In 17 days, Wall Street will close the book on what'll probably be another banner year. All told, the broad-based S&P 500 was up 25% through this past weekend, and investors have endured a peak pullback in 2021 of just 5% in the widely followed index.
As is customary when the finish line nears, investors look to the future and pick out the trends that'll shape the upcoming year and well beyond. In 2022, there's little question that Wall Street and investors are laser-focused on the metaverse.
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An up to $30 trillion opportunity at investors' fingertips
In simple terms, the metaverse represents the next iteration of the internet. It's a 3D virtual environment where people will be able to interact with their surroundings. While there's plenty of entertainment factor associated with virtual reality, there's also a huge dollar figure that comes with operating a virtual realm.
In speaking with Bloomberg News last month, Matthew Ball, the CEO of Venture Capital firm Epyllion, uttered a future market value for the metaverse that may have left some viewers/readers floored. Keeping in mind Ball launched a metaverse exchange-traded fund earlier this year (and therefore has an inherent bias in its long-term success), he sees the metaverse becoming a $10 trillion to $30 trillion opportunity. In Ball's own words:
Even if you have more modest expectations, precedent from the digital economy, the internet, the mobile internet, suggests that this is a $10 [trillion] to $30 trillion opportunity that will manifest in a decade or a decade and a half.
The most appealing aspect of the metaverse is the ability to put money to work in multiple channels of growth. For instance, investors could consider buying shares of virtual and augmented reality device makers, such as Meta Platforms (META -11.94%). Meta, the parent company of wildly successful social platform Facebook, has seen robust growth from its Oculus devices -- though revenue from Oculus still accounts for only a fraction of companywide sales.
Beyond the physical product that allows users to connect to a virtual world, there's the underlying technology and services that'll be needed to make everything work. This includes the high-powered semiconductor chips necessary to power a virtual realm (ahem, Nvidia and Advanced Micro Devices), the networks capable of supporting a rapidly growing virtual environment, and the software to allow for the development of real-time virtual content (e.g., Unity Software).
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The single biggest question that'll determine the future of the metaverse
But buried beneath the hype of this potential $30 trillion economy is a yet unanswered question that has massive implications for the metaverse:
Will the metaverse be centralized or decentralized?
Meta Platforms has made no secret about its desire to spend big on the metaverse. In fact, the company changed its name from Facebook to Meta in late October to hammer home its new focus. CEO Mark Zuckerberg noted on the company's third-quarter conference call that Meta would spend $10 billion on the metaverse in 2021, and successively more in the several years to follow. With the company sitting on a nearly $45 billion net cash position, as well as generating $53.6 billion in operating cash flow over the trailing 12 months, it certainly has the capital to spend.
Beyond just the physical products needed to access the metaverse, Meta might well be working on a virtual currency or payment platform that could offer additional revenue channels for the company.
The key point, though, is companies like Meta would control the lion's share of the development and, in turn, reap most of its rewards under a centralized structure.
If the metaverse were to go the decentralized route, things would look very different.
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What would a decentralized metaverse look like?
In the cryptocurrency space, two top-performing coins have surged this year because of their metaverse appeal. Decentraland (MANA -4.82%) has gained nearly 4,000%, through Dec. 10, with The Sandbox (SAND -5.79%) surging an even more impressive 13,300% on a year-to-date basis. It should be noted that a considerable portion of these gains have occurred since Meta announced its name change on Oct. 28.
Decentraland is a virtual reality platform built on the trusted Ethereum blockchain. Blockchain being the digital and decentralized ledger that records immutable transactions. In Decentraland's virtual world, users have the ability to purchase and develop digital land, as well as interact with other users and digital assets throughout the virtual world. The digital assets users buy are stored as non-fungible tokens (NFTs), which can be sold (or purchased) in a marketplace. The protocol token MANA can also be used to pay for goods and services in the virtual world.
The Sandbox is also built on the Ethereum blockchain and follows a similar play-to-earn path. Users have the ability to purchase plots of land and develop those lots however they'd like. This often involves creating experiences for other users on that land. The protocol SAND token is used to purchase land and interact with other users' content.
The core difference between what Meta offers and what Decentraland and The Sandbox bring to the table is ownership and monetization potential. With the latter, virtual users own their creations and have the ability to monetize their worlds. With the former, creations could be purposefully limited by the largest metaverse players.
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And the winner is...
Which side will win?
To quote those three most difficult words a longtime investor will ever say: I don't know.
The metaverse is simply too early in its development process to even begin deciphering whether a few major players will be the architects behind most augmented and virtual reality projects, or if blockchain-based projects will allow users to control and develop their own worlds.
One thing we do know is that many of the largest companies at the heart of metaverse development have very big piles of cash. Admittedly, cash isn't everything. We've watched companies with massive cash hoards waste their capital on share buybacks and acquisitions that ultimately never panned out. But with companies like Meta able to invest $10 billion or more on an annual basis, and having amazing brand recognition to boot, it's going to be difficult for relatively obscure blockchain projects to keep pace.
There's also no definitive answer as to whether blockchain is necessary to operate virtual worlds. Although blockchain has demonstrated plenty of promise when it comes to expediting the validation and settlement of payments (especially cross-border payments), the technology remains untested on a large scale.
There's no question that I'm intrigued to see which way the pendulum swings. Just understand that you don't have to invest on the ground floor to win big in the metaverse. Waiting things out until the metaverse matures and we have an answer to the most important question may be the smartest move.
