The revealing economics of the metaverse

At first glance it seemed crazy. A young friend had announced loudly and with pride in his voice that he had bought real estate in the Metaverse and was planning to build a house there. I asked why he needed a residency, why he didn’t just come over, do a few curls with Zuck, according to the promotional material, and then leave after attending a virtual concert with avatars of his virtual friends. It was kind of an investment, he explained. A place in the midst of all this desirable activity, he explained, was certainly to be appreciated.

A little thought convinced me that his plan wasn’t as crazy as it first seemed, nor as new or revolutionary as he might have thought. My young friend’s expectations of the Metaverse were completely in line with the basics of all money and investing. Just as there is nothing real or substantial about the house he has planned or the metaverse for that matter, there is nothing real or substantial about money or investing. There is no intrinsic value in any of these places. All value and all prospects for return depend solely on what people want and think other people want. There is nothing but that.

It is true that a metaverse house cannot keep its owner warm in the cold and cool in the heat. It also can’t stop the rain from falling on his head, even if he’s willing to keep that plastic helmet on 24/7. In that sense, it has less intrinsic value than a real building on a real lot. But the shelter provided by the actual structure, the intrinsic part, contributes little to its value. A house on a safe waterfront is worth much more than the same building on a descending high street. This difference depends entirely on people’s preference for the coast, and the success of the investment depends on people’s continued preference for the beach over Main Street. A little over a hundred years ago, fashion and taste made the Main Street location more appealing, and values ​​reflected that difference, as did revenue, at least until preferences changed.

It is the same with stocks and bonds. While stocks appear to have a closer connection to the physical world than the metavers, that connection has little or nothing to do with their value or prospects for valuation. Investors only hold a bond because they are confident that the bond will pay the expected interest and repay principal at maturity. Equities, too, offer nothing more intrinsic than the belief that the issuer is producing something that people will appreciate and continue to value in the future. Value and appreciation are completely dependent on these beliefs. There is nothing intrinsic or real world outside of them.

Indeed, the whole process is further removed from the physical world, as investors must also believe that the money that the bond or stock issuer is expected to pay will itself retain its value in terms of other things people want. And it all depends on what people think the money is worth or will be worth if the investment pays off. Nothing in money is intrinsic. Inflation today is an ongoing reassessment of people’s idea of ​​what that money is worth compared to other things. Even if people had gold coins in their pockets, there was nothing intrinsic. Gold has intrinsic value only to a jeweler and the people who wear it, and even then it’s only because they or others hold it in high esteem. Otherwise gold coins had value only because the community had agreed that they had value.

The story of a remote Polynesian island may offer perspective. Those who have visited the site for the first time have recounted how members of the community stored valuables in giant stone wheels that they rolled into the lagoon for safety. Once a prosperous member of the community had amassed enough wealth, they used it—perhaps in the form of shells that themselves were merely a store of value because the community had agreed that they were—to buy a wheel. The community kept track of who owned which wheels. If that affluent member of the community then decided to build a house, he could sell the wheel and use the payment from the shell to buy labor and materials. (If the community had a banking system, he could also borrow against the value of his wheel.) At a later date, he might decide to slim down and the whole process reversed, leaving him a safe store of value for would have his money. to his children.

Nothing in the Metaverse has less substance than what our prosperous Polynesian and his community valued. None of this has less substance than all modern investments. The young metaverse investor does not have to take into account the physical or the intrinsic. As with any other investment, all he has to do is think about how others will value his effort. It’s a bet, and possibly a good one, on the future popularity of the metaverse. mr. Zuckerberg owns a huge amount of property in the Metaverse. Since the place is digital and he creates it, his possessions can be considered infinite. He has a keen interest in promoting the attractions of the virtual resort he is building. If he succeeds, he will acquire a large number of shells with which he may be able to buy a physical island or a large yacht.

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