‘Virtual currencies’ power social networks, online games – CNN.com

(CNN) — When Santiago Martinez wants to give his friends birthday presents, he buys a cake or flowers or sometimes a teddy bear.

‘Virtual currencies,’ like the hi5 Coin, shown here, are becoming more important on the Internet.

‘Virtual currencies,’ like the hi5 Coin, shown here, are becoming more important on the Internet.

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But the 41-year-old, who lives on Mexico’s Yucatan Peninsula, doesn’t spend pesos or dollars. He buys the gifts with an online-only currency called hi5 Coins.

He also doesn’t deliver the gifts in the physical world. They appear digitally on his friends’ online profiles on a site called hi5, which is a social network like Facebook or MySpace.

“They can’t eat the cake. It is an image — the thing that it represents,” said Martinez, an accountant with a wife and two kids. “You can send the feeling of that [cake] that you want to send.”

In any given month, he spends the equivalent of $40 in this manner.

But Martinez is hardly alone.

As our identities migrate further onto the Internet, currencies that exist only online are becoming a more significant part of commerce on the Web and in the real world. Some, like the hi5 Coin, operate almost like tokens in an arcade or tickets at a fair: They’re a stand-in for real-world currency.

Other “virtual currencies,” like Second Life’s Linden Dollars, however, are traded on markets. The currencies also fuel online gaming communities and are becoming an important part of social networks.

Several online currencies are competing to be the economic engines for MySpace and Facebook, which don’t have their own unified currencies. Other social networking sites, like hi5 and myYearbook, have created their own units of money for their users to spend.

All of this movement leads some experts to see a future in which virtual currencies enter the same trading space as their real-world counterparts.

The online monies are not robust enough to trade competitively against real-world currencies, but people underestimate the large amount of cash that is transferred from the real world into virtual currencies, said Edward Castronova, a professor of telecommunications at Indiana University.

Castronova says people transfer at least $1 billion into the virtual currencies each year, with most of that money going into online games. The actual amount could be much higher, he said, but the market is hard to quantify.

via ‘Virtual currencies’ power social networks, online games – CNN.com.