The Metaverse.

An op-ed by Zen Zijlstra — Executive Director — Investments @ Hatchworks and analyst Ivan Santana. Contributing author Jaap Spreeuwenberg, investment committee member @ Hatchworks.

Hatchworks has prepared a report on the Metaverse, which is at the forefront of the Web 3.0 internet evolution. The potential of this internet evolution recently attracted Web 2.0 companies like Facebook, which changed its name to ‘’Meta’’ and shifting towards a Metaverse entity. This may serve as a catalyst for other Web 2.0 tech companies like Microsoft, Google and Apple to explore the potential of the Metaverse. The market size for the Metaverse in 2020 was estimated at $47.69 billion. The forecasted market opportunity is expected to be $800B by 2024 according to Bloomberg Intelligence.

Source: Bloomberg Intelligence.

As the Metaverse technology is still in its early stages, we can shortly describe it as the space where the physical and virtual worlds will converge, unlocking a new kind of digital economy that might transcend anything we have at our disposal at the moment. Think of 3D virtual worlds where people could travel to different locations and connect with each other in real-time. The Metaverse will enable a new era of labor that will give new opportunities to individuals and companies to access a new high value digital economy.

The Metaverse will need to be live and synchronized at all times. It will have a low entry barrier, therefore being accessible for the masses. There will be lots of economic activities there, which will fuel the system’s development on its own. Anyone will be able to contribute with their own ideas in the system, both individuals as well as large corporations will be able to provide experiences both in open or closed platforms. Today, companies offer their Metaverse experiences primarily through closed platform systems, which means that their software or hardware is not compatible with other platforms. However, by moving towards a more open platform, its interoperability could be high which allows all users, developers and corporations to participate equally.

The opportunity of the Metaverse.

It’s no wonder that Facebook (Meta) will increase its CAPEX by $10B this year to invest in the Metaverse, as they want to be one of the key drivers of this upcoming revolutionary technology. They have already invested on the hardware side, years ago, via their purchase of Oculus; a leading VR kit provider for consumers (now called Meta Quest). None of the FAAMG companies can be left outside of the equation. Not only Facebook (Meta), but Microsoft, Amazon, Apple and Google (Alphabet) which are the biggest tech companies in the world and with a huge presence in the virtual world already, may end up participating in a meaningful way in this paradigm shift.

There is value in being an early adopter of this technology. If we analyze the top 10 most valuable public companies today on the planet, most of them are technology giants. The Metaverse has the true potential to be the internet’s natural successor. The pandemic situation has made us realize that much of our work can be done remotely and in a more efficient and cost effective way.

In a few decades from now, companies and regulations will be much more advanced in terms of remote work, which will allow the Metaverse to have a much easier time to gather aspiring laborers to access it irrespective of their geographical location or socioeconomic background, enabling them to access this whole new digital economy.

The Metaverse will also potentially have even greater reach, time spent and economic activity in comparison to the internet, bringing it’s economic upside even further than its predecessor. Furthermore, as this whole new platform will be created, it will also need a large infrastructure to maintain it. New companies will surge to manage those new technologies, including payment processing, ID verification, security, ad delivery technology, hardware companies etc. Other sectors that may benefit from the Metaverse are teaching, engineering, health and entertainment.

For example, just imagine a history class where children will be able to experience how Ancient Greece was or go even further back in time and experience our planet when the dinosaurs were still alive. The Metaverse will be able to make those experiences possible and even more.

Kieran, NFT specialist of the SoundR project, which allows for VR concerts to happen, stated “…the true metaverse will not be one that rules them all, it will be an interconnected assortment of brand owned and community built offerings that all come together via bridges of interoperability for each user to navigate to their hearts content.”

Brands such as Adidas have seen how current blue chip projects like Bored Ape Yacht Club and Punks Comics have invigorated and empowered their communities to take the narrative by the horns and run with it, and simply put, they wish to be a part of it. Web 3.0 is more than just brands building what they think consumers want. It’s being built by the consumers, for the consumers and brands are having to understand that or are going to be left behind.

“The true Metaverse will not be one that rules them all, it will be an interconnected assortment of brand owned and community built offerings that all come together via bridges of interoperability for each user to navigate to their hearts content.” — Kieran from SoundR

Which companies could lead the industry?

To date, we already have several companies that see its potential and are investing heavily in R&D in order to be pioneers in the sector and staying competitive.

We have already mentioned Facebook, which recently rebranded to Meta, that has a current market cap of $940B. In the company’s presentation that took place on the 28th of October, Mark Zuckerberg stated that their focus will be to build an infrastructure for the Metaverse and leave its social network status behind in an attempt to be one of the first movers in the Metaverse industry. He mentioned to invest $10B this year, and aim to deploy around $180B over the next 10 years. However, Facebook (now Meta) is not alone in this journey. Other companies are also trying to capture global market share in this industry, namely:

Microsoft — Market Capitalization $2.52T.

A well established company and with millions of users spread around the world, Microsoft becomes a strong contender to enter the Metaverse “race”. They own the ‘’HoloLens’’ which is a pair of mixed reality smart glasses and a piece of hardware that might be a key component of the Metaverse. Furthermore, they also own the Xbox, Xbox Live and Minecraft, connecting millions of players around the world, therefore, already offering experiences that might be crucial in the construction of the technology needed for what the Metaverse may become. Finally, they also offer a service called ‘’Microsoft Mesh’’, which is a mixed reality platform where users can already use their own avatars for work and social purposes remotely. If we connect the dots, it becomes clear that Microsoft will play a key role in this virtualized future of labor and information processing.

Epic Games — Market Capitalization $28.7B.

Epic Games CEO Tim Sweeney has been a proponent of the Metaverse vision for a few years already. Epic Games has already taken a big step forward with their game Fortnite. A game that started as a battle Royale only, is now slowly being transformed into a social virtual world with a life of its own. Right now players can create their own unique avatars, choose their skins and the game already has its own currency called ‘’V-Bucks’’ which is used to buy items in this digital world only.

Fortnite has also staged concerts of huge music stars like Ariana Grande and Marshmello with millions of players watching live and simultaneously all around the world. People gather to watch concerts, movies and much more in the game. As the time passes Fortnite starts to look like an important piece of the Metaverse puzzle. This year alone Epic Games announced that they have received $1B from Sony and other tech companies that want to help Sweeney’s vision of building the next stage of the internet.

Source: Global X ETFs, Stream Charts, Billboard.

Roblox — Market Capitalization $73.2B.

One of the mobile gaming industry leaders, Roblox had their IPO in March. Along with Fortnite, Roblox is positioning themselves as a strong competitor in the gaming platforms that are offering the closest metaverse-like experience. They are among the top 3 most downloaded apps for IOS users and achieved tremendous success, especially among children (around 43.2M DAU). It’s possible to play, create and socialize within the platform. Roblox already possesses a few characteristics that are already important in the Metaverse experience. The game, possesses a live economy with their own currency called “Robux”. Developers earn around 25% of the Robux token that is spent by players. Developers can also generate extra income by selling their in-game creations at the game’s marketplace.

In-game avatars are extremely personalized and an extension of the gamers self. As you enter any in-game experience, you will always use your unique avatar. This game component brings an identical expression by players that incentivizes them to invest in new clothing, hairstyles, skins and accessories that can be purchased from digital designers and artists that can dedicate themselves entirely to this activity.

Even known brands like Nike and Gucci have already recognized the importance of the Roblox digital economy by selling digital replicas, also known as NFTs inside the game. For example, Gucci purse has been sold for $4,115 in the game, whereas its physical version costs around $3,400. This purse can only be used in the game and was sold exclusively for Roblox players. Roblox stated that in 2020 alone, its users earned around $329.7M.

Just like with Fortnite, Roblox also hosted famous artist concerts as well. Lil Nas X, an American rapper, performed inside the game and had close to 37M visits to his game concert experience. Many key components for the Metaverse are already present in Roblox, giving them a big advantage in the Metaverse race.

Source: Global ETFs, Fandom, The United Nations World Tourism Organization (UNWTO). Note: Roblox Adopt ME! annualized visits since release in July 2017 through August 2021.

Nvidia — Market Capitalization $816B.

Nvidia, a company that designs, graphic processing units for gaming and professional uses. ‘’Omniverse’’ is Nvidia’s open source platform that allows users to build their own virtual worlds. They intend to offer interesting use cases to the Metaverse, like running a simulation where autonomous drive software could run into millions of driving scenarios without any real world accident risk, that way the software learns and is able to reach the physical world as a much more advanced final product. Nvidia also develops hardware and could be a potential hardware manufacturer for Metaverse purposes.

Unity Software, Inc. — Market Capitalization $49B.

Unity Software is a video game software development company. Their platform allows the creation of real time 2D/3D content. Their creations are used for gaming and even filmmaking as well as VR/AR. They currently own 2 of the biggest 3D video game engines and 94 of the largest development studios are using their engine. They may play a big role in the Metaverse by allowing new businesses to enter the Metaverse industry.

Decentraland — Market Capitalization $6B.

While all of the platforms above run in a traditional centralized manner, Decentraland as its name implies, is a 3D virtual world platform that runs completely decentralized on the Ethereum blockchain. It offers its users the possibility of creating experiences, content and apps that can be monetized. Players can buy pieces of land which can be used to build upon and create their own environment. The game also offers NFTs that can be acquired by using the game’s cryptocurrency called $MANA.

Some key features within the Decentraland ecosystem where players could earn $MANA:

  • Casino’s & Games.
  • Advertising.
  • Concerts/Events.
  • Business Offices.
  • Museum/Art Galleries.

Just as the emergence of the cryptocurrency space dared to endow users with control over their own finances, metaverse gaming on the blockchain threatens to do the same for entertainment. Monetization is a crucial aspect of blockchain-based gaming, and in addition to catering to a growing play-to-earn (P2E) gamer base, which JEDSTAR is at the forefront of, allowing users to create their own monetization strategies within its immersive virtual environment will radically change current economic models. — Josh Wu Hu, CEO of Jedstar

NFTs which are Non-fungible tokens, refers to pieces of digital content that are unique and cannot be exchanged at equivalency. Fungible tokens on the other hand, like bitcoin, are just the same as any other token anywhere in the world, therefore, can be exchanged and used as a medium of exchange.

NFTs could play a crucial role in the Metaverse. NFTs can represent physical assets like real estate, artwork, game skins, collectibles etc. The ones that are based on blockchains have so far been a great success can be traded on the open market such as ‘’Rarible’’, ‘’OpenSea’’ or “Atomichub”.

Once you buy an NFT on the blockchain, you become the owner of a unique piece of digital asset that although anyone can replicate its looks, the ownership of the original one will always be yours. The NFT market has skyrocketed recently both on the blockchain and in the Metaverse like in Fortnite and Roblox. This could be the beginning of a market that will only grow as the Metaverse develops and the digital economy becomes more relevant during the process.

The Metaverse addressable market by sub-themes. Source: https://markets.businessinsider.com. Each of the companies above are addressing their own specialized product/service that might in the future contribute to the Metaverse infrastructure.

Investing in the Metaverse.

This year alone Crunchbase reported that over $10B in venture funding are being directed towards the Metaverse related companies. To compare with last year’s numbers, there was around $5.9B invested in this category. An increase of 69.4%.

Data showed that the most venture funding categories were:

  • Gaming — $7.5B.
  • Online Gaming — $2.5B.
  • Augmented Reality (AR) — $2.1B.
  • Virtual World — $62.8M.

Although, the Metaverse related projects have seen some all time high funding, there is likely much more capital inflows coming as we are still far from ready to have a fully functional Metaverse. We could also see some future funding to various other sectors like networking, virtual platforms, computing processing power, payment services, cyber security, hardware, blockchain as well as crypto currency projects.

Metaverse opens up opportunities for individuals and also communities. I envision Metaverse to be the new Utopia and shall function as a future playground in which one can use it not only for fun and play but also for work, to chill out, nurturing and unleashing imagination and creativity, empowering science and learning experience, preserving heritage and culture, or simply owning a piece of that dream that one cannot afford in the real world plus if design properly it can be just the right place for us to also get our zen moment for some peace of mind and maybe, just maybe too, future war can happen without any bloodshed in Metaverse world hopefully. Whether we like it or not, metaverse is coming so we can choose to miss out or be ready for it and seize the opportunity when it comes knocking. — Karen Yap, head of business development at SkillGaming.

Related Investments

  1. Equities — We’ve already discussed a few that are working directly in the development of this technology. Like the FAAMG giants, Roblox, Unity software and NVIDIA are a few examples of equities that may benefit from the Metaverse development.
  2. Cryptocurrency Projects — There are some projects in the crypto universe that are also becoming part of this tech disruption. However, it’s worth noting that those projects are highly speculative and demand a high risk/reward tolerance. Decentraland, The Sandbox, Enjin Coin and WAX are just a few examples. SkillGaming has also crafted plans for its own Metaverse, focusing on a unique hyper economy, game-fi and NFTs.
  3. ETFs — Another indirect play is the first Metaverse ETF that was launched in June this year. The Roundhill Ball Metaverse ETF (META) tracks the performance of globally-listed companies that are related to the Metaverse. They brought a great opportunity to invest in the Metaverse theme for those with a lower risk tolerance. Some of its top holdings are Nvidia Corporation, Roblox and Microsoft.
  4. Grayscale Investments — Grayscale is a company that manages digital currency investment funds. Headquartered in New York City, the company operates under a proper regulatory framework and offers a secure and compliant way for investors to get exposure to products related to the digital currency asset class. Their current AUM is around $60B.
  5. Metaverse Index — Metaverse index is a decentralized and autonomous asset manager created in 2020 on the Ethereum blockchain. It’s like a traditional ETF. They offer a basket of crypto products that captures the Metaverse thematic and with their $MVI token the investor is able to diversify their portfolio in a less volatile manner. Since its launch in April, the Metaverse Index has gained approximately 175% in valuation. However, it’s worth noting that it has also seen a drop of 70% when the price reached its bottom in June, 2021.
Metaverse Index. Source: https://www.indexcoop.com/mvi

The significant opportunity in the Metaverse lies in the convergence of what currently are separate markets. Gaming, social media, fashion, to name a few. Facebook, Instagram and Twitter changed the social conversation, and Amazon disrupted retail. If you extrapolate that and imagine how the Metaverse creates a digital identity as a layer on top of the world, you can see traditional companies as LHVM, who successfully navigated the online revolution of the last decades, transforming into Metaverse players. That, or they will be replaced by new fashion& design houses such as RTKFKT. For every company that successfully survived the last decennium with the rise of web 2.0; the new challenge lies ahead in adopting a web 3.0 version of themselves. So from an investment perspective I believe it’s not only important to see where you can go long, but also keep an eye on how the companies in your portfolio are adapting this change.

At this stage we are still in the Napster and Netscape phase of web 3.0. Standards are very simple, and JPGs refer to images on a Google Drive and are not really owned by its users. Items are issued by contracts that are just a string of numbers. Just as DeFi boomed after 2015 with the development of the ERC20 standard, the real future in the Metaverse for crypto investors may be the development and adoption of new standards for the Metaverse, such as Lukso and Digitalax are pioneering.

Risks

There are certain risk factors involved that give us cause for concern. These are:

  • Data: Digital data is already important today and will be even more important in a digital world. Social media companies have come under fire by regulators for abusing data privacy laws. In the Metaverse it’s still unclear if the user will have full rights to their data, avatar and virtual assets or if the companies will have full ownership of those, therefore giving them power over the users. We have seen the recent power of social media in shaping our consumer needs and even political decisions. This is something that will need to be addressed if we want to have a fair more friendly user environment.
  • Health: We do not have long-term studies on how much our physical and mental health might be impacted by spending too much time in an immersive reality. Today there are still many people that complain about dizziness and discomfort when using VR headsets for a long period of time. Recent studies point towards social media as being the culprit for the increase of anxiety and depression among younger generations and this issue might be amplified by the uncontrollable use of this new technology.
  • Security: Unique avatars, assets, transactions, and much more will be possible inside the Metaverse and for this reason there will be malicious users that will try to take advantage of this environment for cyber attacks. It could be very damaging for someone in case a malicious hacker steals his/her unique avatar and starts to perform actions without your authorization. Virtual assets will also be extremely valuable, which will make them a target for bad actors in the space. A very robust security will need to be in place for these virtual worlds.

Hatchworks Takeaway

The Metaverse is an upcoming revolutionary digital universe that could disrupt the current physical economy we live in. The Metaverse could change the way how we interact with each other and opens a whole new digital world where individuals and corporations may find new ‘’digital’’ ways to become operational. Hatchworks believes that the Metaverse could throughout the years, create billions of dollars of new opportunities in this digital space.

The Hatchworks Team

Disclosure: Hatchworks is an investor in a range of equities, gold, bonds, bitcoin and other assets on a proprietary basis. The information provided in this document is not investment advice nor is it a solicitation to invest in any asset. For webinar, social media appearances or a pdf copy of this report, you may send an email to info@hatchworksvc.com.

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Heading up the group’s R&D activities for Hatchworks.

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