Metaverse – just a dream or long-term investment opportunity?

You may not have come into contact with the Metaverse at all or have never heard of it before. Don’t worry, you’re certainly not alone in that. However, some companies and investment firms are convinced that the Metaverse could be THE next big trend.

One of them is Mark Zuckerberg, who has already renamed his company from Facebook to META in 2021. McKinsey, a US consulting firm, published a study in in May 2022 forecasting that the metaverse could be worth € 5trn by 2030. In the same study, we learn that in the first 5 months of 2022, companies have put more than $ 120bn into the development of the Metaverse. Private equity firms have invested more than $ 13bn in the Metaverse in 2021. Impressive numbers, which is why investors might want to keep an eye on it.

What is the Metaverse?

To date, there is no clear definition of what exactly the metaverse is. But the consensus is that it can take the Internet to a new level. We have to distinguish between Web 3.0 and the metaverse. While the developers of both concepts want to redefine the Internet, they are pursuing different goals.

The developers of Web 3.0 are trying to create a new decentralized Internet in which users regain control over their data. They criticize the current state of affairs, in which a few companies (Google, Facebook, Amazon,…) “control” the Internet and earn money with their customers’ data. In Web 3.0, the users themselves decide who gets access to which data and they are also the ones who can earn money with their data. Technically, this works in such a way that the data is stored decentrally on a blockchain (e.g. Ethereum). Thus, no central entity has control over the data of the customers.

The metaverse can be decentralized, but it does not have to be. The goals are different:

• The physical and digital worlds merge in the metaverse

i.e. the digital world is not a purely invented world, but real elements and people from the physical world are mirrored into the digital world.

• We experience the metaverse immersively

Until now, we experience the Internet through a screen, often through our smart phone. In the Metaverse, we immerse ourselves in the Internet. How is this supposed to work? In the metaverse, we have a mirrored identity (a so-called avatar) with which we interact in the digital world. But in addition to people, physical elements are also mirrored in the metaverse. Assets can be tokenized and traded. Digital assets are so-called NFTs (non-fungible tokens) whose ownership is often stored in a decentralized manner.

• We experience the metaverse three-dimensionally

It stands to reason that the final and full experience is three-dimensional. When we move as avatars in the digital world, we need appropriate hardware to do so.

Wearing such hardware may seem cumbersome or inconvenient from today’s perspective. In addition, the costs are currently still high. For example, the Meta Quest Pro virtual reality headset currently costs €1,799.

Wide range of applications

From today’s perspective, we don’t know if the Metaverse will be the next big trend. At the moment, it is mainly limited to the gaming market. But the fact is that the metaverse has the potential to expand into wide areas of the economy. In the following, I would like to name a few examples that can be strongly influenced by the metaverse (without claiming to be complete):

• Education

Some universities are already working on a metaverse strategy. This will make it possible for students not only to listen to a lecture virtually, but also to work together with professors and other students in a virtual room. Medical students could practice surgery on holograms. Access to education could thus be significantly simplified.

• Tourism

What does an afternoon on the beach in Hawaii sound like? No problem in the Metaverse. Virtually any place in the world can be experienced digitally. Or do you want to get to know the hotel and its surroundings virtually before booking? Real tourism could be partly substituted by virtual experiences.

• Entertainment

The entertainment industry is predestined for the Metaverse. Snoop Dogg was perhaps the first artist to give a concert in the Metaverse², reaching several hundred thousand viewers. A music video of the artist was created entirely in the Metaverse. In addition to the music industry, sports events can also be experienced in the Metaverse. In addition to several other clubs, Bayern Munich already offers a virtual experience. It is only a matter of time before tickets are offered to experience a sports event in the Metaverse instead of in front of the TV.

• E-Commerce

Shopping on the Internet is already commonplace today. In the Metaverse, however, our avatar, i.e. our digital copy, enters a virtual store. Before we buy a new pair of jeans, we can try them on our avatar. If we like it, we check out, the product is physically delivered and we also pay for it digitally. Digital currencies will therefore play a major role. We will probably be able to choose whether we want to pay with cryptocurrencies (e.g. Bitcoin), stable coins (cryptocurrency linked to a fiat currency) or digital central bank money (CBDC).

By the way, you can already equip an avatar with Nike shoes or a Gucci bag. When we meet our friends in the metaverse, we want the avatar to look good. For some people, the avatar may represent a status symbol, which already prompts luxury goods manufacturers to establish a metaverse presence (e.g. Gucci or Burberry).

• Industry

The metaverse can also play an important role in industry, for simulation, optimization or training purposes. NVIDIA, a major semiconductor manufacturer, also operates the Omniverse platform, which allows companies to enter the metaverse world. BMW has already mirrored its production process in the Metaverse to run simulations or optimization processes. You can learn how the company benefits from this on YouTube. The Metaverse can also be used for new types of advertising.

During Corona, we learned how to conduct virtual meetings. In a few years, however, these meetings could look very different from the way we know them so far. If you want to learn more about this, I recommend the Microsoft Mesh website. According to Microsoft, we can collaborate and communicate with other people in a virtual space using holoportation. It doesn’t matter where the person is physically located or what language is spoken (simultaneous translation).

• Service sector

It is likely that Generation Z (born between 1997-2012) will be the first to use the Metaverse. Ernst & Young (EY), a multinational consulting firm is already using the Metaverse. A younger audience is to be advised on tax issues, for example. First banks especially in Asia are also starting to use the Metaverse. Many more will follow.

The metaverse as an investment opportunity

The metaverse is still insignificant from an investor’s point of view. However, should the adoption of the metaverse progress, it will be worth looking at whether a company has a compelling for the new world of the Internet. Opportunities will be found in IT services and software. But hardware and semiconductor manufacturers will also benefit. In addition, there are many possible applications in the entertainment industry, as well as in the consumer sector. Besides traditional asset classes, crypto assets could also benefit if the metaverse is built on a decentralized basis.

¹ Value creation in the metaverse | McKinsey

² Presence on https://decentraland.org, www.sandbox.game

For a glossary of technical terms, please visit this link: Fund Glossary | Erste Asset Management

Legal note:

Prognoses are no reliable indicator for future performance.