Buying Virtual Property: 4 Key Principles to Consider

Virtual property prices continue to go through the roof and investors are offering up huge amounts of fiat currency for digital land.

Much of this buying activity is occurring on the Decentraland platform. Decentraland is a virtual reality world brought to life via the Ethereum blockchain where users can create, experience, and monetize property and applications using the platform.

Virtual land in Decentraland is owned by the community and users claim ownership of the virtual land on a blockchain-based ledger. Each parcel of land is a non-fungible token (NFT) meaning it’s unique and cannot be forged or duplicated - the same as physical land.

Decentraland styles itself as the “first-ever virtual world owned by its users," and based on escalating virtual property prices, many investors are putting a premium on Decentraland’s first-mover status.

While buying virtual property may seem gimmicky to some, virtual land sales have the potential to be the next big real estate rush.

The rise of Decentraland and the emerging market for virtual properties raises a couple of practical questions for investors:

How should investors value virtual property and do the principles of physical property valuation apply to the virtual property?

If you’ve got millions of expendable dollars to throw around, the above questions might not matter to you.

However, if you’re an average investor looking to diversify your portfolio and own a piece of the metaverse, it helps to have a set of principles or a framework to structure your investment analysis and provide a gut-check before you spend thousands on 1s and 0s.

Currently, there’s a limited understanding of the economics of virtual worlds. However, new research is emerging that’s taking a data-driven approach to understanding the factors and pricing mechanisms that impact virtual land value.

A new study conducted by researchers from the University of Basil argues that virtual land prices are driven by:

Detectability probability: refers to the likelihood your property will be discovered by avatar traffic.

Address-like characteristics: refers to how easily memorizable a parcel of land’s coordinates is.

Because avatars don’t need the virtual property for practical uses (e.g., shelter, office space, etc.) or for resource purposes (e.g., growing food), the researchers that conducted the study argue that virtual land prices are primarily driven by their commercial value.

Using Decentraland’s open architecture, the researchers compiled and analyzed a data set of virtual land prices and arrived at several conclusions about how the value of virtual property has been determined by investors so far.

Their data-driven approach revealed some interesting insights that I think might be helpful to new investors:

1. Location, location, location

A major principle of physical property valuation applies in the metaverse too.

The study’s data indicated that investors are more willing to pay big bucks for virtual land that’s easily found by avatars. Parcels of land in the immediate proximity of a central meeting plaza tend to be of the greatest interest to investors.

For example, virtual land located close to major Decentraland landmarks, such as Crypto Valley, commanded significant premiums.

The premise is that land located next to major hubs of traffic will enable landowners to monetize that property through the sale of digital assets, advertising, or some other experiential activity (e.g., digital games, a casino etc.).

2. Head for the red

If you’re looking to buy property in the real world, generally, investors stay away from seedy neighborhoods and districts - not the case for Decentraland.

Investors looking for the greatest ROI will want to consider buying close to districts where gambling, sex, and other adult activities are promoted. The researchers found that virtual land close to the red light district, for example, commanded higher prices.

Again, the reason for this is that these areas tended to be highly trafficked by avatars and positive spillover effects were created for neighboring parcels of land.

3. Attention is king

The phenomenon underlying land’s economic value in Decentraland is attention, according to the researchers.

Virtual economies are attention economies and land value arises from a virtual parcel of land’s ability to attract, retain, and monetize a user’s attention.

4. Address marketability

In Decentraland, users can transport their avatars immediately from one location to another – walking isn’t required.

Every Decentraland parcel has unique co-ordinates which represent a specific location on the Decentraland map. Because land parcels can be visited instantaneously by inputting address coordinates, investors assigned higher land values to parcels with addresses that were memorable.

Similar to how catchy or straightforward domain names command higher prices than obscure, forgettable ones, address coordinates matter in Decentraland.

Takeaway

Valuing digital assets is tricky, if not downright challenging.

As we can see, many of the insights generated by the study are aligned with traditional real estate valuation, with some subtle differences.

Unlike many cryptocurrencies, some virtual property appears to have a real use case. That being, if we’re all going to be congregating in the metaverse in the coming years, virtual property owners that can attract lots of traffic will have the ability to advertise and sell to avatars.

What’s more, if you’re early to the party and snap up some prime virtual land (not necessarily in Decentraland), it’s within reason that some big company may come knocking on your digital door to take it off your hands.