Should Value Investors Invest in NFTs and the Metaverse? – DataDrivenInvestor

I would describe myself as a value investor. I’ve got a dusty copy of ‘The Intelligent Investor’, read Berkshire Hathaway’s annual letters and usually invest in unpopular companies with strong financials. But with NFTs, the metaverse and cryptocurrency everywhere, I can’t but help to check them out.
In my opinion, I would dare to say many value investors would probably be weary of NFTs because they aren’t explicitly cash generating entities in the sense that NFTs are about art creation or a place for showcasing brands in the metaverse. The value investor looks for businesses with strong cashflows, sustainable debt levels and most importantly is undervalued. In the world of blockchain where exactly are the strong cashflows? There are speculations of what could generate strong cashflows, but these haven’t been proven yet.
I checked out OpenSea and Decentraland to see if I could persuade myself that NFTs are good to invest in like how the internet was back in the 90s.
I like video games, computer games and so on. I can see the appeal of Decentraland — it reminds of games like SecondLife and Habbo Hotel. The only problem is that I was young then. Now, I’m married, have a kid and a full-time job, so I have no time to play games, usually. Furthermore, I seldom use social media such as Facebook or even YouTube. My online use pertains mostly to looking up facts quickly and writing on Medium.
Now, the question is whether the metaverse is worth investing in? With someone of my online habits, I doubt it. But, this is not saying the metaverse is unappealing, it’s merely saying that the attraction towards metaverse may better suit those who want to live a virtual life and isn’t so consumed by reality’s worries.
Anyway, I went into Decentraland and here’s what I think: It’s alright. It didn’t appeal much to me because I don’t like being virtual much, but I can see the appeal. You can customise your own things like how you do in MineCraft, and you can socialise with others. Perhaps, if I were more social, I could see the appeal of Decentraland, but at my stage in life, I wouldn’t play it much. In a way, Decentraland reminds of DAO (decentralised autonomous organisation) meets RPG (role playing game).
As a counterargument to my experiences, this article really explains how Decentraland should be experienced. If you think the article is TLDR(too long; don’t read), here are some summary points:
Here’s something else value investors probably should ponder over when thinking about the metaverse. “If you have easy access to something but you don’t experience it, why should you invest in it?” I pose this question because many investors are too lazy to experience something. Usually, they invest in the hype or avoid experiencing something and convince themselves that they understand it.
If the metaverse had a high barrier to entry, you could use mental models to ponder over it, but the metaverse is easily accessible. Lived experiences are sometimes better than analogous experiences.
With regards to Decentraland and experiencing it, I can see people using it. It is fun, but whether or not if it will be fun for the wider community, like how Facebook is, I simply don’t know. Facebook has a very low ‘time investment’* barrier to get good enough at it. Decentraland may have a higher barrier because you need to design a character, navigate around the world and perhaps even need to spend money to get the full experience. With Facebook, it’s just doing a few clicks and you don’t really need to pay anything to get most of the features.
*By this term, I mean how much time is needed to understand the platform’s futures. It’s quite subjective.
Warren Buffet gives this advice: “Don’t go [to auctions]”. There’s some wisdom behind this. It’s avoiding the endowment effect. Basically, we pay more for something if we already own it or have near ownership. Being the top bidder for something gives us the feeling of near ownership and if someone outbids us, then we must outbid him/her.
OpenSea has some amazing artwork. I would encourage you to see check it out. However, would I buy them as an investment? Regardless of the astronomical prices of Ethereum, I probably wouldn’t. I have no idea how to model their future value or what to do with them as I hold onto them. Maybe, I could open up a digital gallery and charge people to attend, but I’m too lazy for that. Maybe at most, I might personally buy a great piece of art for enjoyment rather than as an investment.
For value investors, we probably wouldn’t really buy from OpenSea because it really is just an auction house. I don’t really want to downplay the enjoyment that art brings to other but simply you are more likely to receive a return on investment with shares than with art.* At least art provides smiles.
*You can still have a monetary return on investment with art; all you need is a buyer.
I’m not convinced that the metaverse or artwork NFTs are great opportunities for value investors because neither are understood too well as investment opportunities and we just don’t know if this is something long lasting or a technology fad like 3D television.
However, the idea of blockchain is great for businesses. Personally, I believe blockchain technology will create benefits to society overtime like how the internet is. For me, a company that can use blockchain effectively to reduce administrative work is something worth considering.
I read a news article about Alfa Romeo giving away NFTs with the purchase of their latest SUV. By doing so, the car’s service history will be attached to the NFT. The idea was not really fleshed out but it’s a practical way of using blockchain for the consumer.
Another way companies are using NFTs is for advertising and brand loyalty. For instance, major fashion brands have set up shop in the metaverse. I’m not too sure if the purpose is to sell virtual fashion or to act as an advertising place for ‘real life’ fashion. Either way, if it drives up sales then that’s a good thing. — Yes, you are still investing in the metaverse indirectly, but the risk of money loss is mitigated as fashion brands usually have a variety of distribution channels.
One big advantage that NFTs do have is that they are usually scarce*. There should only ever be one original NFT of its kind whereas with shares, they can be dilutes quite easily through capital raising, management options or dividend reinvestment. It is only when the management team actively buys back shares or improve profits without issuing capital that the stock becomes scare and increases in value. NFTs are less likely to suffer from this.
*NFTs could suffer from dilution if the artist makes makes too many art pieces or the metaverse has more real estate than buyers available.
For values investors, buying a stake in the metaverse or purchasing artwork NFTs may not offer a margin of safety simply because the NFTs available don’t offer signs of positive cash flow. However, value investors can still invest in companies that are venturing in NFTs. Whether or not they are successful is another question, but if you’re a value investor with a belief in NFTs then this would be the best option for the the time being.
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Written by
I write to broaden my understanding of the world.
empowerment through data, knowledge, and expertise. subscribe to DDIntel at https://ddintel.datadriveninvestor.com
Written by
I write to broaden my understanding of the world.
empowerment through data, knowledge, and expertise. subscribe to DDIntel at https://ddintel.datadriveninvestor.com

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