This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
VR Headset Wars Heat Up
In the fall of 2020, my family and I made a rash Covid-19 purchase:
A $999 Valve Index VR headset.
Blame it on wanderlust. Or the irritation of being stuck at home with the same people for months.
But the moment I strapped on the ungainly headset, I was hooked. Gone were the nausea-inducing arcade headsets of the 90s and any real-world concerns. The Index had me shooting alien-like creatures in Half Life: Alyx for hours — reigniting a joy in video games I thought I had outgrown.
Fast forward to spring 2022 and a whole new cohort of tech giants are now trying to corner the market for VR headsets. As things stand, Facebook parent Meta (NASDAQ:FB) has a distinct lead with its Oculus Quest 2, a standalone headset sold as a loss-leader.
Other players could soon catch up. Apple (NASDAQ:AAPL) could release its own VR setup as soon as 2023 (One can only hope that they call it the i-Eye). Meanwhile Microsoft (NASDAQ:MSFT) is reportedly collaborating with Samsung for its next generation of headsets.
As Apple’s iPhone success shows, you don’t have to be the first mover to eventually dominate a market.
The Second-Order Winners of the Fight for VR
Meanwhile, smaller Moonshots are also grabbing a slice of the “i-Eye” pie…
…and providing Moonshot investors with plenty of opportunities to turn small investments into fortunes.
NYC-based microcap Glimpse Group (NASDAQ:VRAR) owns almost a dozen businesses that help clients from healthcare providers to educators with VR. And internet service providers (ISPs) like Cloudflare (NYSE:NET) are ramping up their systems to handle the eventual flood of data these devices will consume.
But one group of winners is emerging even faster than others:
This ragtag group of blockchain promoters, gaming companies and crypto exchanges has captured the imagination of meme investors worldwide. In October, Google search volume for “NFT” surpassed “stocks” for the first time. And Facebook’s “Metaverse” rebrand would force companies from Disney (NYSE:DIS) to Salesforce (NYSE:CRM) to quickly publish VR plans of their own.
Most of these metaverse plays aren’t exactly your grandparents’ blue-chip stocks.
In March, the popular Axie Infinity (AXS-USD) lost $625 million in a massive hack — a move later tied to work by North Korean agents.
And as recently as this weekend, Rikkei Finance — a self-described metaverse DeFi project — saw $1.07 million vanish from its coffers.
In other words, many of these players are more like the unsolicited callers trying to sell annuities and gold coins to unsuspecting grandparents. You’re not quite sure what you’re going to get.
So when it comes to buying into blockchain-based metaverse firms, my bet is on the single most prominent player:
I’ll admit… when I first played Decentraland, my experience was somewhat underwhelming.
“The graphics… were a disappointment. The blocky imagery looked as if someone had rewound the clock two decades. Cutting edge Unreal Engine 5 visuals, these were not,” I wrote back in January.
And the Decentraland “world” wasn’t much to write home about either:
“As I left the starting zone, another truth dawned: There wasn’t particularly much to do outside of the central squares. With the exception of the occasional house, much of Decentraland is undeveloped and uninhabited.”
But Decentraland was still leaps ahead of its two closest competitors — Axie Infinity and The Sandbox (SAND-USD). In fact, it’s the only candidate to sport an easily accessible 3D world or have consistent online events. And it had far more user-developed content than any of its peers.
In other words, it was the closest thing that blockchain technology has gotten to a VR-ready world.
And when it comes to software and social networks, first mover advantage matters.
The Power of Feedback Loops
Unlike electronic hardware, social networks have strong feedback loops. The more users that sign up for a service like Facebook or Uber, the more attractive the network becomes to others, and so on.
That feedback loop creates a virtuous growth cycle.
It’s why venture capital firms spend billions on early-stage startups to muscle out the competition. If you run the dominant ride-sharing app in a city, there’s little reason for users to download the second-largest player — unless they feel like waiting around thirty minutes for a ride.
Some hardware firms have wised up to that fact. Ask any Apple user why they continue spending $36 a month to lease a thousand-dollar phone, and they’re more likely to respond with some combination of “my iCloud” or “my iMessage” than anything else.
But digital natives have an even more significant advantage. Google’s Android system runs 70% of the world’s mobile operating systems. And the value of Amazon’s (NASDAQ:AMZN) Web Service segment lies not in their several-dozen data centers, but in the lucrative data management software that sits atop of these massive money sinks.
Friends in High Places
That’s why Decentraland is such a standout.
In March, the platform hosted its first Metaverse Fashion Week. Brands from Dolce & Gabbana to Etro created unusual but decidedly well-received shows (The former would use models of cats on their catwalk, complete with reams of leopard print).
“Thanks to the massive amounts of real-life hype Decentraland generated by giving real-world fashion brands with metaverse FOMO a space to show their wearables… Decentraland put its map on the fashion map,” wrote Luke Leitch in a glowing review for Vogue. “I can definitely see this event evolving into something much more engaging.”
Perhaps he was a fan of the feline-themed show.
These perceptions matter. Though crypto is down across the board, prices for MANA token have outperformed Axie Infinity and the Sandbox by 6% and 10% respectively since I reviewed the three in January.
The rise of next-generation VR headsets could also kickstart a gold rush into Decentraland. Today’s crop of high-end headsets still rely on tethering to thousand-dollar graphics cards for a reasonable experience. Future versions could make cutting-edge models as cheap and ubiquitous as smartphones or toaster ovens.
Once you own a toaster… it’s hard to imagine a world without sliced bread.
The Risks of MANA
Decentraland, however, does have some major investment risks.
First, MANA’s Metaverse has some serious competition. Facebook is aggressively pushing Horizon Worlds, its answer to “what should I do now that I’ve bought an Oculus Quest?” Microsoft’s Minecraft supports over a hundred times more daily users than Decentraland. And traditional online games from TakeTwo’s (NASDAQ:TTWO) Grand Theft Auto Online to Roblox (NYSE:RBLX) have far more developed graphics than any current blockchain game.
Second, MANA’s land economy can encourage squatting and stagnation. If it costs nothing to hold one of Decentraland’s 90,601 plots of virtual land, there’s little incentive to develop your holdings until you’re ready to cash out. That leaves MANA at a disadvantage to top-down projects like ApeCoin (APECOIN-USD).
Finally, Decentraland’s MANA token doesn’t have a guaranteed correlation with its Metaverse’s performance. As anyone who’s played Amazon’s New World game will know, humans can still crash the economy of a promising franchise.
Still, these are issues that Decentraland’s team can potentially surmount. A “property tax” or another incentive system could quickly overhaul its online economy. And MANA’s success at Fashion Week suggests this young team might just be getting started.
A Different Way to Play
There are other ways to play crypto too. My Momentum Master strategy has a strong record in market timing — a consequence of crypto’s pricing inefficiencies. And studies have shown that the “Coinbase Effect” does work. Coins tend to rise in the short term after getting added to the exchange.
In other words, there are winning crypto strategies beyond “buy and hold.”
Now, Bitcoin (BTC-USD) expert Charlie Shrem has developed a new approach that combines the best of these strategies. And he’s telling investors how it works in his latest presentation.
What’s After Virtual Reality?
Long-term investors looking for something beyond virtual reality are already eyeing the next big thing:
Augmented Reality (AR).
Rather than transport users into a different world as VR does, AR headsets overlays graphics over the real-world.
Think of it as a heads-up display (HUD) you can wear as glasses.
The technology promises even more than VR. Imagine going to a real-world conference where every attendee is wearing a virtual nametag. Or watching the news while sitting on the beach. (And if work isn’t your thing, what about playing Half Life during a long work meeting?)
Some companies are already pioneering these technologies. Snap’s (NYSE:SNAP) AR Lenses are providing basic AR displays, even if only for 30 minutes per charge. And Google’s Project Iris could bring these headsets to consumers as early as 2024.
Many firms have failed before at AR hardware, including Google itself. But as chip technology continues its exponential growth, don’t be surprised if we’re there faster than we can blink.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.