Big tech companies are investing billions in creating the metaverse. As virtual and augmented reality grows, virtual real estate could become a large asset class.
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The metaverse is designed to be a virtual reality where people can socialize, play games, and perhaps even work in a collaborative setting. By taking advantage of rapidly improving technological capabilities, the metaverse may be able to offer users a virtual place to congregate, a sort of digital public square. Assuming that happens, space in these universes could become quite a hot asset.
Various virtual universes have started to sell land to the public. And, over the past two years, the idea of virtual land as an investment has started to gain traction.
In early 2020, rapper Travis Scott held a widely-publicized concert within the Fortnite video game universe. This opened a lot of eyes to the possibility of virtual worlds. Subsequently, celebrities such as Paris Hilton, Jake Paul, and Snoop Dogg have set up properties and businesses in the metaverse. Snoop Dogg, for example, built a mansion within the Sandbox metaverse, leading to a flurry of speculation as fans rushed to snap up lots around Snoop Dogg’s property, as reported in Fortune.
It’s not just celebrities that are getting involved. Corporate money is also starting to take part.
Coca-Cola (KO) has taken part in promotions involving metaverse platform Decentraland. Gucci set up the Gucci Garden site within the Roblox (RBLX) community as a unique form of marketing. Nike (NKE) is planning to launch a store for digital goods within the Roblox universe. Samsung, Atari, and Adidas (OTCQX:ADDYY) are among others that have purchased virtual land holdings for future business ventures.
There are several reasons that investors may choose to buy land in the metaverse.
Some investors liken it to buying land in Manhattan 250 years ago. With how new the cryptocurrency and metaverse ecosystem is now, it’s still the early innings of this technology as an asset class.
Another feature is that metaverse land serves as a sort of levered bet on the cryptocurrency market. Prices of virtual land are typically quoted in a cryptocurrency. If the price of cryptos rise, metaverse land may also rise in value.
For people setting up businesses in the metaverse, this virtual land offers a way to reach younger consumers. For brands that want to market to a younger demographic, reasonably-priced metaverse land could be a compelling advertising alternative to real-world options such as malls, TV ads, or billboards. Quite a few prominent consumer brands have made metaverse stores or other such items to try out this new marketing angle. Landlords will get to enjoy higher rent if this use of virtual property takes off.
If virtual land becomes a major asset category, it should serve as an inflation hedge. Within most of the virtual universes, there is a fixed amount of land. Over time, if demand rises, so should the value of each plot. Skeptics can argue that there is an infinite supply of virtual land since more can be easily created. However, over time, it is likely that most users will end up at the most popular metaverses, and land in those winning ecosystems may appreciate in value.
The price of land in the Metaverse varies drastically. In leading metaverses, such as Decentraland and the Sandbox, prices are climbing. In smaller, less popular metaverses, land can still be acquired at less expensive prices. As is the case with traditional real estate, location is everything.
On the high end of the spectrum, for the most premium plots, prices have risen into the six and sometimes even seven figures. One NFT collector famously spent $450,000 to buy a plot of land next to Snoop Dog’s holdings in one virtual universe. Some crypto companies have spent millions of dollars to buy packages of land in virtual universes as well.
Some metaverse investors have spoken of buying land in dozens of different universes as a sort of diversification play; by buying properties in each project, it hedges one’s bets as to which ones will ultimately take off. Given the vast number of cryptocurrency projects out there today, it’s hard to quantify exact prices or fair values for metaverse real estate yet, and the market can be highly volatile.
Most virtual real estate is bought and sold using cryptocurrencies rather than fiat money. So, the first step for a potential virtual real estate investment is to obtain cryptos that are popular for DeFi applications, such as Ethereum (ETH-USD) or Solana (SOL-USD) which can then be used for subsequent transactions.
There are starting to be things such as metaverse real estate brokerages and metaverse mortgages. For now, however, these traditional finance world options are not yet broadly popular in metaverse land sales.
Primarily, people acquire metaverse real estate by purchasing directly with cryptocurrency. Many virtual worlds have a store or application that sells land in return for crypto. Oftentimes, these land parcels are structured as non-fungible tokens (NFTs) and thus can be bought and sold like other NFTs.
Generally, a buyer needs to connect a digital wallet to the virtual universe where the buyer wishes to acquire land. It’s important to make sure that the right cryptocurrency has been obtained as well, as many land sales occur in crypto specific to that metaverse, rather than being a broad token such as Ethereum. With a digital wallet and the proper crypto, a buyer can then proceed to picking up their desired property.
Given how early it is in the adoption cycle for the metaverse and virtual real estate, it’s hard to forecast which ecosystem will end up being the most popular.
That said, as of this writing, the Sandbox and Decentraland have become leading options and have obtained a significant amount of celebrity participation and resulting investor interest.
Don’t count out gaming companies as well. Roblox wasn’t designed a crypto-native metaverse but its digital world is attracting significant interest from major retail brands. That could lead to interesting investing ramifications in the future. Other major game publishers may make significant metaverse plays and create virtual land of high value as well.
The answer to this in large part depends on an investors’ risk tolerance. Given how new and unproven this field is, there is a very real chance of losing all of one’s potential investment in virtual land.
These risks include hacking/theft, buying into a virtual universe that fails to become popular, or cryptocurrency in general losing its value, among other risks. Typically, physical real estate will never lose all of its value but it remains to be seen how virtual real estate will hold up during industry downturns.
That said, for investors with a strong stomach, there could be a case for virtual land as a diversifying investment with potentially tremendous upside. It seems likely that at least a couple of the metaverse or virtual reality ecosystems will take off. Properties in those could potentially be multi-baggers many times over. There’s also the possibility of getting leverage on those gains if the cryptocurrency underlying the virtual property also appreciates in value against fiat money.
Additionally, depending on how much corporations get drawn into the metaverse, there could be a good opportunity to generate rent or other income streams from the properties in addition to capital gains. Right now, these business models are as much conceptual as anything, but the possibility is there for fortunes to be made. It’s a new technological frontier, with the grave risks and extreme rewards which that entails.
Companies such as Meta Platforms (FB) are investing tens of billions of dollars to try to make the metaverse take off. If these efforts have much success, a large virtual economy is likely to develop in these ecosystems. Owners of virtual real estate could stand to profit handsomely if and when this occurs.
This article was written by
Ian worked for Kerrisdale, a New York activist hedge fund, for three years, before moving to Latin America to pursue entrepreneurial opportunities there. His Ian’s Insider Corner service provides live chat, model portfolios, full access and updates to his “IMF” portfolio, along with a weekly newsletter which expands on these topics.
Disclosure: I/we have a beneficial long position in the shares of FB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
