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The Assets of the Metaverse
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This article will be a bit different from what you are used to. This article is not a company or asset breakdown but my view on an emerging trend with significant potential to become the next computing platform after the smartphone. Yes, you guessed it, the Metaverse.
I always loved the potential of AR and VR, as you can see from my first articles on Facebook (now Meta), where I was excited about their Facebook Reality Labs segment. This year I took a step deeper and really explored what the so-called Metaverse could be like and what assets could be interesting to own as an investor in this space.
Before we get started, let me emphasize that I am not an expert in this topic or have the full technical knowledge to explain the technical details. I am just sharing my view from my standpoint as a fundamental driven investor who invests in many emerging trends.
You may know from me already that I do not invest in things without utility, so for example, I missed out on all the meme stuff (from crypto to stocks like GME and AMC). And honestly, I am not upset about that because it doesn’t really fit my investing style, although super happy for all the people that made fortunes and changed their lives. I need to own things with utility so that I can value them appropriately. Owning things without utility just makes me nervous and without a strategy which in the end = me holding the bag and going to zero.
First, let’s start with a short introduction of what the metaverse concept is all about.
If you go on Google and type verb metaverse, you get:
“The term metaverse was coined in Neal Stephenson's 1992 science fiction novel Snow Crash, where humans, as avatars, interact with each other and software agents, in a three-dimensional virtual space that uses the metaphor of the real world.”
The term “metaverse” was first used in science fiction novels. It combines the word “universe” with the prefix “meta,” which comes from a Greek word meaning “beyond.” You could say that the first “virtual world” started years ago in gaming. Games that allowed their players to interact with each other in a virtual world appeared around the start of the new millennium, along with the advent of the Internet. These metaversal games were exceedingly popular. Games like There, RuneScape, and Second Life. Hell, even I played Runescape.
The second wave of games followed, with some earning massive numbers of users. The popularity of Roblox, Minecraft, Fortnite & many others. But while these games boast global fanbases; allow players to create, sell/buy items in a virtual world and share experiences with thousands of people, they remain inherently centralized. With that, I mean you cannot transfer your items, avatars, and other digital items and take them with you into another world or game, if you will. They are in some way still a closed ecosystem where the companies owning the games decide the rules, economics, and profit the most from what the users create and develop. The Metaverse concept is now seen as a more open ecosystem with the users & creators having the most significant economic benefit and the “provider” of the platform a smaller piece of the pie. There is also an expectation of having the real world more interconnected to this digital world through AR features and holograms so that the Metaverse doesn’t feel entirely like a computer game.
Ok, but how will the Metaverse look like? What will we be able to do?
Since this concept is relatively new and is in a fast-paced environment where things can change very quickly, what we see as the Metaverse of the future today will undoubtedly be very different when it actually happens.
I see the Metaverse as a kind of mix between reality and virtual reality. I imagine you can go fully VR with a headset and be represented as an avatar or other fictional character or even a 3D representation of yourself in a virtual world and do activities from work to entertainment. On the other hand, I think an even bigger part of the Metaverse will be the AR (augmented reality) segment. It means that you will see holograms and projections popping up on your smart glasses in the real world. It will enhance the real-world experience with more data. I guess it is a bit scary to think about it as it edges toward having a second life. I think this video when Facebook announces its vision for the Metaverse is a very plastic presentation of some of the concepts:
Now leaving my personal biased aside as to if I genuinely want the world to go into full Metaverse, I think this is the reality we are going to. And as such, from an investor standpoint, I see enormous potential in this new digital economy. The assets and companies forming this new world could benefit extremely from its adoption and broad economic effects.
Just to name some main areas where I see people using the Metaverse:
Working. The pandemic changed the perception of working. Many jobs are now remote jobs and will stay remote even when it’s finally over. One of the main tools for doing work from home is video calls and apps such as Zoom, Teams, etc. But the problem with all these tools is that they are not quite immersive enough. People can’t communicate their ideas and thoughts in the same way. And this is what the Metaverse can change. With holograms, you will be able to see the other co-worker or client in a 3D image. You will be able to see not only the picture of the person you are talking to but also his gestures and the movement of his body to some degree. The presentations will also be more interactive and easy to do as they will not be limited to the current “let me share my desktop screen with you” concept. I believe the adoption here will happen quite fast as people that will stay and work remotely after the pandemic will want and need these tools to be more effective and productive, not to mention it does add a fun factor to the whole thing.
Entertainment. With entertainment, we can already see some adoption going on in the Metaverse with concerts. Tomorrowland, one of the biggest electronic music festivals, hosted its concert 100% in the Metaverse this year. Performers and artists are all looking into possibilities into how to do a show in the metaverse. Snoop Dogg partnered with a Metaverse land company called Sandbox and bought virtual land to have a space for his fans, including making concerts in the Metaverse. But the entertainment aspect is bigger than just concerts; it’s also gaming, it’s watching movies, hanging with your friends and visiting virtual places, etc.
Another area where adoption could rise fast is non-work-related communication. With that, I mean people from all over the world will be able to meet and see their friends & family not only via a screen with a Zoom call but actually in 3D holograms, and they will be able to talk with a more immersive experience. This adoption could happen quite fast as it benefits the users in a better way to talk and meet.
The Facebook/Meta announcement is like gas on the fire!
Now the concept of the Metaverse was out there for quite some time. I followed the AR and VR segments for quite some time, but my mind was stuck thinking that AR would be huge because it would enhance the real world, and I thought of VR as more of a gaming thing (like the next level PlayStation or something). Getting to know the Metaverse concept opened my mind as it joins VR and AR in an all-around experience. When I started to dive deeper into it was when I read Packy Mccormick’s piece in January 2021
So the concept was out there, BUT. What changed the whole landscape was on the 28th of October when Facebook (now Meta) had this big event announcing they would rename the company to Meta and spend $10B annually for years to come to help build the Metaverse. Their video presentation of the Metaverse is when I think most people started to realize how this thing could look and how big of a deal it is.
Facebook started this big domino effect, and suddenly all the big tech CEOs began talking about the Metaverse (from Microsoft, Disney to Nvidia and many others). And not only in the public markets, but you could also see how people were starting to pile big money into crypto assets that were associated with this so-called Metaverse.
Looking back, I think the moment Facebook made this big announcement was when the Metaverse started gaining mainstream attention.
So how am I investing in this space right now? Is it investible?
While the space is very young, I have started to build a part of my portfolio around some assets and companies that I think could be very important in this digital ecosystem.
To better understand what assets and segments I am looking at, I draw this diagram.
It represents what I am currently seeing in the market as potential assets to keep an eye on. This diagram is probably missing a lot of other segments and companies, as there are thousands of companies developing and working in this space. This is just how I see it right now, so don’t get upset about it. 😉
As you can see, there are the following segments:
Service infrastructure providers
Software tools for creators
As with any computing platform, the hardware is very important. We are talking about the VR or AR hardware for the people to enter the Metaverse and have a more immersed experience, and the other part is the CPU, and GPU providers that make the devices run and the data centers run. The main chip and GPU manufacturers for me seem to be Nvidia, AMD, and Qualcomm. Both Nvidia and AMD might come to mind to many investors as they have been discussed many times, but I added Qualcomm to my list as well, as its CPU Snapdragon powers Oculus Quest 2, for example.
From a user hardware perspective, so far, Meta (formerly FB) seems to have the edge with the Oculus Quest 2 VR headset that is starting to gain some serious mainstream traction. Just this month, it appears that Qualcomm CEO has intentionally or not slipped the number of Oculus Quest 2 sold, and that number is 10 million! The last number we had was from over the summer when Meta did a voluntary recall, and that number was 4 million headsets sold.
If we go to the AR space, I think Meta will dominate this field too. Their first product launch with RayBan Smart Glasses has potential. While the Smart Glasses do not offer any actual AR experience yet, they show me a few important features. One is that Meta went to partner with Luxottica, the sunglasses manufacturer that owns famous glasses brands like Ray-Ban and the other is that the Smart Glasses are super thin and light. This shows me that Meta understands that for AR to take off the Smart Glasses need to look & feel like ordinary glasses, as people will not want to walk around the world looking like an alien.
Of course, there are other companies that will probably enter the space of AR/VR hardware. Snapchat has Spectacles for AR. Microsoft also has a product called HoloLens, although from a product perspective, it does not compare to Quest 2, and there are rumors that Apple is working on some kind of VR/AR headsets. But for the time being, Meta for me seems to have an edge on the market since the glasses are not weird-looking, heavy, or clumsy.
Another important part of the puzzle for the Metaverse is software engine companies that can power this 3D world experience. They are the basic software stack that a developer needs to know to build this 3D world, from buildings to games and other items. There are currently two dominant engine companies, and they power most Metaverse SPACE/LANDs. One is Unity, and the other is Unreal Engine from Epic Games. While Unity is a public company already Epic Games is not. Both these companies, with their engines, provide a very important asset for anyone trying to build the Metaverse.
Protocols are a very complicated topic. In essence, these are the so-called cryptocurrencies, although they might not be the real currencies of these worlds on which the Metaverse network could function to trade things. They are a layer that takes care of transactions & contracting and make items and things transferable. For example, Ethereum is one of the key ones right now and the biggest. Ethereum allows developers to form so-called smart contracts. From an investor standpoint, you need to understand that to run a Metaverse economy, you need to run it on a protocol. Right now, the protocols that are, in my view showing the most potential are Ethereum and Solana (but there are many others). I think Ethereum will be the big one, given its high adoption rate already and a strong position in the early Metaverse users. It still has flaws like very high transaction prices (because of high network usage) and relatively slow transaction speeds compared to a network like Solana. Current Ethereum can handle roughly 15-45 transactions per second, Solana 50.000 transactions per second.
But even despite all these challenges Ethereum has, they are still the go-to place network on which the Metaverse assets and coins are built. There is an upcoming change in Ethereum that has been called upon for years. It is supposed to happen in the next year or two, and it should reduce transaction fees (also called gas) of the network and make it handle more transactions per second (approx. 100.000 transactions per second). The network update is also known as Ethereum 2.0. It will also affect the inflation/deflation aspect on Ethereum but more on this in another article. An interesting fact is that the payment card Visa network can handle 1700 transactions per second.
Service infrastructure providers
This is an extensive segment. It represents any service you may use in the metaverse. Right now, I think the most apparent and mature enough services are first the marketplaces for trading digital items. These are marketplaces on which users can buy and sell digital items, also called NFTs (non-fungible tokens). If you imagine one day you will want an avatar representing you in the Metaverse, you will go on a marketplace and buy it from a creator (designer). You may also want some virtual concert tickets, and again you will go on a marketplace to buy them from the artist performing at the concert. And the marketplaces take fees in the form of % from the value of the transactions. Right now, the NFT market leader is a company called Open Sea. Their monthly trading volume in August was $3.4B and in September $3B. They charge a 2.5% fee each time you sell an NFT. This means they earned $85M in revenue in August and $75M in September. They also have around 500k total wallets registered right now. But recently, the publicly-traded company Coinbase (also a crypto exchange) announced they would open their own NFT marketplace. They even opened a waiting list to subscribe if you are interested in using the new marketplace. So far, and it has been only a few weeks already, more than 2.5 million people have entered their email on the waiting list, showing interest in the service.
Another service I recognize as potentially vital is ENS (also called Ethereum Name Service). To explain it in an easy-to-understand format: they are an identity provider. With their service, you can register a name/domain representing you in the Metaverse as your readable identity. For example, if you are called Brad, you could register the identity brad.eth, which would serve as your identifier through all of the Metaverse. To understand it as simple as possible, they are similar to GoDaddy for website domain registration, but that is only one part of ENS business, so it is a much bigger concept than just domain name registrator.
ENS decided to do a token listing and airdropped 25% of the supply of tokens to their users. The owners of the ENS token get governance rights and future revenue from ENS’s business as it charges users to register these identities. Interestingly, you do not have to wait to see how many “products” they sold each quarter (like this is the case for waiting on earnings results from public companies). You can see it in real-time any time as it is seen on the blockchain and with it open to everyone. As of writing this article, the fully diluted market cap of ENS is at $7.4B.
Another important segment in the Metaverse are the so-called Spaces or Land ecosystems. These are the so-called digital worlds. In this segment, one obvious thing that stands out to me is that Meta will probably want to launch its own land/space as this is one of the most critical parts of the Metaverse. And from the big tech companies, they will probably not be the only ones. There will be quite a lot of competition between these spaces, in my view, but that doesn’t necessarily mean that there will only be one space/land. Roblox, for example, already has their own space/land in their game. But the competition is now coming also from decentralized platforms like Sandbox and Decentraland, Axie Infinity.
Now with Roblox, the only way for you to get exposure to their ecosystem is to buy the stock. But for decentralized Lands like Sandbox & Decentraland, you have two ways. One is purchasing direct land plots, and the other is through the “economy” token (currency). In Sandbox’s case, that is the token SAND, and in Decentraland’s case, that is MANA.
Now with the Land plots, the way to value it is pretty straightforward. There are a limited number of land plots available in the whole ecosystem, and people can buy and trade the plots. The more this digital world becomes “populated,” and the more stuff people will want to build in it, the more the land plots will be worth. You also have to figure out (as with traditional land plots) the importance of the location of the plots. While I don’t want to get into too much detail, the point is that having land plots next to bigger land plots from famous brands (like Binance or Adidas, etc.) should be more valuable as the visitors of the plots of these renowned brands who will have services or experiences hosted on the plots could potentially also visit your land plots. And of course, if you have more visitors on your plot, you can sell them more of your own products/services, or you can rent the land to someone at a higher price—nothing complicated here.
Now with valuing the so-called currencies/coins of these lands, the thing gets more tricky. The best way to picture these currencies is like they are taxes. The logic is very similar in almost all of them. The token holders have governance power regarding the ecosystem, but they also get % of all transaction fees happening on the platform with these coins. The funds gathered from these fees are then mainly used for rewarding creators to develop more products and features in the ecosystem, for Play to earn reward systems & for staking. I won't explain it here for those who do not know what staking is; you can check it out on this link.
An example of these use cases and the flow of the ecosystem for the metaverse Sandbox:
Now while these decentralized metaverses do have their differences, in essence, the concept is the same. They take a government tax like a cut from everything happening in the metaverse and then use these funds to expand the ecosystem and make it more valuable and exciting for existing and new users.
Here is the data regarding the most popular three decentralized lands and the fee cuts they take:
As you can see from the chart, both Axie (since 2021) and Decentraland transfer 100% of transaction fees back to the foundation owned by the token holders, while Sandbox's original team that made the land still takes 50% of the transaction fee.
While I think the land metaverse fees will have to come down in the long run, there is a case to be made that higher fees in the start can lead to more funds being collected by the ecosystem, which can then help fuel more content and use cases to the ecosystem. Because this field is so young, having more cash than less is a good thing, but they have to be careful in not taking too much and disincentivizing the creators.
When valuing these Land ecosystems, you must also factor in that some have deflationary and some have an inflationary mechanism. And the pace at which the total amount of tokens is released onto the market.
This is, for example, the release schedule for Axie Infinity when the game launched in March 2018:
And this is the release schedule for Sandbox token SAND:
From an investor standpoint, owning tokens from these land ecosystems as an investment is maybe a bit hard concept. But to make it as easy as possible, the bigger the economy of this digital world, the more the tokens are worth since they take a tax-like fee.
Another important aspect to look at is how many well-known brands a project can attract. Sandbox stood out to me from these three metaverses as it has many partnerships with already well-established companies, not to mention that Adidas just bought a plot there.
But again, I think this will be the most competitive space as players like Meta and many other tech giants will enter and start their own “worlds”. They will also have an advantage in terms of onboarding major brands as they have relationships with them. These big corporations will have to watch out to make the ecosystem open and not a closed system like the iPhone. Some will understand that some won’t. I think a big tech company that will understand that and will make the fees on the platform very low will benefit and thrive as the whole point of the Metaverse is that the economic benefits stay with the users (consumers and creators).
With AR tools, I already discussed Meta’s Smart Glasses concept in the hardware section. But another company that is interesting in this regard is a public company called Matterport. They provide software for the 3D modeling of real-world space. They first started with you having to purchase a special camera and take photos from different angles with that camera of the space to do a 3D model. Still, recently they rolled out a feature with which you can take a picture of a space with your smartphone (iOS or Android), which is enough for you to have a 3D model. Currently, this is mainly used in the real estate market as listing agents show 3D tours of properties. I see this software as being important in the Metaverse AR concept. If Mark Zuckerberg’s vision is to make your space more augmented and make projections of it in the Metaverse, you will need to use software similar to what Matterport has got to get a 3D model of your apartment/house (space). And I think the ability to be able to get a 3D model of a space with your smartphone is the thing that can drive mainstream adoption.
Digital items (NFTs)
A vital principle of the Metaverse is that users can also own assets and take them with them even to different lands. This is a very different concept from the so-called web2 in which we live right now, where big platform companies own most of the items/products. In the Metaverse and the web 3.0. concept the users own the items (also called NFTs) and can sell them to other users at any time. These NFTs can range from avatars (pictures of a monkey, human, etc.) to art items (such as digital paintings). Usually, the point of the NFT is that it is unique and, in that way, represents some value as being viewed as a collector item. I have been exploring the NFT market activity in the last six months, and my findings are the following.
Because I am not a trader on the stock market but have a long-term investment strategy, I am looking for a similar concept in the NFT space. The first thing is the avatar NFT projects. The problem with them is that every day there are hundreds of new projects that are listed. Because there is such a big supply of them, most of them will be worth close to zero in a few years (I guess the actual price could be the price you would pay a designer to draw that avatar picture for you). But I think the exception will be avatar NFTs projects that were the first movers & have built a brand (mainly because of the first-mover advantage) and have a strong, influential community. If I look at these influential projects, you maybe have two reasons to hold it from an investment standpoint. The first one is that you think the price will rise because new people will want to enter and buy this avatar. The
second is because you can use the community as a networking opportunity (like a ticket to a prestigious club). And if you think about the value of the project could be valued from how valuable all the members of this club are. For example, one of the most iconic avatar projects is called the Bored Ape Yacht Club (BAYC). The project has been one of the first movers in this space and has gained many celebrities buying the Apes and even changing their Twitter pictures to these Apes. Two very influential ones are Stephen Curry & Jimmy Fallon. You could picture that what you are essentially buying is a “ticket” to a club where you might hang out & meet Curry and Fallon. Now the price to own a BAYC is not cheap. Currently, it’s around $180k for the lowest prices ape. But the interesting thing is that the longer the price stays high, the more people buy at this high price point, the more wealthy and influential people enter this community/network and make it more prestigious and exclusive. In the end, not many people can afford to spend $180k on a picture 😊
So my view is that only the influential and prestigious NFT avatar projects will, in fact, “survive” and could bring investment value. When more people start adopting the Metaverse, if a project stays exclusive and high priced. Because of this, I also invested in BAYC, but I didn’t pay $180k to acquire an ape because I didn’t want to allocate that much money & I got in at a better price through buying a fractionalized vault that holds BAYC. Not to get into too many details, imagine a fractionalized NFT vault as a “company” that owns one or more NFTs like BAYC, and then this company sells shares so that people can buy and own a part of this company. With that, you can own a fraction of a BAYC without having to put down the whole $180k. A known site for checking these fractionalized NFT vaults is Fractional Art. With the fractional ownership of the NFT projects, there are some negatives to think about vs. owning the NFT straight up on your own. One is that the owners than represent more than 50% of the fractionalized shares can vote to sell an NFT at a desired price, there is less liquidity normally (although that is not always the case), and you don’t get the ability to network, because you can’t really say that this avatar represents you as there are multiple owners.
But even with the negatives, I still think it’s better to own a fraction of an influential & strong branded project than to buy into the thousands of new avatar NFT projects coming out every day that will, in my view, have very little value in the future. Now, if you are a trader and want to trade, that is a different story (but don’t forget for trading NFTs, the transaction fees together with the marketplace fees & the project fees are a lot of time, even 20% or more).
Besides the avatar NFT project, you also have classical digital art pieces from famous artists. The valuation behind this is similar to valuing physical art. I don’t own any of the Digital art pieces yet as I don’t have enough knowledge of the artists and the field to make a good decision.
But in the grand concept of the Metaverse, you won’t own only an avatar or a digital art piece. You could also buy concert tickets, digital shoes/clothes, items as NFTs, and use them in the Metaverse. You can already see the first push to start offering these pieces from famous shoe brands. Nike just announced a collaboration to open its virtual store in Roblox:
And Adidas just announced it bought land in the decentralized land space Sandbox.
This thing is getting real with big brands and corporations starting to join in.
Software tools for creators
Now that you saw some glimpses of what the Metaverse could look like and what assets are being built, it is safe to presume that a big part in this digital economy will be dependant on one side software developers (who are already now playing one of the critical roles in our economy) but on the other hand also designers and 3D artists. There is going to be a significant demand to draw and model a lot of items, buildings, and other stuff. And for designers, there are two essential software’s that they use. One is Adobe, and the other is Autodesk. These are the dominant software’s to have if you want to draw a static image or a 3D model. Owning stocks of these two companies could also provide you with exposure to the Metaverse economy.
The Metaverse is not just a concept or a sci-fi movie, but it’s increasingly becoming a reality, and the first steps are already being made. As this space is evolving fast, more and more companies and assets will form the Metaverse, and when new interesting companies develop, I will make an updated version of this article to add those pieces. But for now, the assets mentioned in this article are the ones I am looking at most closely. I didn’t buy all mentioned companies and assets because I like to pick my stocks in specific sectors, so I also want to pick the “winners” in this space. From all the mentioned companies and assets, I do own Meta, Coinbase, Matterport, Ethereum, Sand, ENS & fractionalized BAYC NFT. It’s just a matter of time before I include Unity and NVDA/AMD in my portfolio.
I hope this article was informative for many of you looking into this space, and if you liked it, I would be super happy if you shared it. Also on Monday, we are going to be discussing the Metaverse and this article on my live show on the Podcasting platform Callin. Feel free to join live, listen to the conversation, and ask questions on Monday at 4:05 PM EST. The link to the Show is here.
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I own Meta, Coinbase, Matterport, Ethereum, Sand, ENS & fractionalized BAYC NF.
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