Big Business is Coming to the Metaverse

A report by McKinsey on ‘Value Creation in the Metaverse’ begins by pointing out that with its potential to generate up to $5 trillion in value by 2030, the metaverse is too big for companies to ignore. To put this in perspective, this is the same size as the world’s third largest economy, which is that of Japan.

In 2022 alone, according to McKinsey, upwards of $120 billion has been invested in metaverse projects, 79% of consumers already using the metaverse have made a purchase, and over 15% of corporate revenue is expected to come from it in the next five years. And looking at the inflow of investment, it’s important to note that in 2021, the investments were only worth $57 billion, which is significantly lower than the first six months of this year.

Interest in the metaverse is also growing, according to the McKinsey report. It says, Google searches for ‘metaverse’ skyrocketed by 7,200 percent in 2021, and Roblox, an online gaming platform, reported over 55 million daily active users in February 2022. Meta has committed $10 billion to its Reality Labs division and

Microsoft is planning a $69 billion acquisition of gaming company Activision Blizzard. As we can see, some of the Big Tech names are already steaming ahead here.

What is driving investors to the metaverse?

The answer is that there are numerous factors that are attracting investors. The advances in the technology needed to run the metaverse is one, a growing demographic of those who are in favour of a metaverse (hello Gen Z), an a rise in consumer-led brand marketing that is attracting users to the earliest versions of the metaverse. This has largely been driven by gaming, as well as the emergence of metaverse apps for socialising, fitness, retail, virtual learning and more.

There is also consumer excitement building around the concept. McKinsey surveyed 3,400 consumers and company executives. The research found that around 60% of consumers using early versions of the metaverse “are excited about transitioning everyday activities to it,” and mentioned connectivity with other people as being one of the biggest drivers of interest. They are also interested in exploring digital worlds.

The sectors where growth is expected

Significantly, 95% of business leaders expect the metaverse to have a positive impact on their industry within a decade, with 61% thinking it will only have a moderate impact McKinsey’s report says the metaverse is the biggest new growth opportunity for several sectors in this decade, namely consumer packaged goods, retail, financial services, technology, manufacturing and healthcare.

Although the growth impact will vary amongst these sectors, McKinsey suggests the market impact on e-commerce by 2030 will be in the range of $2 -2.6 trillion.

Virtual learning is likely to see revenues of $180 billion to $270 billion, while advertising could rake in up to $206 billion. Interestingly, the gaming market, which is where a lot of metaverse action is happening right now, may only see revenues of up to $125 billion.

How to capture the value of the metaverse

The report states that by 2030, more than 50% of live events could be held in the metaverse, and that over 8-% of commerce could feel the impact of consumer behaviour in the metaverse. So, how can business leaders make the most of this new opportunity? McKinsey offers a three-step strategy:

  • Develop a value-focused strategy by defining your goals and the role you want to play that will generate value
  • Test, learn and adapt by launching activities, monitor the results and refine the activity
  • Prepare to scale by aligning talent and tech capabilities and embed them in your business strategy and operating model.

This report makes it clear that the appetite for this virtual world is growing on both the consumer and business sides. Clearly it has much to offer beyond where it is now, but there is a lot of educating to do along the way, of both consumers and businesses.

NFT Creators: Finding Fans and Making Money

“To make a living as a craftsperson, photographer, musician, designer, author, animator, app maker,entrepreneur, or inventor you need only thousands of true fans.” Kevin Kelly

Any artist relies on having fans, and having a large swathe of diehard fans, ready to buy whatever you produce, is a goal most would love to achieve. Back in 2008, Kevin Kelly wrote an essay on how the Internet would make this more achievable for artists in any discipline, simply because it opened up a global audience. However, while creative people waited for fans with spending power to arrive, the online took a slightly different direction to the one they hoped for.

Social media platforms, all of them centralized, was seen as a great way to connect with fans. Throw up a Facebook page, promote your work, and fans would find you. It did work, for a while, but then the SM platforms spotted an opportunity, you could say, a trick they were missing, and
started using algorithms that decided what fans saw, changing the relationship between them and the artists. What’s more, the SM platforms were keeping a lot of the revenue they gleaned for themselves.

The Tide Is Turning

Now that tide is turning and returning to Kelly’s vision, and NFTs have proved to be the vehicles for change. That’s because non-fungible tokens enable artists to sell directly to fans without a third party taking a cut. It’s true that many will continue to use centralized social media platforms for promotion and to connect with fans, but the advent of NFTs
and a crypto=based economy is giving them other options to make money.

But, it’s not that easy to understand what NFTs are. Just ask a person in the street. The chances are that you might find one or two that know what an NFT is, while others might have an idea they are connected to Bitcoin, while others will never have heard of them. Those inside the crypto community might be surprised that a new sector that has such a big
buzz around it, and one where a lot of money is being invested, has had so
little impact on the wider public. But then the same could be said of
cryptocurrencies.

A Better Economic Environment For Artists

However, the lack of public engagement with NFTs is not an insurmountable issue. The NFT craze is in its infancy, which
means it has a way to go to mature, and as it evolves and expands, the size of the audience will grow as well. In this respect, NFTs are still a profitable
venture for creators. After all, NFT sales were valued at $2 billion in the
first quarter of 2021, according to Cloudwards.net.

First, NFTs are created on a blockchain.
This also means that even the owner of an NFT marketplace cannot charge
whatever they want for an NFT, because the artist is in control. Of course, the marketplaces will get a fee, and that creates a competitive environment for the creators who will look for those offering a strong sales performance and lower fees, or other incentives.

Second, NFTs allow for more finely tuned pricing tiers. For example, the hugely popular NBA Top Shots cards can be bought for thousands of dollars, or a few dollars. The same can be seen in CryptoPunks, Bored Apes, and any of the other series.

The third way in which NFTs help artists make more money is in the relationship with the user. Unlike buying say a painting at auction, where the auctioneer takes a fee from both buyer and seller, the person who buys an NFT pays very little to acquire a work. That’s because of the crypto factor! There’s very little marketing spend in the crypto market, and neither Bitcoin nor Ethereum has marketing budgets, yet millions of people own them. The same applies to NFT projects. Chris Dixon points out
that the NBA Top Shots cards, “generated $200M in gross sales within a
month while spending very little on marketing.” That’s because sales are significantly based on peer-to-peer marketing, which in turn is boosted by the community of fans that flock to collectible NFTs, and generate excitement about them. Plus,there is a feeling amongst these fans, who are also owners, that they have skin in the game, and the game has a real buzz.

There are still many ways for creators to build a fan base via NFTs, and boost their finances without the interference of intermediaries. Those platforms that impose distribution and monetization on creators are likely to find that they are challenged. Artists now have more choices, and as Chris Dixon says, when crypto and NFTs offer a new way to make money, that is probably the choice artists will take.

HNWIs are embracing digital assets

Capgemini released its 2022 World Wealth Report on 14th June. Its poll surveyed 2,972 global HNWIs with 54% reporting a wealth band ranging from $1 million to $30 million and 46% reporting wealth of $30 million and over. One of the most exciting insights is that 71% of these high net worth individuals have invested in digital assets.

The survey asked about investment preferences, breaking the digital asset sector into cryptocurencies, exchange-traded funds (ETFs) non-fungible tokens (NFTs) and products related to the Metaverse.

The highest concentration of owners are under forty years old, with nine in ten having invested, compared with one in seven overall. The younger group expressed more interest in cryptocurrencies, saying they were their favourite investment, although crypto ETFs and Metaverse products are also highly desired.

However, cryptocurrencies don’t make up the majority of portfolios. According to the survey, HNWIs have only allocated 14% of their portfolios into “alternative investments” which includes crypto alongside commodities, currencies private equity and hedge funds.

On the other hand, Capgemini says that it is seeing an influx of investments into digital assets and this has “increased the demand for educational capabilities.” Nilesh Vaidya, the firm’s head of retail wealth management said: “The influx of new investment avenues such as sustainable investing and digital assets is having a crucial impact on the wealth management industry. Wealth management firms must prioritize providing timely education around this trend to retain their customers.”

As a result, some wealth management firms are looking for first-mover advantage in this niche sector by launching investment products targeted at the demographic. For example, Morgan Stanley introduced Bitcoin to its HNWI clients in March 2021, allowing only those with $2 million or more to invest in the cryptocurrency. BBVA in Switzerland is also offering access to crypto trading and custody services, as is Wells Fargo in the USA. Both of these started their service in 2021.

I previously wrote about the Accenture report that revealed 52% of wealthy Asian investors held some form of a digital asset during the first quarter of 2022, but that wealth management firms have been slow to adopt investment products with cryptocurrency or digital asset exposure. But it looks as those wealth managers elsewhere are now alert to the potential of the digital asset market.

Dazzled by some insanely high APYs?

Have you noticed that a significant number of DeFi projects are offering insanely high annual percentage yields (APY), which, of course, look very attractive to investors, especially retail investors, who are those most at risk.

There are DeFi protocols that have been built using the proof-of-stake (PoS) consensus protocol offering eye-watering returns to their investors in return for them staking their native tokens. But, as most of us know, sometimes by getting burnt ourselves, if something sounds too good to be true, then it probably is.

The issue is that some projects are nothing more than cash grab schemes. Shiraz Jagati at Cointelegraph gives the example of YieldZard, a project positioning itself as a DeFi innovation-focused company with an auto-staking protocol, which claims to offer a fixed APY of 918,757% to its clients. Who finds that believable? All you would need to invest is $1000 to gain a return of $9,187,570! And YieldZard isn’t the only project offering fast and high payouts.

Assessing an APY

How can you as an investor assess the sustainability of projects like this? Here is some advice from Kia Mosayeri, product manager at Balancer Labs — a DeFi automated market-making protocol. “Sophisticated investors will want to look for the source of the yield, its sustainability and capacity. A yield that is driven from sound economical value, such as interest paid for borrowing capital or percentage fees paid for trading, would be rather more sustainable and scalable than yield that comes from arbitrary token emissions.”

Ran Hammer, vice president of business development for public blockchain infrastructure at Orbs, pointed to the fact that DeFi offers a another major innovation to the crypto ecosystem: the ability to earn yield on what is more or less passive holding. But as he says, not all yields are equal by design because some yields are rooted in “real” revenue, while others are the result of high emissions based on Ponzi-like tokenomics.

Understand the source of the ‘yield’

Ultimately, it is very important for investors to understand where the yield is coming from. For example, transaction fees in exchange for computing power, trading fees on liquidity, a premium for options or insurance and interest on loans are all “real yields.” Whereas those that are based on token inflation may turn out to be less sustainable, as there is no real economic value funding these rewards. 

So, if you see a dazzling APY offered, you should consider all of the above, as well as the fact that most returns are paid in cryptocurrencies, and since most cryptocurrencies are volatile, (just look at the market this week!) the assets lent to earn such unrealistic APYs can decrease in value over time, leading to major losses.