Virtual Real Estate May Not Appreciate Like Physical Real Estate
By: Jeran Miller
Tags: Metaverse, Blockchain, Virtual Real Estate, Real Estate, Nft

A realtor’s concerns regarding their potential as long-term investments

Image provided by user Benholfeld via Wikimedia Commons

Real estate is powerful. It’s one of the most reliable asset classes, and much multi-generational wealth has been built on top of it. People everywhere aspire to own some, and now that NFTs have enabled the ownership of digital parcels, the virtual landgrab is officially on. There are naysayers, of course. However, those who have made it their business to understand the implications of “Web 3.0” are nearly unanimous in their excitement to claim some digital space for themselves. Some, like myself, are more hesitant. But they mostly make reference to the bubble-like nature of the current pricing trends. My own apprehension is more related to concerns about the long-term investment value of this whole asset class.

In short, I doubt that an investment in virtual real estate will perform like most investments in physical real estate do. They certainly have potential over the short term. We see that in the blooming resale market. They also have some capacity for generating revenue during their use. But, will they appreciate over the years like brick-and-mortar homes do? I’m dubious about that. Here’s why.

Population arcs

My first time spent in a beautifully crafted and open virtual world was with a game called EverQuest. I got into it around the year 2000, and it was probably the single most memorable gaming experience I have ever had. At that time, though, you couldn’t own anything in its world. You were merely a participant. I loved the game all the same, and I can only imagine my excitement if I could have bought my own treehouse in the city of Kelethin, or maybe opened up my own shop in Freeport. Regardless, I spent hours upon hours exploring the world of EverQuest, and thousands of people were along for the ride. It felt magical.

In 2004, word came down from Sony that EverQuest 2 was on its way. And in November, it was out. I recall how the talk in our guild during the run-up to its release was “Who’s sticking around?”, and the painful realization that — despite all the hours and dollars we sunk into the first title — more than half of us were on our way over to EQ2. On the day the sequel came out, the guild was rather suddenly gutted of members, and the whole world of Norrath did seem to be a bit emptier. But, it turned out that the blow we felt when EQ2 launched was really just a jab, and a right cross was following shortly behind. World of Warcraft landed later that month, and it was basically a wrap from then on. Everyone wanted to play WoW. As the new MMORPG’s population grew, it felt as if a hole had been punched in EverQuest’s bucket, and players were draining out of the game by the day.

This was to become the pattern across basically all open, multiplayer worlds. Even the mighty World of Warcraft wouldn’t be immune. Its user numbers would grow until about 2010, and then trend back down, ending with a sort of “long tail” pattern that continues playing out to this day. Among MMOs and other games, the population figures tend to operate according to the same dynamics: they increase alongside the excitement surrounding the latest virtual world, then flatten, and finally decrease as enthusiasm wanes and other options proliferate.

But, compare these virtual world population charts to the actual populations of countries and states. It’s a very different pattern, and this is critical for real estate. Real estate consistently appreciates over the long haul largely because human populations rise, but the amount of land stays the same. You can essentially count on a general increase in demand, without a corresponding increase in supply. Our experience with virtual worlds —although admittedly they are not metaverses — indicates that they do not behave in the same way. Their population grows, and then tapers off. Demand is not on a steady path upward when viewed in the long term.

Not enough scarcity

The supply side is also problematic. The constant innovation and iteration typical of digital life means there’s no shortage of virtual space for us. While many individual metaverses are governed by DAOs that make it difficult to arbitrarily increase the supply of parcels, there’s nothing inherent to the digital medium to stop land from being minted and driving down prices. So, even if weren’t possible to have more land minted on platform X, there’s always platform Y. As things stand in the real world, there is no alternative to our current platform: Planet Earth. Moreover, just like the old real estate chestnut goes, the thing about its land is “they’re not making any more of the stuff”.

Because we can mint new land or establish new metaverses altogether, virtual real estate has a potentially infinite supply. That doesn’t eliminate scarcity altogether, of course. A given metaverse may mint X number of parcels and that’s it. Or, there may be only a certain amount of land close to some desirable feature. That’s also scarcity. But, it’s of a different sort than the basic scarcity we experience with land in the real world.

It is true of physical real estate that it generally appreciates over time, but this is due to its particular supply and demand situation. Both of those forces get distorted significantly in the virtual realm. We see a bell-like arcs in the populations of people demanding the land, and there is always the possibility of creating more supply somewhere.

Volatility

I also believe virtual real estate is likely to remain somewhat volatile as an asset — more so than its physical counterpart, anyway. The friction in the market is just so low. To illustrate what I mean by that, let’s imagine we live in a place on Earth called “Foolistan”. It’s a nice-enough country, Foolistan, but it’s run by idiots. We, its informed but helpless citizenry, are subject to their terrible policy decisions. And as a result, we feel a certain level of motivation to get ourselves out. Fortunately for the State, there is a lot of friction in the emigration process. We need passports and visas, we need to sell off our larger assets and find a way to transport the rest, we need to learn the new language and customs of whatever country we’re moving to, and so on. The fact of the matter is that most people will need to experience a rather high level of distress before they’re willing to go through the trouble of moving to new lands.

In the virtual environment, such barriers to entry and exit are quite a bit lower. We are capable of moving to a new metaverse rather quickly if it interests us. Our tokenized assets are quite liquid compared to physical real estate. And, to top it all off, new worlds are opening up all the time! This will likely make virtual real estate riskier and more volatile than its physical counterpart. The Internet is fickle, and even if you choose well and invest your time and money in a wonderful platform, there’s always the possibility that a better alternative (or a sequel) could arrive and crash your asset’s worth by making it “yesterday’s meta”.

Finally, there’s the common practice of basing a virtual real estate economy on the platform’s native cryptocurrency. These are currently very unstable relative to most fiat currencies, and their swings in value are likely to affect the markets built on top of them. Even if things in your chosen metaverse are going great, if there’s a problem with Ethereum generally(or whatever its preferred currency may be), you can imagine that there will be repercussions in your investments.