10 Reasons Why I'm Not Investing in Digital Land

Suddenly, everyone is talking about the metaverse, tech's next frontier. Tech giants like Facebook-parent Meta Platforms (Nasdaq: FB) and Microsoft (Nasdaq: MSFT) are reorganizing to focus on the "embodied internet," and the topic has become a buzzword across the business world.

While a virtual land grab might seem to be afoot, there are several reasons you might want to pump the brakes before investing in digital real estate. Keep reading to see 10 reasons I'm not buying digital land.

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While many people have made a killing on cryptocurrencies or NFTs in the last couple of years, there is nothing fundamental underpinning the value of the asset of Bitcoin (CRYPTO: BTC) or a Cryptopunk token. Essentially, what's keeping the value of such assets elevated is just faith and the belief that someone else will pay for it -- also known as the greater fool theory.

The cryptocurrency market resembles a classic asset bubble in several ways, but that won't be clear until it bursts.

The same rules apply to virtual real estate. While there is theoretical value to virtual real estate within a given virtual world like Decentraland or The Sandbox, there's no real assurance that the world will continue to exist or that interest in it will grow. It's a highly speculative market without the usual economic guidelines of supply and demand that underpin physical real estate.

ALSO READ: How To Buy Land in the Metaverse

Land has arguably been the best investment in the history of the world. You only have to look at the $24 that Dutch settlers paid for the island of Manhattan for an example.

More recently, anyone who's owned a home in the U.S. has benefited from another gold rush in the real estate market. Over the last two years, home prices in the U.S. have jumped 29% on average, a handsome return without the need for speculation.

With the global population continuing to increase and standards of living rising, the price for land and the buildings on top of it will almost certainly continue to appreciate.

Forgotten in the tales of crypto riches are billions of dollars that have been lost because users forgot their passwords and got locked out of their digital wallets.

When you own physical real estate, there's a long paper trail to ownership, and even if you're locked out of your house, you can get a locksmith to help you get back in.

That's not the case with virtual real estate. Decentraland advises, "If you lose access to your wallet you will lose your Avatar, name, any of the wearables or NFT items stored within. Please remember to always keep your wallet recovery pass phrases in a safe and secure location."

I'd rather not have to worry about keeping a password secure, and the billions of dollars lost in locked-out accounts show this is more than a small problem.

When you own physical real estate, you can do a lot of different things with it. You can live on it, rent it out, open a business on it, or even farm it and grow food. It's a productive asset.

Virtual land, on the other hand, doesn't really offer these benefits. In theory, digital landholders could sell advertising or host events, but thus far, not much income generation has happened in practice.

The need for virtual land simply isn't the same as physical real estate. People need a place to live; businesses need space for operations; people like to travel, dine out, and visit new destinations; we need land to grow and raise food, and some land is rich in natural resources.

Even in a popular virtual world, there isn't the same need for these functions. For example, a company doesn't need to rent office space in someone else's virtual world. It could just create its own virtual space.

ALSO READ: Investing in Metaverse Stocks

If you want to spend your time in virtual worlds, it may seem more appealing to own a piece of digital real estate, and there are non-financial reasons to buy a piece of virtual real estate.

For instance, SuperWorld -- a virtual world that seeks to replicate the real world with 64.8 billion plots of land -- offers the opportunity to own a digital version of your childhood home or a piece of Central Park.

But buying virtual real estate is probably only going to be appealing if you want to participate in the world where it exists. Otherwise, the benefit is strictly a speculative investment.

If you are planning to buy virtual real estate, you're better off doing it in a world you enjoy being in so that you can monitor your plot of land.

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Prices for stocks, real estate, and crypto have soared over the last two years in a boom that has several things in common with a classic asset bubble.

In the U.S., government stimulus programs have injected trillions of dollars into the economy, and rock-bottom interest rates have fed a credit bubble. Meanwhile, plenty of traders have pumped prices of things like meme stocks to a level disconnected from their underlying values.

Fears of rising interest rates have already led to a sell-off in tech stocks and crypto, and it could get worse. Virtual land and NFTs could be even more speculative than cryptocurrencies, and the nascent boom in virtual land could turn into a bust if crypto prices continue to crash.

Today, the metaverse has an energy similar to the World Wide Web in the mid-'90s -- a moment that brought about a boom in internet stocks in the late 1990s.

However, many of those companies failed -- for instance, Webvan and Pets.com -- and very few dot-com stocks emerged from the crash to go on to be winners.

Virtual worlds today could go through the same process. While the metaverse might go mainstream over the long run, just because it does, doesn't mean today's virtual worlds will be winners.

ALSO READ: 3 Reasons To Buy Decentraland

Currently, the boom in virtual real estate is being propagated by a scarcity mentality. Much like Bitcoin has benefited from its built-in limit of 21 million coins, virtual worlds like Sandbox are advertising land based on a scarce supply. They claim there will only ever be 166,464 LANDS available, as it calls its pixelated parcels.

The problem is there's little evidence that demand to use the land in virtual worlds correlates with its pricing. For instance, Reuters detailed how a plot in Decentraland sold for close to $1 million last June to investment company Tokens.com, which built a virtual shopping center there. However, Reuters could not find any shoppers there in multiple visits.

In the real world, such a deal would be a boondoggle, and there's no reason it shouldn't be seen that way in the virtual world.

The most popular virtual worlds highlight the scarcity of their availability, but what makes the metaverse special is that, like the internet, space is limitless.

For instance, the idea of location-based value doesn't really apply to online worlds because you can navigate anywhere on the internet with a couple of clicks. The key to making the land valuable isn't scarcity but traffic.

Advertisers pay to advertise on Facebook because billions of people use Facebook and see the ads, which helps them gain business.

The traffic isn't there yet to warrant the current prices in virtual worlds.

ALSO READ: Into the Metaverse: Your Guide to Crypto and Virtual Worlds

Though virtual reality headsets appear to be the best way to access the metaverse, the most popular virtual worlds have not begun integrating VR headsets yet.

Decentraland, for example, is only available through a web browser, and Sandbox has not yet opened to the general public.

Much like VR headsets, the metaverse feels like a product without an application right now. After all, it's been eight years since Meta Platforms acquired Oculus, but VR headsets are hardly mainstream. Compare that to how quickly smartphones became the norm after Apple released the first iPhone.

The metaverse tech infrastructure will improve, but technology must be compelling for people to use it. It has to solve a problem. At this point, rather than offering a compelling reason to use it, the metaverse feels more like something technologists are trying to prove can be done.

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The energy behind the virtual land rush, and cryptocurrency more broadly, resembles a number of bubbles that happened before it, like the housing bubble or the dot-com bubble. Investors are rushing in to gain a piece of the "next big thing" and believe they could see returns on their investment of 100 times or more.

However, even many of the most enthusiastic digital land investors acknowledge that buying virtual land is mostly speculative and that there's a lot of hype in the market.

Buying virtual land could pay off in the long run, but as history shows, there are also many ways it could go wrong.