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Monday, November 28, 2022

3 Ways to Stake Your Claim to the $30 Trillion Metaverse

There are no shortage of high-growth trends for investors to be enamored with at the moment. Cloud computing, cybersecurity, telehealth, and even cannabis, represent sustainable double-digit growth opportunities.

Yet none of these opportunities offer the market potential of the metaverse.

Image source: Getty Images.

An up to $30 trillion opportunity is on investors’ doorstep

Put simply, the metaverse is the next iteration of the internet. It’s a 3D virtual environment that will allow people to interact with their surroundings, as well as each other. This means an entirely new digital ecosystem will be built within the metaverse.

According to Matthew Ball, the CEO of venture capital company Epyllion, the metaverse is an opportunity with many zeroes to back it up. In speaking with Bloomberg News in November, Ball had this to say:

“Even if you have more modest expectations, precedent from the digital economy, the internet, the mobile internet, suggests that this is a $10 [trillion] to $30 trillion opportunity that will manifest in a decade or decade and a half.”

By comparison, cloud computing has been one of the top-growing industries for years, and it’s “only” expected to top $1 trillion in market size by the turn of the decade. That’s a far cry from Ball’s projection of up to $30 trillion for the metaverse by 2031 to 2036. With forecasts like this, it’s no wonder investors have been willing to pile into this hypergrowth virtual ecosystem.

But there’s no one-size-fits-all way to invest in the metaverse. Rather, there are three ways investors can stake their claim to this potential $30 trillion pie.

Three golden eggs placed in a basket that's lined with one dollar bills.

Image source: Getty Images.

1. Diversify. Diversify. Diversify!

To begin with, investors can gain metaverse exposure by putting their money to work in metaverse-targeted exchange-traded funds (ETFs). The Roundhill Ball Metaverse ETF (NYSEMKT:METV), which Matthew Ball helped bring to market last year, is arguably the best example in the ETF space.

The idea behind a metaverse ETF is simple: Operating a virtual realm is going to require a lot — and I mean a lot — of working parts. There needs to be the computational power to support the metaverse, the networking and bandwidth to provide data, payments to handle virtual ecosystem transactions, hardware to allow users access to these virtual worlds, and identity security to ensure that digital assets and user identities remain protected. Mind you, this is just a small snippet of the physical and intangible needs of a massive virtual ecosystem. This means dozens of companies may play a role in supporting the metaverse.

The Roundhill Ball Metaverse ETF has 45 holdings, as of Feb. 3, with seven countries represented in the portfolio. Most importantly, the median market cap of these 45 holdings is $68 billion. In other words, the typical company being held by this ETF is going to be profitable and time-tested. While these stocks will have clear metaverse ties, there’s a really good chance these companies also have highly profitable core businesses that’ll fund metaverse research and development. Translation: You can sleep well if you choose to buy this ETF.

The one minor knock here is you’ll pay a 0.75% net expense ratio, which is a bit higher than the weighted average expense ratio for all ETFs.  But if the metaverse is everything it’s cracked up to be, a 0.75% expense ratio could be well worth it.

An engineer placing a hard drive into a data center server tower.

Image source: Getty Images.

2. Buy individual stocks with metaverse exposure

If ETFs aren’t your cup of tea, a second way to gain metaverse exposure is to directly invest in companies with metaverse ties.

The advantage of this method is it allows you to place greater weighting on the companies you feel will outperform. Plus, with most online brokerages eliminating commission fees and minimum deposit requirements, there are no fees or commissions to purchase stocks on the major U.S. exchanges. Thus, this method can save a little money, relative to purchasing an ETF.

On the flipside, buying individual stocks will require more initial and ongoing research. Thankfully, as noted, most of the companies involved in the metaverse are already well-established.

For example, Microsoft (NASDAQ:MSFT) has a variety of ways that it can benefit from the metaverse. The company’s cloud infrastructure segment, Azure, is already No. 2 in global cloud spending. Cloud computing and storage will be necessary to handle the mountains of data and information generated within the metaverse.

Microsoft also made waves with its announced all-cash deal to buy gaming giant Activision Blizzard (NASDAQ:ATVI) for $68.7 billion last month.  At the end of September, Activision had 390 million monthly active users, some of which are already playing games within virtual platforms.  The Activision deal is another way Microsoft can bring people into its vision of a digital/virtual ecosystem.

A person wearing headphones who's playing a game on their smartphone during an Esports tournament.

Image source: Getty Images.

3. YOLO with metaverse cryptocurrencies

For those of you with a high tolerance for risk (and reward), the third way to stake your claim in the $30 trillion metaverse is by purchasing relevant cryptocurrencies.

Whereas many of the companies associated with the metaverse are profitable and time-tested, most metaverse cryptocurrencies have only been around for a couple of years. It’s not yet clear if they’ll have the financial support or gaming interest to last for a significant length of time.

On the other hand, the two biggest players, The Sandbox (CRYPTO:SAND) and Decentraland (CRYPTO:MANA), have respective market values of $3.4 billion and $4.9 billion, respectively. If these two projects can consistently gobble up a significant portion of the capital being invested in virtual worlds, these market values could be an absolute steal.

Both The Sandbox and Decentraland have similar operating models. They’re both play-to-earn-styled games built atop the Ethereum blockchain. They allow users to purchase digital plots of land that can be upgraded or built upon to attract other users. These plots of land are stored as non-fungible tokens (NFTs), which provide immutable proof of ownership of a digital asset stored on blockchain. Whereas the ownership of in-game creations stays with the developer in traditional PC and console gaming, Sandbox and Decentraland allow users to own and monetize their own creations via NFTs.

Going the “you only live once” (YOLO) route with cryptocurrencies is effectively a bet on the metaverse being decentralized. This may well be the case. But with many established companies throwing tens of billions at the metaverse, like Microsoft, a centralized future is also a very real potential outcome.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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