Move over, cryptocurrency and NFTs. The next hot digital commodity appears to be virtual real estate. Plots of “land” in virtual-reality worlds have recently gone for millions. But is virtual real estate comparable in any way to real-life land and buildings?
In short, no. The real estate market is heavily regulated and predictable in many ways. This new market is an unregulated Wild West of speculation, impulsivity, and uncertain expectations. No one really knows what will happen next with it. That makes for both interesting headlines and very risky investment.
What Is Virtual Real Estate?
Virtual real estate, like other virtual commodities, isn’t new. Virtual worlds such as Second Life have been around for years. You can purchase a plot of “land” in one of these worlds to do what you like with—build a house, create a shopfront, or sell it to someone else. However, these plots have been fairly inexpensive in the past. A large plot of land on Second Life could go for just $600. Plots in these new virtual-reality worlds are trading hands for the equivalent of a million dollars or more.
The new rush to create virtual worlds is based on a concept called the “metaverse,” a term from science fiction implying a virtual-reality universe. They include Decentraland, Axis Infinity, and The Sandbox. Many of these virtual worlds are suited to virtual-reality headsets, though they can be accessed through a normal computer as well.
The metaverse’s proponents, such as Mark Zuckerberg, imagine an entire parallel world. You could host a party, have a work meeting, or go shopping, all in virtual reality. Especially in today’s pandemic-influenced world, the idea of an online space that feels more real appeals to many.
It’s Early Days Yet
Despite the exciting promotional ads, the metaverse is still in the brainstorming stage. Creators throw out ideas of what they’d like to create, what they’d like this space to look like. But none of that exists yet.
Creating a digital world isn’t easy. VR games with quality graphics can take years and cost millions of dollars to produce. Many companies are working to create a world that would catch on, but many believe that as with social media, the landscape is likely to become dominated by a few giants. It makes sense that people will want to use the same platform as their friends. It’s certainly impossible to know who those top platforms will be, should the field be dominated by a few heavy-hitters.
Much of what companies are pitching—NFT avatars and clothes for your virtual-reality self—will end up being limited to a single platform, since there’s no universal standard for coding virtual-reality objects. That’s a hurdle companies badly want to overcome, but the capacity to do so does not yet exist.
The other hope these companies have is that users will want to spend money in these worlds. They’ll shop, purchasing items both digital and real, and pay money for real estate, skins, avatars, and more. But is that the experience users are looking for? Given virtual games and worlds exist where you can do almost anything you want for the original purchase price of the game, it’s difficult to imagine users would want to come to a world where everything is pay-to-play? In the internet we know, users prefer free sites and abandon sites that are too cluttered with ads.
Is Virtual Real Estate Really Land?
Well . . . no. It’s more like selling a web address, in that you can buy an “online space” which you hope will end up being popular. It costs the creator almost nothing to sell it to you, and if you pay more, you’ll have to hope someone else will want it enough to pay you even more for it someday.
However, lessons from real estate still apply. Imagine someone was selling land in the middle of the desert, promising it would be a profitable place to do business or a fun place to live. You’d want to ask questions like,
- Who else lives there?
- How much foot traffic does the area get?
- Do current residents find it a good place to live?
- Do current business owners make a good profit doing business there?
The answers to all of these questions, in the metaverse, aren’t available yet. Most of these online spaces are newly created and theoretical. You can’t actually go there yet, or if you can, few have. So it becomes like buying a shopfront in an empty town. You could hope people will move in, but there’s no way to know if they will—especially if there are other similar empty towns all over.
Don’t Trust the Sale Price
Like with other digital products, it’s easy to get taken in by the sale prices you see on virtual real estate. For instance, a virtual yacht just sold for $650,000, and a plot in Axie Infinity recently went for $2.3 million. But are they worth that much in any real terms? It’s impossible to be sure. They certainly don’t come with the guaranteed market or visible amenities you’d get from a real yacht or $2.3 million in Manhattan real estate.
Sometimes, these large purchases are only to create buzz. Sometimes, the buyer and the seller of a virtual product are the same person, using different accounts. That’s why, as with crypto and NFTs, sale price can never be an accurate assessment of long-term value.
Should You Invest in Virtual Real Estate?
Physical real estate tends to be a solid, long-term investment. Everyone will always need a place to live, and businesses need a place to put inventory and provide working space. But in the digital world, none of this demand is guaranteed. Nobody has to live there! That makes it a much higher-risk investment.
High-risk, high-reward investments should be a tiny part of anyone’s portfolio. And, for the individuals and companies investing in virtual real estate, it is. A million here or there is a tiny venture for them, to see what might happen next. For ordinary people, these new investment products should come only from money you can afford to lose. Your financial advisor can help you come up with a risk structure for your portfolio that matches your investment goals. To find a good advisor, contact us today.
