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4 Reasons Not to Buy Virtual Land

Why I'm not buying virtual land yet

I wouldn’t even consider virtual land proptech, but it’s been hard to ignore talk about the metaverse. So I checked out what’s on the market and evaluated it like a real estate deal.

When you buy a piece of raw land there’s a lot that goes into closing. You have to do a ton of due diligence, legal work, and line up your financing. The most important part of the purchasing process is negotiating the right price. The price is dictated by the property’s highest and best use and what other people are willing to pay for it.

For the most part, these factors have direct analogues to virtual land in the metaverse. New use cases for virtual land are emerging every day. And buyers have been bidding prices up in several metaverses to insane valuations.

A lot of metaverse proponents point out that the valuations are justified because the land is truly unique and scarce. That should mimic the real world. Decentraland for example only has 90k parcels and unless the DOA votes to increase it, that’s it for that metaverse. Likewise, Manhattan is 22.82 square miles and that hasn’t changed since.. Okay it actually increases once in a while from landfill projects. But land in the real world more or less stays pretty constant within the span of a lifetime.

Reason #1: New Metaverses and Virtual Land Are Appearing

Here’s the biggest thing about metaverses that’s got me worried if I bought a piece of virtual land today. The top 5 most popular metaverses out there today probably won’t be the top 5 metaverses 10 years from now. And land, whether real or virtual, ultimately derives its value from how many people want to spend time there.

With real estate, if I buy a piece of land in Manhattan, it does a pretty good job of retaining or growing its value over my lifetime. I know that a bunch of programmers can’t materialize a new, prettier Earth with better graphics and cheaper transaction costs.

A better analogy is trying to attract people to move from a tier 1 city to a brand new city. It takes decades for a city to really develop a culture and mature. But the bottom line is, real estate pricing in top tier cities is safer than virtual land. At least for now.

We’re in the early days of web 3.0 and first mover advantage is really hard to defend. I am fully expecting a multitude of metaverses to appear. And there will be battles for supremacy over underlying crypto platforms as well. So I absolutely DO NOT trust any virtual land I buy today to retain its value.

Reason #2: Volatility

What’s that? To the moon you say? Yea there’s absolutely a chance that a parcel of virtual land could 1000x. That wouldn’t happen in Manhattan, at least within a hold period shorter than my lifetime. The risk reward profile on virtual land is practically unmeasurable right now. Manhattan real estate on the other hand has a fantastic Sharpe ratio. Many foreign investors see it as a safe alternative to a Swiss Bank.

The process for purchasing a parcel of virtual land in Decentraland involves transacting across THREE different and extremely volatile securities. The first was Ethereum, the underlying blockchain on which all Decentraland transactions are recorded. Ethereum needs to be converted to MANA, which are tokens that are used as the actual currency within Decentraland. And the Third is the parcel of land itself, which can be bought and sold on open exchanges.

On any given day, I’ve seen Ethereum, Mana, AND land parcels swing by more than 5 percent, and not all in the same direction. You could argue a foreign investor has to go through the same thing. Like if a chinese investor converts RMB to USD and purchases real land in Manhattan, all of those things can fluctuate. But I don’t worry about any of those things swinging by 5% or more a day. Nor do I worry about the currencies being replaced by a better one. Nor do I worry about a new Manhattan materializing out of thin air.

Reason #3: Barriers to Entry for Metaverse users

Yknow why I don’t worry a lot about Manhattan land value? Because it’s the densest county in America. Despite the dip from Covid, it’s a huge jobs center with tons of stuff to do. People want to live here. But the density also creates affordability barriers, because it’s one of America’s most expensive cities.

I noticed that Metaverses have a few barriers as well, and affordability is definitely one of them. Most people haven’t embraced the idea that virtual land or NFT’s have intrinsic value yet. But for those who have, there’s a lot more demand than supply. A parcel in Decentraland goes for at least 4350 MANA, which as of this filming is about $15k. And one record breaking parcel traded for $8mm. So this stuff is not cheap.

Further, as I was exploring Decentraland from my underpowered laptop, I was experiencing some slowdown. The draw distance didn’t extend beyond a couple blocks, and it looked like a PS1 game. At the highest graphics settings, my laptop nearly caught fire.

So, another barrier is the fact that not everyone can afford the latest Nvidia GeForce. And bitcoin miners keep buying them all anyway. So metaverses have a long way to go before they’re ubiquitous and accessible. Once a critical mass of people join and establish mature markets, the volatility will die down and the virtual land valuations will be more stable.

Reason #4: We’re in a bubble, and the injection of newly printed cash makes it worse

Until then, we’re clearly in a bubble. This parabolic rise and fall pattern is pretty pretty common occurrence:

  • The tulip craze in the 1600’s
  • The dot com boom in the late 90’s
  • The housing boom in the mid 2000’s
  • Weed stocks
  • Wall street bets stocks
  • SPACs
  • Tesla pretty much every 6 months
  • The top 5 cryptocurrencies.

With governments around the world printing new money to fight off he pandemic recession, investors have in turn fueled and burst massive bubbles in the last 18 months.

There will likely be some amazing and value-creating use cases for virtual land one day. But as of now, the risk profile is way too high for me. There’s so many signs of bubble mentality. Early adopters are blindly betting on its potential and factoring in the next decade’s worth of innovation into today’s price. They’re definitely not using any dependable valuation metrics. Warren Buffet put it best when he said, “The stock market is a voting machine in the short term and a weighing machine in the long term”. There’s plenty of voting going on right now, and a proper weighing machine doesn’t exist yet.

If you’re not fully convinced, my next post applies several real estate valuation methods to a plot of land in Decentraland. The results are not pretty.