I hesitate to write this article, because if this article were to be published, an arbitrage equilibrium (more on that later) will probably materialise and current Dubloon arbitrageurs will rage on me. Nevertheless, it is an interesting real-life demonstration of the principles of arbitrage – yes, it is Neopia but to many people it is no less real!
First of all, what is arbitrage? In economics, arbitrage entails taking advantage of a price difference. It can be the price difference between the same asset selling at different prices on different markets (e.g. you managed to buy a book at a player's shop for 100 NP, while on the Shop Wizard the average price is 1000NP. You resell it at your shop, netting a profit of 900NP), or similar assets with identical cashflows on the same market. Dubloon arbitrage falls under the second category.
Dubloons are fast-selling products, primarily because they are required for training Neopets at Cap'n Threelegs' Swashbuckling Academy on Krawk Island. Training Neopets of Level 10 and under costs 1 One Dubloon Coin, training Neopets of Level 11-20 requires 1 Two Dubloon Coin, while training Neopets of Level 21-30 and 31-40 both require 1 Five Dubloon Coin. While they may only be used for training Neopets of levels 1 to 40, keep in mind that there are many new and old players creating or adopting new Neopets every day, and many players do want to train their new, low-levelled Neopets.
Besides training Neopets, Dubloons are also used for buying products at the Smuggler's Cove, where über battle weapons are sporadically released. Famous past products include the Seasonal Attack Pea at 100 Dubloons, the Attack Pea at 160 Dubloons and the Grapes of Wrath at 155 Dubloons. The Smuggler's Cove restocks but rarely, ensuring all who managed to get their hands on an item can resell it for massive profit.
The situation in Neopia is unique. First of all, there is a Dubloon-o-Matic on Krawk Island which "lets you exchange your Dubloons for higher denomination coins." That means you can put in 2 One Dubloon Coins and it will churn out a Two Dubloon Coin. The reverse, however, is not true – you cannot insert a Two Dubloon Coin and expect it to give out 2 One Dubloon Coins.
Next, Anchor Management was added to Krawk Island as a once-a-day activity as a reward for the "Krawk Island has Disappeared" site plot. Dubloons, especially One and Two Dubloon Coins, are quite frequently given out as daily prizes, which has led to their significant depreciation.
On the other hand, the news about a new upcoming Battledome has led to many people actively training their Neopets. Codestones have appreciated massively in price, and Dubloons would no doubt have followed suit if not for the large influx via the players' daily visit to the Anchor Management.
So here we have an interesting situation – the overall demand for Neopet training is rising, but the price of Dubloons, an essential and integral ingredient to training, is depressed. The result is that One, Two and Five Dubloon Coins sell out pretty fast in players' shops.
Arbitrage in Action
Now let's take a look at the Dubloons on the Shop Wizard. The average price of a One Dubloon Coin is about 1025 NP while the average price of a Two Dubloon Coin is about 1250 NP. Does it make sense to convert two One Dubloon Coins to one Two Dubloon Coin via the Dubloon-O-Matic? Of course not, for you will be paying 2 x 1025 NP = 2050 NP for something that you can buy for 1250 NP, resulting in a loss of 800 NP.
Let's look at the Five Dubloon Coin then. The average price is 3700 NP. Does it make sense to convert 2 Two Dubloon Coins and 1 Two Dubloon Coin into a Five Dubloon Coin? You bet it does! 2 x 1250 NP + 1025 NP = 3525 NP, resulting in a net profit of 176 NP.
How about Ten Dubloon Coins then? They average 5895 NP on the shop wizard. No matter which combination of One, Two or Five Dubloon Coins you use, the result is a net loss. Moreover, keep in mind that Ten Dubloon Coins are not used at Cap'n Threelegs' Swashbuckling Academy and hence will sell much more slowly, tying up your capital for more operations.
Arbitrage is very time and price sensitive. The market fluctuates, and Five Dubloon Coins may not always be the sweet spot for profit-making. The trick is to look at each Dubloon in terms of Price per Base Unit. Divide each Dubloon's price by its denomination, and fit the results together like a financial Jigsaw Puzzle to see which operation would net a profit, if any.
Best Time to Capitalise
Is there a best time to conduct this arbitrage? Of course!
Remember that the main source of Dubloons is the Anchor Management, which is a daily event. There are timezone differences for players, but chances are most players would visit the Anchor Management within the first 12 hours of the new Neopian day. If they get Dubloons as prizes, most players will sell the Dubloons in their shops after a quick check at the Shop Wizard's to see how much they are worth. With an influx of Dubloons, the price will get depressed during the first half of the Neopian day.
Hence, the best time to buy One and Two Dubloon Coins in order to arbitrage would be during the first 12 hours of the Neopian day. On the other hand, if you were to buy the Dubloons in the second half of the Neopian day, all the cheap Dubloons would have been bought and there would be no influx reducing the prices. You would end up making less profit, if indeed at all.
Mahatma Gandhi once said, "Morality is the basis of things" and I am sure many of us would not like to profit at the expense of others. The prime consideration for many, as it was for me, would be "Is arbitrage immoral?"
Well, a self-regulating market irons out arbitrage. In financial firms there are multiple servers running complex algorithms, constantly looking out for price differentials on the equity and commodity markets, while in Neopia this happens when many players carry out the same steps. If more and more players buy up One and Two Dubloon Coins to convert into Five Dubloon Coins, the former category will increase in prices while the latter category will drop in value until an arbitrage equilibrium is reached, where it is no longer financially worthwhile to carry out this operation.
So yes, the price of One and Two Dubloon Coins may rise through arbitrage, but the price of Five Dubloon Coins will also drop because of it. This will go on until there is no price differential at all to capitalise on. So all in all, I would consider it to be Karmic neutral – neither particularly good nor bad.
If this article were to be published, Dubloon Arbitrage will probably cease to exist as many players duplicate the process. However, potential arbitrage of other sorts exist. You can convert ordinary Codestones into Red Codestones on Mystery Island, you can repair broken items at Donny's Toy Repair Shop at Terror Mountain (if an unbroken item costs more than its broken equivalent, you know you have a deal!), and there is always the Cooking Pot of Jhuidah the Island Faerie's.
Presently, none of these deals make financial sense, but you may never know when a game changer like the Anchor Management may pop up. Once you understand the principle of arbitrage, you would be well poised to seize upon any new opportunity that presents itself. Carpe diem (seize the day)!*
P.S Caught the pun? Yes, seize the day because at night you would literally be making a loss!