In New York City, there is a row of tall, skinny, high-rise condominium buildings along the southern end of Central Park that's become known as “Billionaire’s Row.” The average apartment there sells for more than $37 million, several have sold for more than $100 million, and one even sold for the staggering price of $240 million.
Although the buildings offer ultra-luxury finishes and spectacular views, a popular topic of local conversation is how nonsensical those prices seem. What is even more remarkable is that almost nobody lives inside these apartments; they mostly sit unused. People are flabbergasted that these vacant apartments trade for such high prices.
As it turns out, humans are notoriously bad at pricing assets, especially when an asset’s value is exponentially higher than its actual utility. This explains why people are confused by the prices on Billionaire’s Row or are consistently astonished when art trades for large sums of money.
So last week, when Christie’s sold Beeple’s digital art for $69 million, naturally people were aghast. (Beeple is an artist who, until October, had never sold a piece of art for more than $100.)
Although people believe assets prices are related to their utility, in reality asset values are determined by two factors: collective belief and transferability.
For example, money only has value because people believe they will be able to easily exchange it for goods and services in the future. Like currency, art’s value is based upon society’s collective agreement about its value – and nothing more. The value of art has little to do with the cost of the materials used to make it or how useful it is, which is why most people cannot accurately price it.
See also: Janine Yorio - Here Comes the Virtual Real Estate Boom
Website domain names are another virtual asset, just a combination of letters that exist only online. Dozens of domain names have sold for more than $10 million apiece. (The most expensive domain name sale was for carinsurance.com, which sold for $49.7 million.) Yet, we have made peace with the fact that certain domain names trade for high prices because they are considered to be more “rare.”
So when a friend recently asked me, “Why would I pay real money for fake land?,” I explained that digital real estate is like a combination of NFT art and domain names. That’s because the marginal cost to produce a digital parcel of land is almost nothing, and its value is more closely related to its perceived scarcity than to its actual utility.
Recently, digital real estate prices have been appreciating more quickly than real-world real estate (just ask the artist Krista Kim, who sold an NFT of a house for $500,000). Some might even say the prices seem inflated. Meanwhile, some of the most trafficked streets in the world – including New York's Madison Avenue and Broadway and London's Oxford Street – are littered with empty storefronts, bringing about the so-called “retail apocalypse.” Landlords literally cannot give away this space, not even for free.
Although stores sit empty, people are still buying things. In the never-ending search for customers, real-world companies have followed shoppers online. Their next stop is the metaverse, where their customers are socializing and window-shopping – and now even buying real-world items.
Although the number of users in metaverses is still just a trickle, when users do start populating metaverses in meaningful numbers, selling real-world products to people in those virtual worlds will become a very cost-effective way to market things. The convergence of real-world spending in virtual world environments is nothing new. Players have been buying “skins” and extra lives in video games for years. (Amazon is a fascinating case study in the increasingly intertwined relationship between e-commerce and brick and mortar retail.)
Big companies opening virtual stores in virtual worlds is a natural progression, and they are already starting to do so.
For example, Domino’s has made it so people can buy pizza from a store in the metaverse Decentraland and receive the pizza at their real-world address. (CoinDesk parent DCG is an investor in Decentraland.)
See also: Jeff Wilser - The People of Decentraland Will Greet You Now
Also, this past week, Adidas dropped a collaboration with Karlie Kloss inside Decentraland, where attendees could get a free (virtual) pair of Adidas shoes for their avatar to wear. This corporate-sponsored virtual event was attended by people from all over the world. Companies are realizing that virtual events like these can be much more cost-effective than real-world ones.
Imagine the possibilities if instead of Nike having a store on every Main Street in America it built one jaw-dropping virtual retail experience in a metaverse that could sell to quite literally anybody anywhere at any time? At some point, every company will realize it needs virtual stores in a metaverse like Decentraland, just as they have all learned they must all have a website on the internet.
The results are self-fulfilling. As the content inside the metaverses becomes more compelling, more people will show up, thus attracting more corporate sponsorships.
So does it make sense that “fake” land trades at prices that approach real-world valuations?
In 2014, Chanel purchased a nearly 4,000-square-foot retail space on Madison Avenue in New York City for $123.8 million. At $31,000 per square foot, this sale broke records, and people at the time felt the price made no sense.
But if a virtual storefront can cater to an infinite number of potential customers (millions more than walk down Madison Avenue in a year), then the value of virtual land may eventually trade at prices that seem as mystifying as Beeple’s art or condos on Billionaire’s Row. Collective belief in the value of virtual real estate is already growing.
Furthermore, the Beeple sale has shown us that a legitimizing force like Christie’s can attract real-world wealth in enormous amounts. As real-world companies set up shop in virtual worlds, they will drive up property values around them and foster investment in new, community-building projects, building a new and valuable digital real estate ecosystem with credible players and significant price tags.
The rapid adoption of NFTs by the art world demonstrates just how quickly these changes can take place. So while today it might seem crazy to spend $10,000 on a parcel of pixelated “land,” take into consideration that some digital NBA TopShot cards that sold for $9 a pack in November have since gone for $200,000 each.
So we have established why digital real estate might have a value, but why do we think it might hold value or appreciate? It’s the same reason why people digital art and digital basketball cards are selling for more than their real world equivalents: transferability.
See also: Jeff Wilser - How NFTs Became Art, and Everything Became an NFT
You’ve surely heard stories of refugees sewing gemstones into the hems of their clothing to hide wealth and move it around as they emigrate. Crypto assets can be easily moved around. So not only is digital real estate increasingly perceived as valuable, but its transferability is what will catapult its value beyond any perceived utility or scarcity value.
Unlike real-world real estate, digital real estate can be sold within minutes without an attorney because its ownership history is logged on a self-contained decentralized, blockchain ledger. What’s more, digital basements never flood and digital buildings never need a new roof.
The escalating prices of NFTs and digital real estate today are small compared to what they may be worth in the future, once the rest of the world catches on. For that reason, I predict that the best parcels of virtual real estate will appreciate faster than real-world real estate.