Previously published on April 27, 2022 in
By Milton Ezrati, Chief Economist at Vested
At first blush, it sounded insane. A young friend had announced, intensely and with pride in his voice, that he had purchased real estate in the metaverse and planned to build a house on it. I asked why he needed a residence, why did he not just visit, shoot a few curls with Zuck, as per the promotional material, and then leave after taking in a virtual concert with avatars of his virtual friends. It was an investment of sorts, he explained. A place amid all this desirable activity was, he explained, bound to appreciate.
A little thought convinced me that his plan was neither as crazy as it at first seemed nor as new or revolutionary as he might have thought. My young friend’s expectations about the metaverse were entirely consistent with the basics of all money and investing. Just as there is nothing real or substantive about the house he planned or the metaverse for that matter, neither is there anything real or substantive about money or investing. In neither place is there any intrinsic value. All value and all return prospects hinge only on what people want and believe other people want. There is nothing apart from that.
To be sure, a metaverse house cannot keep its owner warm in the cold and cool in the heat. Nor can it keep the rain off his head, even if he is willing to keep that plastic helmet on 24/7. In that sense, it has less intrinsic value than a real structure on a real plot. But the shelter that real structure provides, the intrinsic part, contributes little to its value. A home on a secure beachfront is worth a lot more than the same building on a fading Main Street. That difference lies entirely on people’s preferences for the seaside, and the success of the investment depends on people’s continued preference for the beach over Main Street. A little over a hundred years ago, fashion and taste made the Main Street location more desirable, and values reflected that difference, as did gains, at least until preferences changed.
It is the same with stocks and bonds. Though securities appear to have a closer link to the physical world than does the metaverse, that link has little or nothing to do with their value or their prospects for appreciation. Investors will hold a bond only because they trust that the bond will pay interest as scheduled and return the principal at maturity. Stocks, too, offer nothing more intrinsic than the belief that the issuer is producing something that people will value and will continue to value in the future. Worth and appreciation depend entirely on these beliefs. There is nothing intrinsic or real world beyond them.
Indeed, the whole process is further removed from the physical world because investors also must believe that the cash the bond or stock issuer is expected to pay will itself hold its value in terms of other things people want. And that in turn depends entirely on what people think cash is worth or will be worth when the investment pays. Nothing about the cash is intrinsic. Today’s inflation is an ongoing re-assessment of people’s notion of what that cash is worth in terms of other things. Even when people had gold coins in their pockets, there was nothing intrinsic. Gold has intrinsic value only to a jeweler and the people who wear it, and even then, it is only because they or others hold it in high esteem. Otherwise, the gold coins only held value because the community agreed that they did.
The story of an isolated Polynesian island might offer perspective. Those who first visited the place told of how the members of the community stored value in giant stone wheels that they rolled into the lagoon to keep safe. Once a prosperous member of the community amassed enough wealth, he would use it—maybe denominated in seashells that themselves were only a store of value because the community agreed that they were—to purchase a wheel. The community kept track of who owned which wheels. If this prosperous member of the community then decided to build a home, he could sell the wheel and use the seashell payout to buy labor and materials. (If the community had a banking system, he might alternatively borrow against the value of his wheel.) At some future date, he might decide to downsize and the whole process could go in reverse so that he could have a secure store of value to will to his children.
Nothing in the metaverse has any less substance than what our prosperous Polynesian and his community believed had value. Nothing in it has any less substance than all modern investing. The young metaverse investor has no need to consider the physical or the intrinsic. As with any other investment, all he needs to consider is how others will value his holding. It is a bet, and perhaps a good one, on the future popularity of the metaverse. Zuckerberg owns an enormous amount of property in the metaverse. Since the place is digital and he is creating it, his holdings might be considered infinite. He has a keen interest in promoting the attractions of the virtual resort he is building. If he is successful, he will acquire a great many seashells with which to buy perhaps a physical island or a large yacht.