At first glance, it seemed crazy. A young friend had announced, loudly and with pride in his voice, that he had purchased real estate in the metaverse and was planning to build a house there. I asked why he needed a residency, why didn’t he just visit, shoot a few curls with Zuck, as per the promotional material, then leave after attending a virtual concert with avatars of his virtual friends. It was a kind of investment, he explained. A place in the midst of all this desirable activity was, he explained, bound to be appreciated.
A little reflection convinced me that his plan was neither 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 entirely consistent with the basics of all money and investing. Just as there is nothing real or substantial about the house he planned or the metaverse for that matter, there is nothing real or substantial about money or investing. In none of these places is there intrinsic value. All value and all prospects for return depend solely on what people want and think other people want. There is nothing apart from that.
True, 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 structure on a real plot. But the shelter offered by the real structure, the intrinsic part, contributes little to its value. A house on a secure waterfront is worth much more than the same building on a declining main street. This difference rests entirely on people’s preferences for the seaside, and the success of the investment depends on people’s continued preference for the beach over Main Street. Just over a hundred years ago, fashion and taste made the Main Street location more appealing, and values reflected that difference, as did earnings, at least until preferences changed.
It’s the same with stocks and bonds. Although stocks seem to have a closer connection to the physical world than the metaverse, that connection has little or nothing to do with their value or prospects for appreciation. Investors hold a bond only because they are confident that the bond will pay interest as expected and return principal at maturity. Stocks, too, offer nothing more intrinsic than the belief that the issuer is producing something that people will appreciate and continue to appreciate in the future. Value and appreciation depend entirely on these beliefs. There is nothing intrinsic or real world beyond them.
Indeed, the whole process is further removed from the physical world as investors must also believe that the money 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 when the investment pays off. Nothing in money is intrinsic. Today’s inflation is a continual reassessment of people’s notion of what that money is worth relative to other things. Even when 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 is only because they or others hold it in high esteem. Otherwise, gold coins only had value because the community had agreed they had value.
The story of a remote Polynesian island might offer perspective. Those who have visited the place for the first time have told how community members stored valuables in giant stone wheels which 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 seashells which were themselves only 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 prosperous member of the community then decided to build a house, he could sell the wheel and use the payment from the seashell to purchase labor and materials. (If the community had a banking system, he could alternatively borrow against the value of his wheel.) At a later date, he could decide to downsize and the whole process could be reversed so that he could have a safe store of value for will to his children.
Nothing in the Metaverse has less substance than what our prosperous Polynesian and his community believed to be of value. None of this has less substance than all modern investments. The young metaverse investor does not need to consider the physical or the intrinsic. As with any other investment, all he needs to consider is how others will value his stake. 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 holdings can be considered as 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 seashells with which to buy perhaps a physical island or a large yacht.