Most people have only begun to hear the term metaverse recently, but it’s an important concept considering the implications it can have on the future. Smart contracts, digital art, and ownership of your digital world could become how we prove ownership, enjoy and preserve history, and much more.
With many investors and entrepreneurs holding the belief that the metaverse has the potential to change life as we know it, the concept has already grown to be a nearly $50 billion per year market, according to Emergen Research, and it’s expected to continue on a dramatic upward trajectory. When an industry becomes such a valuable one, opportunities arise in the stock market.
An entirely new category of metaverse stocks is beginning to emerge, but what exactly are they, and are they worth your investment dollars?
What Are Metaverse Stocks?
The metaverse is a virtual world that’s the result of a mix of social media, verifiable digital ownership, and hardware like virtual and augmented reality equipment that allows the end user to enter the digital stage.
Metaverse stocks represent the companies making this virtual universe possible.
Because there are so many moving parts that make the metaverse work, the term applies to stocks across a wide range of categories within tech.
Types of Metaverse Stocks
Wall Street defines metaverse stocks as tech stocks in the following categories:
Virtual Reality (VR) Companies
VR headsets, software, and other equipment make it possible for the end user to connect to the digital world in a way that wasn’t imaginable just a few decades ago. The companies at the cutting edge of this industry are integral to the continued growth of the metaverse as we know it.
For example, Meta Platforms (Nasdaq: FB) — parent company of the social media giant Facebook — is also the developer and manufacturer of the Oculus, a popular virtual reality headset. Meta founder and CEO Mark Zuckerberg has said that the future of the company would be in the metaverse, connecting consumers by mixing virtual and augmented reality with social media.
Software Companies & Video Game Companies
Software companies like Microsoft (Nasdaq: MSFT) are also key players in the industry. Microsoft operates the popular open-source game Minecraft, which allows users to build their own digital worlds.
This open-source technology has become the basic building blocks for many pieces of the metaverse, like the explorable virtual world NFT Worlds that consists of virtual lands with blockchain-verified ownership for virtual real estate.
The online game platform Roblox (NYSE: RBLX) is another popular stock to consider in this category.
The company’s claim to fame is a 3D experience that allows players to build their own 3D worlds for their friends and other Roblox players to enjoy.
Nothing in the metaverse would be possible if not for the high-end semiconductors that process the massive computing workloads involved in developing and maintaining a digital world.
The best example of a company in this category is chipmaker NVIDIA (Nasdaq: NVDA). The company is famous for its high-end GPUs, originally designed to reduce the time needed for processing 3D graphics. Today these GPUs are used in cryptocurrency mining machines, servers, and various other pieces of technology necessary for keeping the digital world alive.
Cryptocurrency is the basis of the economy in the metaverse. Without cryptocurrency, there would be no metaverse. Digital land, art, music, gear, and more can be purchased using Ethereum and other digital currencies.
Taking advantage of this new, global economy, some companies have purchased massive pieces of real estate and thousands of cryptocurrency mining machines. Once the cryptocurrency is mined, it’s sold to investors and those who use it for metaverse purchases. One such company is Riot Blockchain (Nasdaq: RIOT). The company operates a fleet of more than 7,000 mining machines.
Cloud Computing Companies
Finally, cloud computing companies are the lifeblood of the metaverse. The digital universe requires quite a bit of bandwidth, and companies like Amazon.com (Nasdaq: AMZN) are responsible for providing the hosting to keep the metaverse alive.
Data centers, like those offered through Amazon Web Services (AWS), make it possible for the end user to communicate with the digital environment.
Pros and Cons of Metaverse Stocks
As with any other category of stock, investing in metaverse stocks comes with its own set of pros and cons. Some of the most important benefits and drawbacks to consider include:
Pros of Metaverse Stocks
The metaverse has experienced substantial growth over the past year, and many observers suggest that trend will continue, with the stocks in the sector following suit. Some of the biggest advantages of investing in these stocks include:
Many metaverse stocks happen to be some of the strongest growth stocks on the market. Many stocks in this category are known for price appreciation well above that of the market average. The explosive growth in the metaverse as an emerging industry adds the potential for significant new revenue streams to some of the market’s best growth stocks.
The metaverse is new and growing quickly. It’s giving end users the ability to communicate with each other like never before and the ability to own digital products. Other applications for the metaverse include giving the medical community better options for tracking patient data, the financial community better options for transferring funds across borders, and almost certainly more uses yet to be discovered.
There’s a high level of excitement involved when investing in a budding industry that has the potential to revolutionize various facets of life. Because of this excitement, investors are more likely to do more detailed research into metaverse stocks, resulting in wiser investment decisions.
3. Known Leaders
The companies carving out leadership positions in the metaverse are the same household names that are known for their positions of leadership in other areas of technology. Think about the names listed above: Microsoft, Meta Platforms (Facebook), NVIDIA, Amazon; these are companies that you already know and likely use.
There’s always a benefit to investing in the companies you know and trust. There’s also an advantage to investing in companies that have a clear track record of leadership.
Cons of Metaverse Stocks
Sure, investing in metaverse stocks comes with its benefits, but what about the drawbacks?
1. Speculation Driven
The industry has grown massive, but it’s largely driven by speculation. The general idea among metaverse enthusiasts is that the digital world and the innovation happening within it will change life as we know it.
However, the industry is in its infancy and none of the world-changing concepts driving the value in the industry have been widely adopted by the general public. As a result, until the theories about use cases are proven and widespread adoption takes place, any investment in the industry will be a speculative one, coming with high risk compared to investments in stable, proven industries.
2. Risk of Regulation
Regulation is a major risk to the metaverse — specifically regulation of the cryptocurrencies that make up the digital economy as it functions today. Due to the lack of regulation, the cryptocurrency landscape is rife with scams, and crypto assets sometimes used for money laundering and funding criminals, so regulators around the world are working to step in.
In the most severe cases, global regulations could force metaverse participants to rethink their virtual economy. For example, in China, many aspects of the crypto economy have been banned. If other countries follow in their footsteps, the global validity of the metaverse and access to its economic platforms will be diminished.
3. Significant Loss Potential
While the leaders in the metaverse industry are large, relatively stable companies, the vast majority of stocks in the industry represent small-cap and penny stocks that operate on a hope and a dream.
Although a few small-cap and penny stocks make it to become some of the world’s largest companies, it’s also common for smaller companies — which lack the financial or innovative capabilities to keep up with the big dogs — to fail, resulting in significant losses for investors.
Considering this, if you decide to invest in metaverse stocks, it’s important to avoid the noise of small companies popping up everywhere with big promises and high hopes. Instead, focus on the large, established companies that are likely to take dominant roles in the industry.
Should You Invest in Metaverse Stocks?
There’s no one-size-fits-all answer to whether investors should consider investing in any asset. Every investor is different, with unique goals, timelines, and capital availability.
So, who should invest in stocks in this category? You might be a good candidate to invest if:
1. You Have a Long Time Horizon
Younger investors with a long time horizon can afford to take larger risks than investors who are nearing retirement or have a short-term time horizon for another reason. Investors with a long time horizon have the time necessary to make up for losses should they take place.
Considering that metaverse investments are speculative, and significant declines are possible, it’s important that those who invest in the category have time to recover should something go wrong.
2. You Have a Healthy Appetite for Risk
Even if you have the time to recover from losses in your portfolio, you might not be comfortable with taking the risk of significant losses in the first place. Most investors with a long-term horizon are more comfortable taking the slow-and-steady approach to building their portfolio.
Unless you’re investing in blue-chip companies that happen to be getting involved in the metaverse, chances are you’re taking on significant risk when making your investment. On the other hand, that risk will come with the potential for significant gains.
The best investors for this category of stock are comfortable accepting larger levels of risk in an effort to generate outsize returns.
3. You Enjoy Researching New Opportunities
If you’re going to invest in the metaverse, it’s important that your investment decisions are 100% research-driven rather than emotion-driven. New companies are popping up in the industry left and right — and at first glance, they all seem to be great investment opportunities.
The best metaverse investors won’t act on knee-jerk reactions. Instead, you’re a good candidate for these types of investments if you enjoy putting the time into researching what a company is, its strengths, weaknesses, management style, and financial capabilities.
If you’re not willing to put in the time to research opportunities in great detail, you could end up losing your shirt with a bad investment in this category.
How Much of Your Portfolio Should You Allocate to Metaverse Stocks?
The best rule of thumb to follow when determining allocation, especially for beginners, is the 5% rule. The rule stipulates that you should never invest more than 5% of your equity holdings in any single stock, and you should never invest more than 5% of your equity holdings across all high-risk assets in your portfolio.
If you plan on only investing in large, stable companies like Microsoft and Amazon that have also taken leadership roles in the metaverse, it’s safe to invest up to 5% of your equity holdings in each company.
If you plan on investing in new, innovative companies with hopes to become leaders in the industry, however, you shouldn’t invest more than 5% of your equity holdings across all stocks of this type.
Consider Investing in a Metaverse ETF
Investing in any new industry often proves to be challenging, even for investors who have been active in the market for years. There’s quite a bit of research involved in choosing the best metaverse stocks, but there’s also an option that greatly reduces the research required — the exchange-traded fund (ETF).
ETFs are bucket investments that pool investing dollars from a large group of investors. The ETF invests the money in a diversified portfolio according to the fund’s prospectus, and gains are shared among the shareholders.
Investing in the metaverse via themed ETFs takes away the need to research each and every stock you’re considering buying, giving you the ability to let the Wall Street pros handle the leg work for you.
Lately, there’s been a rise in themed ETFs focused on information technology and metaverse investments. Some of the best options to consider include the Global X Fintech ETF (Nasdaq: FINX), SPDR S&P Software and Services ETF (NYSE: XSW), and Vanguard Information Technology Index Fund ETF Shares (NYSE: VGT).
Although investing in ETFs means you won’t have to research every individual stock, you should compare your options before making your investment. Each ETF is created differently, investing in different assets, charging investors different fees, and generating different historical returns. By comparing a few options, you can rest assured your investment is being managed in the most effective, low-cost way possible.
The metaverse is quickly growing to become a massive industry, and opportunities in the space are abundant. However, before diving in, investors should consider the risk. Only a small percentage of companies in the industry are stable blue-chip plays, and investing in smaller, lesser-known companies comes with added risk.
Nonetheless, with a bit of research and a willingness to accept larger risks, you have the potential to generate significant gains with these stocks.