Ever since Facebook changed its name to Meta, the concept of the metaverse has gained a lot of attention. Basically, the metaverse is a virtual world in which people can interact by controlling digital avatars. But what makes it different from an immersive video game?
The simple answer is scope.
Proponents of the metaverse argue that it’s the future of how we socialize, learn, and even work. You’ll be able to go to concerts, museums, casinos, coffee shops — you name it! Nearly anything you can do in the real world can be done virtually in the metaverse.
Another aspect of the real world that’s been transferred to the metaverse is real estate. Metaverse platforms intentionally limit the size of their digital worlds, so they can parcel out pieces of land to be bought and sold on virtual real estate marketplaces.
Across the top 4 metaverse platforms — Sandbox, Decentraland, Cryptovoxels, and Somnium — there were over $500 million worth of virtual real estate sales just last year. Virtual real estate got a boost during the COVID-19 pandemic when people started spending more time online, and then another one when Facebook changed its name to Meta.
There’s no doubt that the potential to make huge returns on virtual real estate is there. For example, one early investor bought a piece of land in 2020 for $38.70 and then sold it the next year for $13,140.81. That’s a 33,900% return!
Today, a lot of virtual real estate is selling for as much as physical real estate. In fact, the largest sale to date was a 500-square-meter plot of land that sold for $2.43 million. But how do you tell how much a piece of virtual property is really worth?
Well, it’s not easy. Virtual real estate is a highly speculative investment. Many buy it hoping that it will continue to appreciate, but they’re really just participating in a land rush to get there first. Some don’t even know how they’ll use a piece of virtual land once they own it.
Still, there are some basic principles to evaluating virtual real estate. For one, building something interactive on the land—like a virtual club or ecommerce store — can raise a property’s value because it allows you to charge for admission or lease out space.
Heavily-trafficked areas are also going to be worth more. The more avatars that visit a property, the more you can make from foot traffic or selling ad space.
Similarly, being close to other valuable properties can make yours more valuable. That’s why someone paid $450,000 to be Snoop Dogg’s neighbor on the Sandbox platform, for example.
Ultimately, the value of virtual real estate depends entirely on how much other people value it — just like money.
That said, there are several reasons why you should be extremely cautious when investing in virtual real estate:
For one, the future of the metaverse is still uncertain. While it may be the future of digital spaces, it’s not clear how big of a role it will play in the overall economy. On top of that, there’s no way to know which metaverse platforms will stand the test of time. If the one you invest in loses popularity, the value of your digital assets could plunge to zero.
Then there’s the problem of scarcity. Though metaverse platforms cap the amount of land they make available, there’s nobody stopping them from expanding it later. Nor is there anyone stopping you and others from developing new metaverse platforms. In other words, digital land can be infinitely replicated. And yet scarcity of land is what gives it value. So virtual land is vulnerable to a high level of volatility.
When you buy virtual real estate, you’re also buying something that’s not tied to reality. People just don’t need virtual property the same way they need physical property. If you lose your physical house, for example, a house in the metaverse won’t save you.
And lastly, metaverse platforms rely heavily on blockchain technology. Most use cryptocurrencies for processing real estate transactions, which are highly volatile in and of themselves. This gives virtual real estate investments yet another layer of risk.
Right now, virtual real estate is still a new phenomenon. We’re only beginning to understand the ins and outs. Sure, early investors stand a lot to gain if they’re lucky. But like any investment with the potential for high rewards, there’s also a lot of risks.
So only invest what you are prepared to lose. If you have some extra money you can afford to lose, why not?
In fact, according to Los Angeles bankruptcy attorney Devin Sawdayi, “if you have enough cash for a down payment on a physical property but can’t get financing for the rest, consider using the money to purchase a piece of virtual real estate instead to avoid the financing roadblock.”
Whatever you do, don’t spend your fiat money on virtual real estate investments just because you’re taken in by the hype. Do it because you’ve studied the metaverse market and you can afford to take a chance.