The hype never ends when it comes to cryptocurrencies. These days, the Metaverse and non-fungible tokens (NFTs) have the spotlight. Like their predecessors (blockchains like Bitcoin and Ethereum) they carry intimidating labels and lofty promises brandished by their supporters. After all, it doesn’t get more “meta” than the Metaverse. Rather than reflexively ignoring such grandiose claims and parabolic price moves, I thought I’d explore these topics in order to assess their investment merits, if any.
I admit, the Metaverse intimidated me. Whenever mentioned, I typically tuned out to the discussion that followed writing it off as more utopian “tech-bro” speak. However, a recent podcast interview (finally) inspired me to dig in and check my premises. The result is a more nuanced view of the Metaverse and NFTs that can enable it.
Metaverse: Neither Meta Nor Universe
Said simply, the Metaverse is neither “meta” (i.e. beyond) nor “verse”, as in a separate universe. It’s a shared, virtual environment like the “lands” of a video game. People log on to their computers and interact via avatars to play games, converse, and even conduct commerce online. It’s like a 3-D chatroom on steroids and very much a microcosm of the world in which we live; not something separate.
The popular game Fortnite is currently, in a sense, the largest Metaverse. To be sure, one’s actions are limited to the gameplay. However, users are finding an expanding list of activities available to them as the community grows. Other online environments are also emerging that hope to offer more ways to interact. These expanded possibilities—especially those related to commerce—are the source of the hype.
People are exploring ways to sell goods and services, advertise, socialize, and even invest in such virtual worlds. Millions of users may pass through these online environments, all with real money lining their real pockets in their real lives. This is the real commercial potential.
NFTs as Digital Commerce Enablers
NFTs have gained a lot of attention recently. They are an offshoot of cryptocurrencies and have burst onto the scene with some spectacular headlines. From art, to tweets, to virtual real estate, NFTs are facilitating the trading of digital assets in a new way.
The artist Beeple recently sold a a collage of 5,000 digital images at Christie’s for $69 million. Source
NFTs are exactly as claimed—they are non-fungible tokens that are part of a blockchain. Each NFT is unique and not interchangeable with any other (hence, non-fungible). This differs from cryptocurrency. Each bitcoin or ether is exactly the same as the next; they are fungible. Thus, NFTs can be used to store specific information in a decentralized manner on a blockchain. For this reason, NFTs can potentially facilitate the trading of digital assets.
NFTs utilize the Ethereum blockchain to document specific ownership rights in a (presumably) secure and immutable way. All information is stored on a public blockchain making fraud harder to perpetrate. This can facilitate the buying and selling of digital property since the authentication process is seamless. Possession of the NFT is proof of ownership.
The NFT technology seems promising, especially for content creators (like visual artists and musicians). No longer must they rely on third-party distributors to validate and broker the sales of their works. The blockchain can theoretically do that job leaving more margin for creators.
NFTs are a natural fit for a Metaverse. Since NFTs are proof of ownership, assets can be easily bought and sold among strangers. Furthermore, using a popular blockchain like Ethereum allows NFT holders to transfer digital property between different online environments. This commerce facilitating activity wasn’t previously possible. Digital content cannot move from one game to another.
Sizing Up the Metaverse and NFTs
Currently, there is no true Metaverse. There are, however, glimpses of potential precursors and they’re already big business. As noted, the video game Fortnite is the largest.
Fortnite is an online, multi-player video game. However, it’s evolved into a social activity onto itself. Many people sign on simply to meet with friends and hang out virtually. By one report, the game had amassed 350 million registered accounts from its 2017 launch through May of 2020. With such a large audience (note that people can own multiple accounts), Fortnite has begun to expand its reach. It now hosts live concerts, movies, and more.
There are other Metaverses in development that utilize blockchain technology such as Decentraland (note that Fortnite does not). Decentraland is a virtual environment that runs on Ethereum. Unlike Fortnite, it has no game objective. Its purpose is purely economic. Users log on to “create, explore, and trade” in its self-contained, online space. A central characteristic is that parcels of virtual land can be owned and developed. Users have built galleries to sell digital art, casinos, games, and all kinds of structures for display. Decentraland uses NFTs to define and record land ownership rights (via its LAND token) and a native cryptocurrency (MANA) for commerce.
Weekly virtual land sales in Decentraland surged to over $3 million earlier this year but have since declined. Source
Digital parcel sales in Decentraland are becoming big business. Prices have steadily risen. Recently, a patch of virtual land sold for nearly $1 million! While weekly sales volumes have been declining, they did surpass $3 million this past March (shown above). Such statistics are grabbing investors’ attentions and funds are forming to focus on this novel asset class.
The price for virtual land has been on the rise. Source
It’s not just digital land catching people’s attention. NFT sales reached $2.5 billion in the first half of 2021. All sorts of digitized items are being sold for eye-popping amounts. In March, one piece of digital art fetched $69 million. Twitter founder Jack Dorsey sold his first tweet for $2.9 million. Both used NFTs. While the NFT landscape is currently dominated by collectibles, people are starting to experiment with the format.
Collectibles currently dominate the NFT landscape which, in my view, have little investment value. Source
Companies too are exploring the use of tokens. For example, Mattel recently actioned off three Hot Wheels vehicle collectibles and E.l.f. Cosmetics sold some digital designs. Sotheby’s even opened a virtual art gallery in Decentaland where it will display and sell digital artwork (as NFTs).
Clearly, NFTs and the Metaverse are more than child’s play. They are attracting lots of dollars and lots of interest from a variety of people and institutions. However, is this all hype? Or do NFTs and the Metaverse have real utility value and investment merits?
Finding the Real-World Value
Like cryptocurrencies, I find it challenging to separate the hype from the potential value that the Metaverse and NFTs possess. While their technologies are novel, I don’t see their utilities as such. This is not to downplay their value. Rather, I want to ground it in reality in order to cut through the noise and gain a better understanding of their potential.
When you boil it down, the Metaverse and NFTs are merely commerce facilitators. They are tools for accessing new markets of people and products with greater ease and efficiency. They are forums for people to socialize, brands to advertise, artists to perform, collectors to trade, etc. The potential here is in increasing human connections.
To be sure, this is nothing to sneeze at. After all, that’s essentially the internet’s greatest contribution. The more people that trade and collaborate, and the easier it is, the more value that can be created. The Metaverse and NFTs are not magical. They are innovations facilitating human interactions. Even if they feel less personal, they are enlarging network effects.
With a greater handle on their utility, we can now treat individual NFTs and Metaverse assets as we would any other, whether they exist in a real or a virtual world. I can apply my existing investment frameworks to these digital assets, just like Bitcoin. Purely speculative NFTs with low utility values will likely have volatile prices and poor investment prospects, in my view (like collectibles); while those with greater cash flow potential will be of higher quality. Metaverses too will have their nuanced assessments, like the real-world marketplaces they emulate. Valuations will differ based on userbase characteristics.
New Assets, Same Approach
The Metaverse and NFTs are emerging technologies for creating and reaching new markets of people. To be sure, their potential is promising. The largest virtual forums already boast millions of users representing scores of possible customers. Many may not be accessible otherwise. Hence, I understand why companies and investors are turning their attentions to them.
However, confusing jargon and frenetic price moves can make the cryptocurrency space (and its offshoots) very intimidating. Though, beyond the grandiose proclamations and utopian visions lie familiar concepts upon which any investor can rely. I simply needed to cut through the hype and understand their utility values before any assessments were possible. In my view, some likely hold significant investment value while many will prove to be as worthless as my baseball cards in the attic.
My approach to investing in NFTs and the Metaverse is no different than for stocks, bonds, or real estate. They can easily be analyzed within my existing investment framework as either categories or individual assets. All that’s required is some real-world elbow grease to learn their fundamentals and markets, and a good pair of earplugs block out the noise.
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