The metaverse has gained a lot of traction over the last few years, with billions of dollars being poured into the realization and expansion of the virtual world. While its future looks promising to the growing number of investors and users jumping in, its long-term success isn't concrete. There are several hurdles that could squander the hot new investment opportunity as quickly as it has risen -- the most pressing being a recession. Here are two reasons a recession could crush the future of the metaverse.
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Spending changes in a recession
The pandemic may not seem like a prosperous time for the economy, but after halted economic activity in 2020, spending on the investor and consumer levels rebounded quickly, even surpassing pre-pandemic levels for gross domestic production (GDP). In other words, it's been a great time for the metaverse to grow.
People were forced to spend their time at home, which meant the metaverse user base grew. More users brought more attention and thus more money to the space on an institutional and private level. But the spending and user base it saw over the last two years are unlikely to be sustained in a recession, something many experts say is coming.
Recessions are periods of lulled economic activity with less consumer spending due to constrained budgets or layoffs. The effects of this are felt across the board, but they disproportionately affect middle- and lower-income earners -- the user base the metaverse relies on for future growth.
If you have to choose between spending money on groceries, gas, or housing or making a speculative investment in the metaverse, it's a pretty obvious choice. Real-world challenges will take precedence over virtual spending in both time and money.
The metaverse needs everyday users, not billionaires, to succeed
Right now the growth of the metaverse is being funded primarily by the wealthy, not the average consumer. According to a report by Colormatics, the primary demographic of individuals investing in NFTs and digital real estate in the metaverse is people in tech-based cities, aged 18 to 34 years, who earn $150,000 or more per year.
These wealthy individuals, like hedge funds, private investment firms, Fortune 500 companies, and celebrities, have excess money to speculate in the metaverse with, as well as oftentimes a better-than-average understanding of cryptocurrencies, which serves as the basis of Decentraland (MANA -5.44%), The Sandbox (SAND -6.73%) and Axie Infinity (AXS). That leaves out the majority of Americans -- the roughly 82% of US citizens who make less than $150,000 per year, the exact demographic the wealthy are relying on to make the metaverse go mainstream.
For the metaverse to succeed, it needs an ever-growing number of users to continuously spend money buying non-fungible tokens (NFTs) -- which simply isn't happening. A recent study from Axios surveyed 2,500 people and found fewer than 7% were excited about the future of the metaverse, with the majority, 58%, saying they were indifferent to the idea. Add in the pressures of a recession, and the likelihood of users growing is dismal.
Image source: Getty Images.
Average monthly users for the three main crypto-based virtual worlds have fallen as much as 30% since the start of 2022. Sales volume for NFTs, including virtual real estate, has also dropped 37%, a sign that interest in the metaverse could already be waning as inflationary pressures build across the country.
Speculative investments don't fare well during recessions, and the metaverse is just that -- a speculative play. Could this red-hot investment outlive a recession? Of course. But I personally think it's unlikely. This, among other reasons, is why I'm not investing in the metaverse and am instead putting my hard-earned investment dollars into more reliable and consistent income streams.
