Investing in Virtual Land v’s Buying Tokens in the Virtual World
Why invest in virtual land when you can buy tokens in the protocol itself?
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Which is the superior investment, virtual land or tokens belonging to the virtual world? This is the key question when contemplating how to profit from the explosive growth expected in all things metaverse.
Surprisingly, this is not a cut and dry question. There are advantages and disadvantages to both.
This article assumes you are familiar with the concept of virtual land in the metaverse. If you aren’t, read this article, Is Now the Right Time to Buy Virtual Land?
We searched high and low for an answer to what we considered a straightforward question but failed to find anything useful to answer that burning question. As is usually the case in our world we had to get our hands dirty and work out the answer ourselves!
Let’s look at the advantages and disadvantages of investing in virtual land and or the tokens relating to each virtual world. After that we will try to determine which is the better investment, if any.
Advantages of Buying Virtual Land
● Land has development potential which translates to both income and capital growth. Let’s assume for a second that you buy a plot of land and rent it to a company looking to build a virtual shopping mall on your land. You therefore have the potential for rental income, rent increases and capital growth, depending on the success of the mall obviously. The more successful the operator the more the land will be worth and the more rent you can charge. It is no different to real estate in the real world.
● Virtual land is a unique asset which you can hold, trade or rent.
● Whilst virtual land is currently a highly volatile asset it is likely to become less correlated to macro economic factors and the wider cryptocurrency market as the market matures and land is developed and income streams established.
● Virtual worlds have only limited land available. Once all the plots have been sold there is no more. In an ideal world anyway.
● You are able to buy and sell your virtual land through the virtual world’s marketplace and third party marketplaces such as Opensea.
● There is arguably uncertainty when buying tokens in terms of whether certain cryptocurrencies represent a security. Assuming you are not buying/selling a share of land then virtual land is unlikely to be considered or treated as a security.
● Some of the virtual world’s tokens have a market cap that are arguably overvalued providing limited upside potential for investors. It could therefore be considered better value to invest in the land rather than the token. This could apply the other way too, i.e. where the token looks better value than the land providing an opportunity for arbitrage.
Disadvantages of Buying Virtual Land
● The entry point for buying virtual land is higher than buying tokens
● Whilst the platform states there is limited land available most projects allow the DAO to increase this at their discretion.
● You can lose your virtual land to a hack. Also a hack of the protocol could lead to a loss of confidence in the project and a loss in value of the land.
● Unlike tangible real estate, virtual real estate is inextricably linked to its metaverse, therefore if the metaverse is a flop your land will be worthless.
● Buying virtual land is a high risk investment.
Advantages of Buying Tokens in a Virtual World
● Low entry point, you can buy a fraction of a token.
● There is usually more liquidity with tokens than with land and thus more exchanges to buy and sell through.
● You may be able to stake your tokens and earn income from them.
● You will require the platform’s token to participate in its virtual world and buy land creating additional demand for the token .
● The success of the project will translate into capital appreciation in the token. Investing early in an emerging metaverse could lead to extraordinary gains as you will see below.
Disadvantages of Buying Tokens in a Virtual World
● Founders can increase the circulation supply of tokens at their discretion. It’s been done many times before causing investor outrage.
● You can lose your tokens to a hacking attack.
● The value of a virtual world’s cryptocurrency is inextricably linked to the success of the virtual world.
● Cryptocurrencies are extremely volatile and are also impacted by macro economic factors.
● Buying cryptocurrencies is a high risk investment.
Comparing and Contrasting
The big question is, what asset is more volatile and which has the superior upside potential?
Let’s look at Decentraland and The Sandbox for the answer.
Floor Price of Virtual Land
Floor Price of Virtual Land
On the face of it, if you invested in either of these projects at the start by buying SAND and or MANA your returns could have been 635x and 290x respectively. This compares to 5x and 7x investing in both project’s virtual land. However this quick analysis fails to take one crucial factor into account. The floor price is the lowest price a seller is willing to accept at any given time. Obviously if you have land that is located in a prime spot then your land is going to be far more valuable than the average plot. The same theory applies if your land has been rented to a successful game developer.
The final question I’ll leave you with is, why buy real estate as opposed to stocks?
The bottom line is, it’s all about diversification. Whilst the choice between virtual land and tokens is a slightly different proposition to real estate and stocks, the high risk of both asset classes accounting for a large part of this difference, an investor should, depending on his resources and appetite for risk, spread his bets by investing in both assets.
Buying tokens in one of the more established virtual worlds may not be a great idea at the moment. Valuations are still high, Decentraland’s market cap is $1.64 billion fully diluted and The Sandbox $2.7 billion, whilst ApeCoin is a massive $4.8 billion. Virtual land seems far more affordable with floor prices of around $2,000. This could be a rare opportunity to buy into these metaverses before prices rise and removes this opportunity from the reach of the average investor.
To conclude, whilst owning both the token and the virtual land is a wise strategy, buying land in our opinion is a superior investment particularly at these low levels. The ability to benefit from rental income, rent increases and significant capital growth makes virtual land an investment that deserves very close attention.
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Not Financial Advice
This article does not constitute financial advice or a recommendation to buy in any way. Always do your own research and never invest more than you can afford to lose. Investing in cryptocurrencies is high risk, and you could lose 100% of your investment. The article should be treated as supplementary information to add to your existing knowledge.