Exploring the Viability of NFTs and the Metaverse for Value Investors
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Chapter 1: The Dilemma of Value Investors
As a dedicated value investor, I often delve into the pages of 'The Intelligent Investor', absorb Berkshire Hathaway's annual letters, and typically favor investing in companies that fly under the radar yet possess solid financials. However, with the rise of NFTs, the metaverse, and cryptocurrencies, I find myself curious about their potential.
Many value investors might approach NFTs with skepticism, as they don't inherently generate cash flow. NFTs primarily revolve around art and brand presence in the metaverse, while value investors seek businesses with robust cash flows, manageable debt levels, and, crucially, those that are undervalued. In the realm of blockchain, where can we pinpoint reliable cash flows? Speculative discussions abound, but the evidence remains elusive.
I explored platforms like OpenSea and Decentraland, hoping to convince myself of their investment potential akin to the internet boom of the 1990s.
How Engaging is the Metaverse?
I enjoy video games and can understand the allure of Decentraland, reminiscent of SecondLife and Habbo Hotel. Yet, my current reality—marriage, parenthood, and a full-time job—leaves little time for gaming. My social media presence is sparse, restricted mainly to quick fact-checking and writing on Medium.
Thus, is the metaverse a wise investment? Given my online habits, I doubt it. This isn't to say the metaverse lacks appeal; it seems more suited for those seeking a virtual existence, unencumbered by real-world responsibilities.
My experience in Decentraland was underwhelming. While it offers customization akin to Minecraft and opportunities for social interaction, my current life stage limits my engagement. The platform feels like a fusion of Decentralized Autonomous Organizations (DAOs) and role-playing games (RPGs).
Key Takeaways on Decentraland:
- Engage in virtual clubs, art exhibits, and races.
- Participate in gaming and marketplace activities.
- Potentially earn cryptocurrency through real estate ventures.
- Have a voice in governance through voting.
A pertinent question arises for value investors: "If you can easily access something but don’t engage with it, why invest?" Many investors invest based on trends rather than personal experience.
Regarding Decentraland, while it can be entertaining, its broader appeal remains uncertain. Unlike Facebook, which has a low time investment barrier, Decentraland requires significant effort to fully enjoy, from character creation to navigation.
Chapter 2: The Value of Art and NFTs
How Much Do You Collect?
Warren Buffet wisely advises against auction visits, as it helps avoid the endowment effect—where ownership can inflate perceived value. OpenSea showcases incredible artwork, but would I invest in it? Despite Ethereum's soaring prices, I'm hesitant. Lacking a clear model for future valuations and with no plans to create a digital gallery, I might only purchase art for personal enjoyment rather than as an investment.
For many value investors, platforms like OpenSea resemble auction houses more than viable investment opportunities. While art can bring joy, it typically offers lower returns compared to equities, although a buyer can always emerge.
Trusting NFTs as Investments
I remain unconvinced that the metaverse or NFT art presents solid investment opportunities. There's still ambiguity surrounding their longevity, reminiscent of technological fads like 3D televisions.
However, I believe blockchain technology holds promise for businesses, much like the internet did. A noteworthy example is Alfa Romeo offering NFTs with their latest SUV, attaching the vehicle's service history to the NFT—a practical application of blockchain for consumers.
Fashion brands are also leveraging NFTs in the metaverse, though it's unclear if their goal is to sell virtual items or simply advertise real-world products. Either way, if it boosts sales, it’s a positive outcome—indirectly investing in the metaverse while minimizing financial risk, as established brands have diverse distribution channels.
An Important Consideration
One notable advantage of NFTs is their scarcity; each original NFT is unique, unlike shares that can be diluted through capital raises or management options. Only when a company buys back shares or improves profits without issuing new capital does a stock become scarce, potentially increasing its value.
Conclusion
For value investors, investing in the metaverse or NFT art may lack sufficient margin of safety, given the absence of positive cash flow indicators. Nevertheless, investing in companies exploring NFTs could be a prudent alternative for those who believe in their potential.