The bubbling of the metaverse
The Metaverse is now mainstream. Triggered by Facebook’s renaming to Meta Platforms, the state of common knowledge in the market shifted almost overnight. No longer was the metaverse something imaginary and illusory, the preserve of Ready Player One fans and anonymous Twitter accounts with cartoony avatars, it was real. REVENUE. CASH.
We first wrote about how gaming could get levelled up into a much more immersive experience more than two years ago now in Gaming’s Next Level. A year after that was the first time we used the actual word “metaverse” as we outlined a couple of emerging opportunities we were keeping an eye on.
Of course, things have changed drastically since we penned those notes. At one point, we considered Tencent as one of the leading candidates to dominate the metaverse. That may still be true though it’s clear now that profiting from this will be a secondary priority. Yet while that was going on, the growth of the metaverse was truly in full swing for all those who were watching carefully. On one hand, the likes of Roblox, Fortnite and Minecraft were building their idea of the metaverse in walled gardens. On the other, in the world of crypto, an alternative path was being charted by the likes of Axie Infinity, Decentraland and the Sandbox, just to name a few.
The bifurcation in ideologies was further underscored this week, with the Winklevoss twins raising US$400m to build a metaverse outside of Facebook’s (or now, Meta’s) walled garden. Details look scarce at the moment, but it’d be interesting to see what they have up their sleeves.
As these digital nations saw their genesis unfold, and opinions form around how to govern them and value the assets within them (especially with everything being pretty much intangible), users were flowing into these ecosystems both in search of fun and in search of work, especially in the emerging world.
And so, we now find ourselves at the point where “metaverse” has graduated from the realm of the exotic into the realm of common parlance. Everyone wants to be a metaverse company, and the big numbers are coming through: the metaverse could even be a multi-trillion dollar opportunity, and sell-side research houses of all shapes and sizes have now sprang into action with the narrative wheel.
Here’s where things get tricky. What we wrote about Axie Infinity last week is also true of the metaverse in general: It is (still) just the beginning.
Usual disclaimers: none of this is a solicitation to buy or sell anything, this isn’t financial advice, so please ask your advisors for advice - that’s what you pay them for. Additionally, we hold positions in some of the names mentioned across the realm of stocks and crypto.
Pulling the future into the present
Let’s face it: we’re staring straight into a potential bubble that is inflating by the day. While the rest of the market shudders at the thought of out-of-control inflation, potential rate hikes and a complete breakdown of one of the greatest uninterrupted bull markets we’ve seen, a select pocket continues to rise with great fervour, their common point being that they’re all “metaverse” plays.
Bubbles, contrary to popular belief, aren’t all bad though. While the irrational exuberance in the near term tends to lead to pundits (and analysts) making up highly aggressive forward estimates for growth which tend to prove out of kilter in the near-term, the trends that they foretell may well hold water in the longer run.
George Soros’ famous line regarding bubbles comes straight to mind: “When I see a bubble forming, I rush in to buy, adding fuel to the fire. That is not irrational.”
And a bubble indeed this is.
Bubbles facilitate a suspension of disbelief, allowing human irrationality to permit the pull-forward of capital into the present to fund projects that would otherwise be deemed impractical on a capital allocation standpoint, a phenomenon which in recent years has also been helped by the low/zero interest rate environment.
Everybody wants a chunk of the metaverse pie: some candidates are indeed prime players in the space, while others are pretenders, taking advantage of a tangential link to market themselves as metaverse participants.
Caution, as always, is very much the key to survival.
On all fronts
One thing worth pointing out is that for the first time, we’re seeing a bubble form across two previously uncorrelated asset classes: equities and crypto.
As we’ve argued for quite some time now, these distinctions in “asset class” labels don’t really matter to us when it comes to deciding what makes an interesting opportunity. However, what matters to others matters to us, and labels matter to the broader market – a lot.
On the equities side, names like Nvidia and Roblox are stealing the show. In the crypto space, the likes of The Sandbox and Decentraland are dominating the top mover charts. And all this is happening against a backdrop of weakness in much of the broader tech equities markets and crypto markets. How’s that for dispersion?
At a fundamental level, this isn’t surprising: stocks have always displayed thematic dispersion, while in crypto, where flows traditionally had to go through a “base” like BTC or ETH, these days traders (or investors) can simply take their credit cards and go straight through into whatever tokens they want. Rightly or wrongly, not all roads lead to BTC or ETH anymore. Dispersion is here to stay. And the flow dynamics have changed too.
All of this said, we dance with one eye on the exit. Of course, the fundamental story behind these trends remains intact, and as we’ve seen from the likes of Nvidia’s conference presentations and their recent results, the tooling they’ve put in place for the metaverse (or in their words, the “omniverse” because it’s a much bigger story in the end) is ready to use.
Having the right tools is a great start, but lots of work still needs to be done.
We’re sure that creators and designers all over the world are keen to get their hands stuck into these new toolkits and business models, but building takes time: experimenting, failing, improving, and iterating.
We won’t shy away from a looming bubble – it’s a wonderful opportunity to make some good money. But the stark reality is that bubbles burst, so we enjoy it while it lasts.
And many years after, once all the promises of the initial irrationality actually become fulfilled, even this bubble may seem like a drop in the ocean. After all, remember this one?
