The metaverse is a term used to describe a virtual reality world whereby users can interact as they would in the real world. The metaverse is a simulated digital environment that uses virtual reality (VR), augmented reality (AR) and blockchain, along with concepts from social media, to create a world whereby users can interact as they would in the real world.
Within the metaverse there are several opportunities for asset managers to either expand their existing portfolios into virtual assets or to create virtual portfolios inside of the metaverse. How feasible is this and what does the future hold?
In a similar way to physical land, digital land is land that exists in virtual worlds. Just like physical land, it is sold in plots and can be traded using the currency of the specific plot. In what may seem like something taken straight out of The Matrix, virtual real estate is selling for large sums of money, even millions of dollars for some rare plots. Value of digital land is typically determined by density of population. The more users congregate in a certain area, the more expensive that land will be. Since Facebook announced it was heavily expanding into virtual reality (and even changing its name to Meta Platforms), prices for virtual plots have skyrocketed with some increasing as much as 500% in 2021.
A recent report by crypto asset manager Grayscale has estimated that the digital world may grow into a $1 trillion USD business in the near future.
While this may seem like a decent investment, proponents are warning that investing in virtual real estate is very risky, unlike real-world land which has traditionally been seen as a safe investment. Virtual real estate is highly speculative and block-chain based. This in turn, like cryptocurrencies, makes it highly volatile. Some researchers have speculated that the current virtual real estate market is in a bubble and sooner or later that bubble is going to burst. ‘Only invest what you are prepared to lose’ is the warning being given.
Are there similarities between real world and virtual real estate? Certainly, in both scenarios, location is key. Areas where people congregate are far more valuable because advertisers and retailers are bidding to get a spot in that area.
Unlike buying real world real estate, which in some countries can be a painstaking experience taking several months, buying virtual real estate is fairly straightforward. An investor simply purchases the land either directly from the platform or through a developer. From there, the land is now yours to do what you like. There is no planning permission that would typically be in place in the real world. Investors would typically build on the land and make it interactive for other users to access.
The metaverse certainly provides an interesting investment opportunity for asset managers. However, it is a little too early to see if it provides a viable alternative. Much like cryptocurrencies, virtual real estate is currently far too volatile and risky to be a viable investment alternative. What the metaverse does provide is a possibility for unlimited portfolio diversification. Portfolio managers could not only invest in different asset classes, but different asset classes in different virtual worlds. This would open many avenues of exciting possibilities.
James Girling
Managing Consultant