Cryptocurrency: Investing in virtual land: Bubble or boom?

This article first appeared in Wealth, The Edge Malaysia Weekly, on January 31, 2022 - February 06, 2022.
Cryptocurrency: Investing in virtual land: Bubble or boom?
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Real estate investors are no longer restricted to buying land on Earth. Now, even virtual land in the metaverse is open to them. The most expensive plot of virtual land, for instance, was sold for US$4.3 million (RM18 million) last November. For context, the typical value of homes in New York was US$737,699 as at last December, according to real estate broker Zillow. 

The metaverse is essentially a virtual world where users can socialise, work and play with each other as their avatars. The concept is already well known among gamers who interact on platforms like Roblox and Fortnite. But public interest in the metaverse took off significantly after Facebook rebranded to Meta last October, in its bid to build a social media on the metaverse. 

Popular metaverses like Decentraland and The Sandbox have since sold virtual land to businesses such as Adidas, PwC and celebrities. 

For instance, rapper Snoop Dogg is building a virtual replica of his mansion in California, called the Snoopverse, in The Sandbox. For a fee, users can gain access to his private parties, buy his products and interact with him. Last December, a non-fungible token (NFT) collector paid US$450,000 to purchase a plot of virtual land next to Snoopverse. 

The idea is that virtual land owners can build up the property and charge rental fees, sell it to other buyers or build experiences and games that charge users a fee to access.

There have been sales on the secondary market as well. The most expensive plot of land, for instance, was purchased by virtual real estate developer Republic Realm from Atari SA. Even metaverse REITs (real estate investment trusts) have been set up to reap profits from virtual land in multiple metaverses. 

According to Republic Realm’s 2021 Metaverse Real Estate Report, which tracks over 180 metaverse projects, virtual land prices rose from an average of US$6,000 per parcel in mid-2021 to US$12,000 per parcel by year-end. 

But is this a bubble or a boom? Some see investing in virtual land as a long game as it will track the growth of the metaverse and Web3, which is a new iteration of the internet based on blockchain and decentralises ownership of the web. Others, however, think that the use case is not strong enough.

“I wouldn’t classify it as an asset class. The Sandbox, which is our metaverse project, is an entertainment product. It’s an online space for everyone to share, socialise and potentially work. But to do that, you need to have land to participate,” says Robby Yung, CEO of Hong Kong-based game developer Animoca Brands, which owns The Sandbox. 

“The long-term concept is that we believe that people are going to spend more of their time in these virtual spaces, and I think Web3 will solidify that transition. And thanks to blockchain, we have an economic and financial underpinning to the internet, so we can make peer-to-peer transactions and exchange values securely, which we weren’t able to do before.”

Virtual land in the metaverse is sold as NFTs to buyers. Meanwhile, NFTs are supported by blockchain to prove ownership of digital assets. It is cited by the interviewees as a game changer. Previously, it had been difficult to prove ownership of digital assets. 

“I think we’re seeing the start of a digital land boom driven by the desire to show off one’s collectibles and diversify into alternative digital assets. Bitcoin made digital asset ownership mainstream and networks like Ethereum have allowed us to build on that concept by creating unique digital assets, which are NFTs,” says Matt Maximo, research analyst at US-based Grayscale Investments. The firm has multiple trusts investing in digital assets, including in Decentraland’s native token, MANA. 

The most popular use cases for NFTs have been in art, which is purchased for display. “Currently, there aren’t great ways to do this. Metaverse land gives users the opportunity to create personalised spaces, where their digital collectibles can have a home and be displayed for others to appreciate,” he adds. 

The decentralised nature of Web3 also means that users can own a piece of the virtual land and generate revenue for themselves. This would have been difficult previously, where creators of digital assets like games and art found it difficult to monetise their products.

“We currently live in the Web2 world, where big tech companies own the internet and we are just peasant farmers on their proverbial lands. Web3 allows for ownership in its truest form in the digital realm,” says Andrew Vong, chief futures officer at EquitiesTracker. 

It might have been difficult to picture the metaverse before this, but the pandemic brought it into perspective as people found themselves socialising and working remotely. Mesh for Microsoft Teams, for instance, already enables people to have a holographic virtual meeting. People can take their avatars into 3D immersive spaces to interact with each other. 

In fact, it is the possibility of using the metaverse to work and socialise, beyond just playing games, that could make it more mainstream. Singers like Justin Bieber have held concerts in the metaverse, while Adidas and Nike have made moves to introduce digital apparel for the metaverse.

Most of the activities on The Sandbox currently, observes Yung, have been the buying and selling of virtual land, some of which are done by professional developers. Individual and corporate virtual land owners are still building experiences on their land. 

“We only launched the alpha version of The Sandbox on Nov 28 last year. In less than two months, we have half a million players in this version. I think the next thing that will happen as we build up the metaverses is to connect them. Interoperability is going to be very exciting and that’s what makes Web3 so different. It’s open ended and interoperable. You could enter a building in The Sandbox and come out in a different metaverse,” he says. 

A quick check on NFT marketplace OpenSea shows that average sale prices of NFTs in The Sandbox rose by roughly 78% since last November. As for Decentraland, the weekly average price of its virtual land NFT rose by 4,173% from November 2020 to October 2021, according to a Grayscale Investments report from December 2021. 

Beware of the virtual land bubble?

The concept of investing in virtual land is still in its early days, as many land owners are still building up their properties on the metaverse. Even the ability to play games on The Sandbox, for instance, has not been released yet, according to its FAQ page. Most of the interviewees agree that the prices may be volatile and it may take a while before investors will be able to see a return.

While there are limited plots of land in each metaverse, which ensures scarcity, any company can build a new metaverse, observes Edmund Yong, partner of blockchain development consultancy Celebrus Advisory.

“In the real world, for real estate holdings to be valuable, there must be scarcity. But there could be an endless number of metaverses. And nobody talks about what will happen if the founding company folds. And what if there is a malware or virus? The virtual land that you bought for more than the price of a condominium in KLCC could disappear overnight. At this point in time, this is quite speculative and recreational,” says Yong. 

Additionally, there must be enough users on the metaverse for virtual land owners to earn a rental or fee income. Unless the metaverse is popular enough or it already has a loyal user base, this can be hard to achieve. 

“My hunch is that there will be a winner-takes-all scenario and big tech will most likely win. Microsoft already has a head start with Microsoft Teams and the virtual office. Even Disney already has the content, so they can build a virtual theme park. But start-ups running the metaverse could run out of funding,” says Yong. 

The hardware aspect of the metaverse must be addressed too. To have the best experience of the metaverse, he believes that virtual or augmented reality headsets are needed. This is not required in every metaverse currently. In that case, good connectivity is essential. 

“It’s a major roadblock for adoption. Look at how the Google Glass failed. For that price, I’d rather buy an actual condominium in KLCC. That can give you dividends in the form of rental income,” says Yong. 

Yong was an advisor for PicHere, a Malaysian virtual land project that was proposed in 2018. The idea was to create a social map platform that allowed people to “pin” pictures and videos on the map. The virtual land owners could earn revenue from letting others place virtual billboards on their plots. Venture capital firm Epnox Capital invested in the project, which won the Axiata Digital Challenge in 2017. However, PicHere did not take off due to waning interest in the initial coin offering that the team was planning to launch then, says its founder King Sze. He is currently the CEO of app and web development company Epnox Technologies.

How to invest?

The most popular metaverses include Decentraland and The Sandbox. Users can purchase land on the two platforms or through NFT marketplaces like OpenSea.

Grayscale’s Maximo points out that investments can also be made in the infrastructure, which are the protocols that provide the infrastructure for developers to build blockchain-compatible games, casinos, virtual events or more. People can also invest in the games themselves. 

Similar to physical properties, location matters for virtual land. “However, this ‘location’ refers to the virtual world it exists in. In the case of Decentraland, LAND estates (what virtual land is called in Decentraland) are valued based on the game’s adoption, activity, usage and in-game factors, such as size and proximity to other parcels,” says Maximo.

Some of the things that investors can look out for include user adoption and community, he adds, and funding for the development team. The latter is important to ensure that the game can sustain long-term development of the metaverse.

“Metrics such as sales of game assets, token volume and protocol revenue are good indicators of strong user adoption. However, it’s important to understand if it’s purely incentive-driven adoption or a natural growth,” says Maximo. “A lot of crypto projects see massive adoption and usage during the incentive period and fail to retain the broader user base after.”

It could also be helpful to look at the Twitter and Discord communities of the games, he adds. “Gamers are highly community and nostalgia-driven. What helps to make games special are the opportunities to build authentic relationships while playing the game … Games are places for players to create experiences, so a development team that is highly interactive and involved with the community is very important for long-term growth.”

Vong suggests investors look at where the data for the metaverse is stored. It could be on a centralised server that belongs to a big tech company, for instance, or stored in the InterPlanetary File System (IPFS). 

“The IPFS is supposed to be a decentralised way of storing information, where your data is stored in multiple independent storage sites on the internet. That makes it impossible to take down and it’s permanent. You can switch ownership of it by making that change on the blockchain,” says Vong. This could circumvent the risk of a single entity shutting down the metaverse. 

At this point, virtual real estate developers are buying up plots of virtual land to build experiences and spaces like luxury condominiums. These are then rented or sold to other buyers. Businesses, meanwhile, are using these spaces to run events. 

For instance, Gucci ran a virtual fashion installation in Roblox last year and sold an exclusive digital bag, while Nike unveiled Nikeland, a virtual space for fans to connect and outfit their avatars with virtual Nike products in Roblox. Republic Realm developed the first metaverse shopping mall, Metajuku, on Decentraland. 

The virtual real estate world, say the interviewees, will mimic the real one. There will be speculators who will push up prices and result in a bubble, observes Marco Stagliano, CEO of Another-1, a Singapore-based company building NFTs for collectibles. 

But he is confident that there will be a stabilisation of prices in the future. “I’m sure there will be regulations on the NFT marketplaces and there will be a normalisation of prices. I don’t believe that the bubble will burst on solid NFT projects, but there might be fewer sharp increases in value.” 

Yung also does not discount the volatility that investors may face, but he believes in the long-term potential of the metaverse. As long as people are spending more time in online spaces, virtual land will be attractive, he adds. “If you’re going to just buy and hold, then be prepared that the experience might be different than if you do something on the land. It’s probably worth more if you build a house on a property.”

Even if the pandemic ends and people return to their routines, Yung believes that the metaverse will still be relevant because it can bring people with similar interests together, no matter where they are based physically. 

“There are going to be many metaverses. I think people should not have the mentality of picking winners. These are fundamentally entertainment products now. So, I think people should think about it in terms of where they find the most fun in and which community resonates with them. It’s not an investment asset but something fun, with the side benefit that it might be worth more in the future,” says Yung. 


Getting to know the popular metaverses


Users can earn MANA (native token) to purchase LAND, a non-fungible token (NFT) that divides Decentraland into virtual plots.

Decentraland is made up of 90,000 plots of 16m x 16m real estate NFTs. 

The value of LAND is based on its location in relation to other LAND plots, such as public roads or public areas. 

As user traffic increases for a plot of LAND, owners can monetise it through the sale of NFTs, advertisements or other services.

Secondary market NFT sales in Decentraland grew from US$3.6 million in October 2021 to US$20 million in November 2021.

Measured in terms of all-time active wallets, Decentraland has 20,000 users. 

Source: Grayscale Investments


The Sandbox

Users can build, own and monetise their gaming experiences by using SAND, the platform’s utility token.

LANDS are blockchain-backed virtual tokens that represent physical parcels of the Sandbox metaverse. Players can own a portion of the metaverse and host content like asset and games on LANDS.

There are 166,464 LANDS in The Sandbox metaverse. 

Users can publish their games in the plot of land or rent it to game creators. They can also host events, earn and customise assets, play games, monetise assets and vote in the metaverse governance.

Users can buy LANDS on the Map of The Sandbox website during sales events or they can buy secondhand property through third-party NFT exchanges like OpenSea and Rarible. 

Source: The Sandbox whitepaper and website