didn’t try to protect me while I was spending money on skins, only when I tried to get my money back.

So, I downloaded the app and waited seven more days to finally place the order.

Like in any other market, Steam Marketplace has the “bid” and the “ask” prices with quite large spreads. I correctly predicted that loot box buyers might not be the most patient people on Earth and will probably pay the “ask” price if I am the first in line.

I set up the price one cent lower than the cheapest other offering, and after a few minutes, the crate was sold for €2.99. I received €2.6 after fees. After a few weeks of waiting, the game got a new update, which probably raised the demand for loot and loot boxes, driving higher prices.

From my trades, Steam and the game developer earned 69 cents in commissions, nice.

I profited 25 cents, or almost 11%, compared to the initial expenses. I was only expecting a cent or two from arbitrage, but I was rewarded by the market fluctuations.

Hardly any value was created. I only helped recycle cheap skins into the brand-new loot box. So who are the losers? Probably, the kids who buy a loot box and then sell red beanie hats and XXL Picture Frames back to the market.

High demand for chance?

My approach was hardly the most optimal. You could hunt for better bargains on third-party marketplaces. When buying components, you could place “bid” orders for many similar items and wait for impatient sellers. I saw thousands of bids to buy those same “red beenie hats” or other items a cent cheaper, which means I was not the only one bargaining.

Also, I had very limited information about the whole loot box market as I only checked opportunities in a single game. There is probably more.

However, I won’t rinse and repeat the cycle for a “from rags to riches” story. This experiment is not investment advice. It is another stark warning about kids hooked on loot boxes and gambling.

The demand for loot boxes and the subsequent supply of dumped items creates market inefficiencies that allow for arbitrage despite huge commissions to Steam Marketplace and developers.

Why does the demand for loot boxes seem to be higher than the demand for the actual loot, such as red beanie hats? Wouldn’t well-informed loot box buyers instead choose a cheaper option to buy components and craft the loot box themselves? They could buy beanie hats and frames themselves, craft them, and open the loot box immediately.

While instant gratification without additional steps can explain part of the discrepancy, the other part may relate to why several EU countries have banned loot boxes – they are considered a form of gambling. Buying a virtual hat carries no chance of obtaining something better and no cycling between frustration and euphoria.

Authorities in Belgium and the Netherlands have requested video game publishers to remove loot boxes from their games offered in the countries, with the risk of receiving a fine of up to €830,000 Euro and criminal prosecution in case of non-compliance.

However, loot boxes are not yet considered gambling in most other EU states.

Virtual items with uncertainty-based rewards are currently examined in the European Commission's ongoing evaluation, and the report is due around June 2024, according to Evelyn Braun, Team Leader for Digital and Unfair Practices at the EU Commission.

While regulators argue about the details, “Counter-Strike” alone made nearly $1 billion in 2023 from randomized loot boxes, and the figure does not include additional related purchases such as keys, according to Business Insider.