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The Metaverse: an “out-of-this-world” investment opportunity?

By Alek Sawchuk, CFA, CIM 4 March 2022 7 min read

With the invention of the metaverse comes new investing experiences and opportunities. We break down the common features of this exciting new technology, and share how to carefully manage your investments in this uncharted territory.

Now that we’ve covered Cryptocurrencies, NFTs and Web 3.0 in the digital asset series, we can dive into the emerging concept of the metaverse. Part three of this digital asset series explores the “world” of the metaverse and how cryptocurrency, NFTs (non-fungible tokens), Web 3.0, and augmented/virtual reality all come together. We will cover ways that investors are gaining exposure to the metaverse and look at the underlying investment risks. Buckle up. For the traditional investor, some of these concepts are truly jaw-dropping including the fact that virtual properties have sold in excess of millions of dollars.  

What is the metaverse? 

Defining the metaverse is difficult since the term is used very broadly and does not necessarily refer to a specific type of technology. Rather, it can be viewed as a method in how we interact with technology. The metaverse can involve different experiences for online users and is still largely in its infancy. Despite a lack of definitive characteristics, there are several common features that are often related to the concept of a metaverse including: 

  • A more connected and personalized online-user experience.
  • An augmented or virtual reality component.
  • A digital economy where users can buy and sell goods.

When we envision a connected online-user experience Facebook comes to mind. Facebook allows us to interact with friends, family, and make new connections. We can share everything, worldwide, from puppy pictures to what we’re having for dinner. Facebook serves as a timely example because of its recent company name change to Meta. This positioning was strategically marketed because Facebook (now Meta) likely recognized the connected online-user experience it offers and how they leverage its virtual reality (VR) product line—the Oculus headset—to enhance that experience.

In the future, VR headsets could offer business or personal applications, such as hosting online meetings in a more connected way. Many of us are already comfortable with the pandemic-induced work-from-home culture. Perhaps your day will soon start with a cup of coffee before you put on your VR headset and your digital character presents themself in a finely pressed outfit of your choosing at the virtual boardroom table–while in reality–you are still wearing your pajamas sitting at your kitchen table. However, we are a long way from this level of virtual business immersion. A few limitations include user adoption–which takes time or simply never happens at all–combined with other factors like real-time internet connection and bandwidth issues, and large up-front corporate investment and training costs.

Virtual versus augmented reality

Virtual and augmented reality should be properly distinguished. Virtual reality is more commonly associated with a virtual world outside of the one we live in. Augmented reality creates superimposed images in the world we live; for example, while I was doing some online shopping for ski goggles, I noticed that augmented reality ski goggles are being developed where you can see your speed, altitude, markers, location of your friends, text messages, all housed within your ski goggle lenses. Although sometimes these two terms can be used interchangeably, both are important technologies that can be leveraged in the metaverse for a more intimate user experience.

Where do cryptocurrencies and non-fungible tokens (NFTs) fit within the metaverse?

Parts one and two of this digital asset series will make this connection easier to digest. Think of an NFT as “virtual artwork” and cryptocurrencies as “digital currency” for the sake of simplicity in this example about a metaverse called Decentraland. 

Decentraland is a 3D-online virtual world with virtual land for sale, houses, and even social centres, which host concerts, art shows and other entertainment. Instead of paying for these Decentraland assets and services in Canadian dollars, users pay with a digital currency called MANA. Inhabitants of Decentraland may choose to hang some of their NFTs for sale in their home or even at the local virtual art studio.

You can even pay for a virtual property manager with MANA to ensure your lawn is mowed and rental properties are in order. Hopefully you don’t get a bad tenant? This might sound a bit other-wordly, so to speak, but the reality is many of these virtual lands and properties are routinely fetching hundreds of thousands of dollars and in some cases, well in excess of a million dollars. Search Decentraland and you’ll quickly find it in recent headlines. 

Investment risks

Metaverses themselves are not globally connected like the world we live in today. Decentraland and other metaverses do not share the same geographical connectivity as say Canada and the US. While we might one day expand our real-world horizons to Mars, right now we have finite resources and “real” land/property on Earth, all of which is connected by geographical borders.

There is nothing stopping metaverse creators from introducing new virtual worlds. Virtual “space” is theoretically unlimited and memory and processing power doesn’t currently present deep barriers to entry. The success of a metaverse is largely contingent on speculation, popularity, marketing, and user-adoption. This could be further complicated by real-country tax rules and regulations. Consulting an expert and performing your own due diligence is prudent.  

Another consideration with virtual space is its inherent intangibility and subsequent lack of utility. There is evidently nothing “physical” about these landscapes, products and services. This opens up a speculative debate about whether consumers have preferences towards physical or virtual products and services. Virtual products and services likely don’t share the same utility (being equally useful and beneficial for consumers). For example, conventional businesses will sell physical products and services such as sunglasses or haircut services. Would you be indifferent to purchasing these same products and services for your virtual character? Virtual companies may not have the same ability to sell in-demand goods and services, innovate, expand, and ultimately build shareholder value. 

Does my portfolio hold exposure to the metaverse?

You may already hold some metaverse exposure without realizing it. Many diversified portfolio solutions hold passive investments in the S&P 500 index (a US index constituted of 500 of the largest by market capitalization companies), with companies like Facebook (now Meta), Apple, Microsoft, and Activision Blizzard inc. included. Roblox is another publicly traded company that offers an online metaverse-style platform experience where users can buy virtual clothing for their avatars and play online games. Activision Blizzard (Blizzard Entertainment) created World of Warcraft, among other popular metaverse-style platforms, where users purchase in-game subscriptions and customize their online characters. 

Corporations like Nike may even position their business to produce metaverse advertisements and offer their products for virtual online characters. This metaversal retailer concept could expand to essentially anything we buy in our day-to-day lives including virtual food, clothes, cars, pets and more. Remember, the metaverse can simply extend to a more interconnected online, personalized, user experience. It doesn’t necessarily need to be the stereotypical movie scene of slapping on a bulky virtual headset and transporting yourself into a 3D world. 

Bloomberg has grouped together a basket of stocks tied to metaverse themes and subsequently ranked meta exposure from one (low) to three (high). As noted earlier, many of these popular stocks will likely already hold some exposure in your current portfolios (common in diversified portfolio solutions).

Conclusion

With such innovative possibilities surrounding the metaverse in almost cinematic and futuristic ways, it’s no wonder we are seeing a surge in interest and prices for digital assets associated with the metaverse. Clearly there is a lot of excitement and hype surrounding metaverse concepts. However, excitement and hype aren’t always analogous with strong investment decisions. Diversification and long-term thinking still remain a successful investment strategy. In addition, it’s likely that companies you already hold in a diversified portfolio will adapt to metaverse technology and leverage business opportunities as they deem fit, such as retailers selling virtual items or producing virtual advertising (which could even take the form of an NFT). 

Given that the price of land in a virtual world can be worth more than land in the physical world, there may be an element of irrational exuberance in the market. All in all, it would be prudent to consider any direct metaverse investment exposure relative to your overall portfolio and to avoid overconcentration of any single technology that may or may not pan out.

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