What a difference a year makes. In 2022, some metaverse cryptos were down more than 90% for the year, and many analysts had already written off the metaverse as a potential investment option. However, through the first two weeks of 2023, the script has flipped. Metaverse tokens are now the best-performing sector in the crypto market.
Leading the charge has been Decentraland (MANA 0.54%), which at one point was up more than 133% in 2023. Sentiment seems to have shifted dramatically on the prospects of this metaverse token. Moreover, sentiment has shifted nearly overnight. So is Decentraland a buy?
The roller-coaster hype cycle
When it comes to the metaverse sector, understanding investor sentiment is key. It has truly been a roller-coaster hype cycle for the metaverse during the past 18 months. Back in 2021, anything "metaverse" was golden, and Facebook even went so far as to change its name to Meta Platforms to achieve first-mover status in the metaverse.
And it wasn't just tech companies, celebrities, brands, and top social media influencers hyping the metaverse. High-end consulting firms and Wall Street banks constantly pointed out that the metaverse represented a potential $1 trillion market opportunity.
But in 2022, investors realized that it might take a lot longer than expected to realize the full scale of this market opportunity. That's why I'm concerned about this new hype cycle: It could be just as fleeting.
Lack of fundamentals
Of course, you can blame the broader market decline for much of Decentraland's woes last year, as investors dumped all cryptos indiscriminately in a mad rush for the exits. But part of the blame rests with Decentraland itself. Despite all the efforts spent on attracting top celebrities and brands to build in its metaverse world, Decentraland still has less than 1,000 daily active users. The usage numbers, quite frankly, are not very encouraging.
Lack of a good catalyst
Despite the recent run-up in price, it's difficult to find a single good reason why Decentraland has been rising so fast in 2023. The consensus seems to be that positive macroeconomic news in January is driving the growth. Based on a single good economic number, metaverse investors are now convinced that fears of inflation have been overblown, the economy will improve, and users will go back to playing in the metaverse.
Maybe I'm too skeptical, but I need to see some major catalyst that is driving this growth -- or else it's all hype and could disappear at any moment. Yes, Decentraland did announce some new profile features and avatar functions, but this seems to be a small tweak rather than a big catalyst. Another working hypothesis is that the start of the Australian Open tennis tournament in mid-January played a role. The logic here is that the Australian Open has a metaverse destination inside Decentraland where you can learn more about tennis, and that might be the reason Decentraland is up so much. I don't find this to be a very convincing argument, especially since the tournament only lasts two weeks.
Standing out in the metaverse
Even without the presence of a good catalyst, and even with poor usage numbers, I might be persuaded to buy Decentraland if I felt that it was absolutely the best-in-class metaverse crypto. But I don't think it's possible to make that argument. For example, both The Sandbox and Gala -- two metaverse cryptos that rank in the top 100 by market cap -- are surging as well. Overall, everything metaverse-related seems to be going up, so it's hard to say that Decentraland is somehow unique.
Image source: Getty Images.
Another major concern is that the term "metaverse" has been used so much that nobody really knows what it means anymore. Back in 2021, it generally referred to a specific metaverse world such as Decentraland. But it is now used to describe anything related to virtual reality, augmented reality, or even online gaming. You could legitimately make the case that Apple is now a potential metaverse stock, based on reports of a major VR headset product coming in 2023.
Short-term vs. long-term outlook
Over the long term, there is no doubt there will be some sort of market opportunity related to the metaverse. Some tech company will figure it out, or perhaps one crypto will find a new multibillion-dollar market niche. However, over the short term, I'm much more skeptical. The hype cycle is so intense that it's hard to see 100% gains in two weeks as anything other than another corkscrew turn on this roller-coaster ride called the metaverse.
Thus, I need to see a change in strategic direction before I can get behind Decentraland. The old approach of "build it and they will come" is not working. When Decentraland stops relying on influencers, brands, and celebrities to bring in new users, and instead finds a real value proposition that appeals to mainstream consumers, that's when I might decide to hop on the metaverse roller coaster.
