With serious money pouring into the space and major corporations shining the spotlight on the potential of the industry, many investors are on the edge of their seats trying to comprehend how they can capitalize on the virtual world..
The virtual land market in the “big four” metaverses – namely, Decentraland, Somnium Space, Cryptovoxels and Sandbox – topped $500 million in 2021, and that figure is projected to double in 2022.
In a post shared to his own Facebook page, Zuckerberg said Meta (FB) was now “a metaverse company, building the future of social connection,” rather than primarily a social media company. The company is also now calling its employees “metamates”, which in spite of being extraordinarily lame, it really emphasizes the degree of focus they are instilling in their company culture.
But it’s not just tech giants that see the potential…
Even Nike (NKE), the legacy athletic-wear manufacturer recently acquired RTFKT (pronounced artifact), the designer of virtual products and experiences.
If the concept of buying digital shoes that you can never wear, or a virtual condo you will never live in for thousands of dollars seems strange to you, you are not alone…
So first things first, let’s dive into the basics.
What is the Metaverse?
In short, a metaverse is a virtual world that can be accessed through technology like VR or AR headsets, computers and cell phones.
Author Neal Stephenson originally coined the term “metaverse” in his 1992 science-fiction novel “Snow Crash,” which envisions a virtual reality-based successor to the internet. More recently, however, the concept was popularized in the movie Ready Player One.
The real catalyst for investor interest was the major announcement by Facebook in which they changed their name to Meta, signalling the company’s “all-in” attitude to bringing this new(ish) concept into reality.
Generally speaking, the idea of something that looks and feels similar to a metaverse isn’t new.
The Sims, Second Life, and role-playing games like RuneScape, World of Warcraft and Fortnite have popularized the use of (and addiction to) life inside of a virtual world.
Consumers love escapism, spending countless hours in virtual worlds where they can try to create a more interesting life than the one they currently live in.
Likely, the most common misunderstanding about the metaverse is that there is no singular “the” metaverse. There are many, and in the future there will be countless metaverses.
Similar to the construction of a video game, any software developer can theoretically build a metaverse, and most will not survive in the long run.
In my last newsletter I stated that I believe there are too many cryptocurrencies, and in the future, I expect to say the same about metaverses.
Without users and mass adoption, a virtual world is a particularly lonely place. In spite of what was in my opinion a great user interface, Google Plus failed and Facebook (now Meta) thrived, and it will not be much different for metaverses.
With virtual worlds existing for many years, what’s changed recently to make the concept so revolutionary?
Could I get a side of Blockchain with that?
When Bitcoin (BTC) was introduced in 2008, it was the first time that a digital currency became secure and usable.
The underlying technology that made this possible was Blockchain, a term that has been bastardized through excessive overuse.
With the hype aside, there is truly no denying the many incredible innovations that are being made because of Blockchain technology. The use of this technology allows for not only disintermediation (adios middlepeople), but it allows for digital scarcity.
Though we’ve seen compelling virtual worlds before, the metaverse is the first to successfully create scarcity of virtual assets through the use of NFT’s.
As a lightning quick primer, an NFT is a non-fungible token.
“Non fungible” means each one is unique, and “token” implies that it can be easily traded without an intermediary involved.
An NFT can be art, music, movies, virtual shoes or even a parcel of land. It can also be a virtual certificate that verifies authenticity of a real world good like a Rolex.
The key here is that you can’t simply duplicate the NFT, because only the original is verified as authentic and therefore holds value.
This has major implications for preventing content piracy, and will not only disintermediate many industries, but it puts a lot more value in the hands of the creators.
To apply this to the metaverse, a single plot of land is sold as an NFT, of which there are only so many plots available inside of each virtual world.
Supply = finite
Demand = unknown
If land is finite, and the metaverse is somewhere that consumers increasingly want to spend their time to socialize, work and play games, then theoretically finite items inside of these virtual worlds should increase in value.
Theoretically…
How can you invest in the metaverse?
There are a few avenues to incorporate exposure to the metaverse into your portfolio, of which these range between spicy habanero to a mild hit of tabasco…
Crypto
The metaverse is ultimately powered by crypto, as you can’t directly buy anything with fiat currency like $USD.
Different metaverses have their own digital currencies that are used for in-world purchases. Decentraland uses MANA and Sandbox uses SAND. Both of which can be purchased through your friendly neighborhood crypto exchange.
However, be warned…these currencies can fluctuate wildly, yanking the value of your metaverse assets purchased with these metacurrencies higher, lower and higher again.
Something worth noting is that SAND and MANA are both ERC20 tokens, which means they run on the Ethereum blockchain.
So…to buy a plot of land in Decentraland one must first convert fiat ($USD) to Ethereum (ETH) and then to MANA.
Regardless of which of these metaverses proves to be most successful, money must flow into ETH first as a gateway, creating what in my mind feels like a bullish thesis for a slightly more stable exposure to the metaverse.
Risk = ??
NFT’s
An empty metaverse is a lonely place…
Buying assets for the virtual world makes it feel more like home and adds personality to your digital presence.
Assets include plots of land, homes, designer clothing, avatars, art, experiences and everything in between. All of these assets are represented by NFT’s, meaning everything you purchase is of limited supply, and can be verified immediately as being authentic.
For example: buying land in the metaverse is done through NFT’s, as each parcel is both non-fungible (ie. unique) and a token (easily tradeable).
The Sandbox metaverse is currently the land sale record holder, having sold a plot of land for $4.3 million in a single transaction last December.
While parcels of land exist only in a specific metaverse, digital goods can be used across different metaverses as they are cross metaverse compatible. At least that’s the idea, though I will be curious to see this play out in the long run.
As I mentioned earlier, Nike purchased a company called RTFKT.
RTFKT’s “CloneX Mintvials,” which are used to mint random NFT avatars designed in partnership with the Japanese artist Takashi Murakami, have done over $100 million in sales over the last two months, according to CryptoSlam, and over $17.5 million of it came on December 13th, the day the partnership with Nike was announced.
Owners of these Clones have since received “airdrops” of free goods such as the space pod, loot pod and the first Nike collab called the “monolith”.
My friend purchased a vile for 3 ETH in November, which made me choke when I heard the price tag. The only thing that shocked me more was seeing vials trade on Opensea for 10x that original sticker price in a matter of months…
Even Elon Musk purchased a pair of the company’s $90,000 cyber sneakers!
So what do you even look for in an NFT?
The answer is that it’s truly an art and not a science. Size and engagement of the underlying community appears to be the core value proposition, as many NFT’s in and of themselves are virtually worthless without an active community of supporters.
This is a topic to be explored in detail in the future as there is still much for me to learn…
Risk = ???
Stocks
There are many large cap companies moving to gain exposure to the Metaverse.
Nike acquired RTFKT and is already releasing a co-branded product.
Facebook changed their name to Meta and is pushing heavily on the user experience side of things with their push into virtual reality.
NVIDIA has launched “omniverse”, which is its metaverse building software that has already been downloaded by over 100,000 creators.
…
Disney CEO Bob Chapek appointed executive Mike White to lead the company’s metaverse strategy.
Even McDonalds (MCD) is filing patents for virtual restaurants!
Many of these large cap stocks will only indirectly offer metaverse exposure with some more involved than others (ie. Meta rebranding entire company vs McDonalds exploring virtual restaurants).
For more pure play exposure, there are of course numerous early-stage penny stocks offering investors access to the metaverse through metaverse mortgages, land sales, NFT portfolios and a host of new business models popping up every day.
Prepare yourself for the next sectoral bull market because I really feel it.
But reader beware! There is an enormous amount of BS that you should be skeptical about.
Risk = ? – ??
How am I positioning my portfolio?
Last newsletter I said I was going to increase exposure to crypto, namely with BTC and ETH, though I will admit I didn’t pull the trigger…
Seeing both ETH and BTC jump ~20% since then has temporarily killed my enthusiasm. Though I still see both as compelling for the long term, prices have moved enough to make me consider waiting for a pullback.
I will however set up my BitBuy account and transfer some funds to be ready.
Side note: I was an investor in a private round for BitBuy last year, and they have subsequently been acquired by WonderFi, the decentralized finance platform with notable investors Kevin O’Leary and Josh Richards. The transaction will net me roughly 3x on my investment.
I am still targeting a roughly 5% allocation split between ETH and BTC when I do make my move.
It is also very likely that I will buy my first NFT, with an RTFKT space pod looking like a plausible candidate. The rationale is that a space pod should receive further “airdrops” of free virtual merchandise, with resulting cash flows de-risking my investment. You will never see me buying any virtual jpegs with no real usefulness or potential of future “dividends.”
My large cap portfolio currently holds Microsoft (MSFT), which is the only large company exposure I have in the industry, but Disney is looking like a very interesting candidate as well.
The growth of Disney+ makes me optimistic, as it really shows that they can produce content and pull in an audience incredibly fast. At the end of the day that’s what the metaverse is all about, content in the form of a 3-dimension world and an audience of avatars that inhabit it.
In true Small cap Kev fashion, I of course hold some pure-play metaverse penny stocks as well…
NFT technologies which is still private, though going public soon on the NEO exchange. They have the NFT ticker, which in this retail investor crazed world really means something. The company is somewhat of a proxy for the NFT marketplace with investments across a wide range of NFT art, experiences, play to earn (P2E) games and coins. There are some key names on the management team, with CEO Mario Nawfal being featured as the “#1 standout crypto expert” in 2022 by USA Today.
See their website here: www.nfttech.com/
My other position is in Immutable Holdings (HOLD), which to be fair, is not purely focused on the metaverse or NFTs. They refer to themselves as “the Berkshire Hathaway of Blockchain”, which is a very cute tagline to be taken with a grain of salt. The metaverse exposure in this case is through their ownership of www.NFT.com, an enviable domain name. Much like WonderFi (WNDR), they also count Kevin O’Leary and his star power as a strategic investor and ambassador.
See their website here: www.immutableholdings.com/
To wrap this up, the metaverse is simply a market opportunity that shouldn’t be ignored. The consensus is strongly in favor of this becoming the next trillion dollar industry, and I tend to agree. With that said, be more cautious than ever, as this still yet to be regulated industry is akin to the wild west.
Take your time, do your homework, and don’t be fooled by celebrity endorsement or FOMO!
…
This newsletter is written by Kevan Matheson, Founder & CEO of Edge Investments.
Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion.
After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency.
In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems.
Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more.
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