New properties are appearing at a record pace - but these aren’t properties you can browse on Zillow. The metaverse is becoming the new frontier of real estate investment, and big players like Facebook have been investing heavily in the future of this space. However, understanding the fundamentals backing virtual property is important for moving forward with your investment strategy.
Wondering whether to invest in virtual real estate? Here’s what you need to know. (note: this does not constitute financial advice.)
In this context, digital or virtual real estate is a digital asset meant to mimic actual, physical real estate. People and companies can purchase digital property and establish homes, storefronts, and more in that online players can participate in. This can be done through several online worlds. You can also host parties with limited guest lists and rent out your property - just as you can in the real world.
Decentraland is one of the most well-known virtual property worlds. It’s a blockchain-based virtual reality platform where people can play games, visit each other, have parties, shop, and more. This is an example of how the Ethereum blockchain is used to facilitate transactions and interactions in digital space. Other big names include Somnium Space, Sandbox, and Upland.
"Technologists believe the metaverse will grow into a fully functioning economy in a few short years and offer a synchronous digital experience that will be as integrated into our lives as email and social networking are today," notes a recent article by Debra Kamin in The New York Times - aptly summarizing why many people are interested in investing in the metaverse while it's still in its infancy.
Whether or not Decentraland and other digital properties represent a good investment depends on how much risk you can find acceptable. There is definitely risk involved with purchasing digital property assets.
Right now, much of the investment into digital worlds is somewhat speculative - it’s based on an assumption of how people will use the world once it’s fully built, but it’s not really based on the utility of the digital world as it exists today. It’s likely that part of the hype around digital properties is related to investors hoping to land on “the next Bitcoin” and become overnight millionaires.
That said, it’s inevitable that life will become increasingly digital - the question isn’t whether the digital world will become more important, the question is which platforms consumers will prefer, and how they will opt to interact with them.
When the dot com bubble burst in 2000, for example, it didn’t kill the internet - it just signified the end of many early services and platforms that consumers didn’t prefer. It’s very possible that many of the big players in the virtual real estate space today will no longer exist in 10 or 20 years - just as Myspace no longer dominates social media like it once did.
Take a stroll back through the web archives if you want a reminder of what speculative hype looks like - and it may sound a lot like what you're hearing today about the metaverse.
"Every day more big companies turn their attention to this new medium, realizing that it really represents something new. I'm now convinced that one day Second Life or something related to it will become a Google/Yahoo/MySpace-scale company," reads a 2006 CNN Money article about the future of Second Life (one of the earliest and well-known digital worlds which still exists, but is hardly a cultural juggernaut).
"I think people are betting on the prominence of certain platforms without evaluating the wider landscape. Google wasn't the first search engine - and yet it became the most prominent," says Jasen Edwards, an editor at Agent Advice. "The most important metaverse has likely not been created yet. Right now, rather than taking a leap of faith and trying to do a 'land grab' with digital real estate, perhaps it's better to sit on the sidelines and see which platforms become dominant."
Make no mistake, these companies are pioneers in the metaverse. Just as with the original American pioneers, some will make it big - and others will lose everything along the way. Here are some of the issues that Decentraland, and virtual worlds in general, will have to solve before their properties can be “worth” what people are paying for them.
Reports of lag have been dogging Decentraland since its inception and continue to this day.
“Any time it has to render many NFTs it lags, stutters, and dies,” reads part of a scathing review published in The Gamer. “If virtual worlds could smell, this one would definitely smell like [poop].”
“The floor disappeared several times; mountains appeared and disappeared in the distance. The stage flickered, my frame rate slowed, my character jittered,” reads a VICE review of a Decentraland rave that went briefly viral. “If the metaverse is the embodied experience of existing in a virtual world, then Decentraland is a much worse alternative than basically anything else that already exists.”
Both reviews noted that when they visited this world, it was sparsely populated, and many of the people who appeared to be “there” were AFC (Away From Computer). This is a problem because the utility of digital worlds hinges on people actually using them to interact with others.
These are the types of reviews to keep your eye on. The early adopters for a digital product are usually people already attuned to that world - gamers, VR enthusiasts, etc. If these groups - who are already set up for a more seamless transition to the digital world - aren’t enjoying it yet, what’s the likelihood that it’s going to gain traction with everyone else?
"I think that most people aren't really following the history in this area. The most successful online real estate markets have been in MMORPG's like Everquest and World of Warcraft. Both of them became incredibly valuable for a while, then fizzled out. Digital real estate simply isn't permanent in the same way that real estate is," notes Leonard Ang, CEO of iPropertyManagement.
The low count of actual users also poses a challenge to the profitability model. Many in the digital real estate space have been touting its potential as a source of passive income - own property and display ads there! Make money as a landlord without ever fixing a broken toilet. However, companies will not pay for ads that no one views or clicks on.
One thing anyone in the cryptocurrency world has noticed is that regulations have grown as the technology has matured - and increased oversight has the potential to strangle rising platforms overnight. Unlike real-world property - which has hundreds of years of reliable, established laws behind it - the metaverse is still a bit of a Wild West.
Brad Biren, an attorney who works with digital hub IQMOP, explains that regulation is inevitable - so the sooner it happens, the better.
"The lack of transparency of future risk prevents many investors from seeking venture capital. Regulation for better or worse needs to happen so this nascent industry can mature," he notes.
Many scams targeting elderly people revolve around the internet. Why? In part, it's easier to scam people when they don't really understand or are new to the underlying technology.
The majority of people looking to invest in digital real estate are beginners without much experience in the field. Consequently, it's easier to fall for scams that look like plausible buying/selling platforms. This February, China’s financial services watchdog issued an alert that illegal fundraising schemes and scams related to the metaverse are on the rise.
At the end of the day, you're the only person who can evaluate the level of risk you're comfortable with. If you decide to invest in digital property, you should treat it as more of a gamble than a traditional investment opportunity.
If you're looking for a more predictable and less risky return on your investment, real property in the real world is probably a better fit for your portfolio. In the real world, available property is a finite resource and it's necessary for people to live (here's more info on why it's still a good time to buy a home, despite how crazy the market is). Unlike Decentraland, real-world property can't be unplugged and shut down overnight.
But that said, who knows - this might be the start of the next big thing.
To buy land, you typically will use crypto coins associated with that world rather than fiat currency. If you're wondering how to buy metaverse coins, popular platforms to do so include Binance, Gemini and Coinbase.