Decentraland (CCC:MANA-USD) “defines itself as a virtual reality platform powered by the Ethereum blockchain that allows users to create, experience, and monetize content and applications.”
I define it as a great live test of the Greater Fool Theory in investing. Investors in the past months have been trying to assess whether metaverse is the future of the internet. Some say it may be, as tech giants have invested or plan to invest heavily in this new hot trend. Will metaverse become more than a hot trend, a reality any time soon?
When I try to understand the concept behind Decentraland as a business idea and an investment opportunity, I am surprised about three biases in the investment world that probably will always be present.
Decentraland allows to buy and sell land, names, digital assets. Virtual land, not real land. It is based mainly on three concepts. Explore, Create, Trade.
I love technology and therefore I like the idea for digital creators to make out of nothing digital assets or experiences online. Decentraland offers the opportunity to digital creators to create scenes, artworks, challenges using the simple Builder tool. What’s even better is that they can get paid by taking part in events to win prizes.
The trading concept is the one that makes me as I have said numerous times not a fan at all of the cryptocurrency market. Fortunes have been made by the bold investors who took the risk and invested in coins and tokens that traded for a tiny fraction of a dollar.
Unfortunately, fortuned have been lost by investors who got in this “irrational game” of investing in the cryptocurrency late and at inflated prices that collapsed. Is MANA token a different story? I argue that it is not.
“Decentraland was launched following a $24 million initial coin offering (ICO) that was conducted in 2017.” Looking at CoinMarketCap details about Decentraland in the early morning on Jan. 12, 2022, I am overwhelmed by stats that say “The live Decentraland price today is $3.10 USD with a 24-hour trading volume of $674,129,855 USD USD. We update our MANA to USD price in real-time. Decentraland is up 9.43% in the last 24 hours. The current CoinMarketCap ranking is #32, with a live market cap of $5,624,112,596 USD. It has a circulating supply of 1,824,526,935 MANA coins and the max. supply is not available.
A market capitalization of $5,624,112,596? This is insane, irrational, and beyond any logic. I am trying to understand the explanation of why MANA had a price of $0.12 in early 2021, reached a high price of about $5.5, and now seems to trade in a range near $2.80-$3.40 for the first week of 2022. It is time to wonder if the market capitalization of $5.6 billion is worth it.
The Greater Fool Theory
In simple words, the Greater Fool Theory means that there will always be a “greater fool” in the financial markets who will be ready to pay a price based on higher valuation for an already overvalued security to make a profit.
Rather than focusing on whether an asset, digital or not is overvalued or not, “greater fool” investors assess the likelihood of selling sell the investment to someone else for a higher price than what they paid.
If someone in the future was to write a book about the Greater Fool Theory for sure, Decentraland would be among the top candidates. Visiting the marketplace of the platform, I saw digital clothing valued at $300. What? Come on who will buy this? And why?
What about digital land sold for $7,000? I am about to get dizzy without having consumed any alcohol, just coffee. It gets more frustrating, a name BabyDoge is sold for $50,000.
Instead of buying a brand new shiny fast car, why not buy this name? What are the odds of reselling the investment to another “fool” and making money? I believe the odds are slim to none. I would bet on none.
As an Economist, I have a wide interpretation of money. When it comes to wasting, it is done to fulfill personal needs such as buying a new tv when you do not need it simply because it is the latest model of a brand name, and this purchase will make you happy. When it comes to investing, my criteria change a lot. Investing is made to make money, and irrational moves are not the best choices.
Why should someone buy digital land? Can you visit it in real life, throw a party, drink a cocktail under the hot sun in summer or just plant a tree, a real one that after 50 years you will show to your children as your legacy of living in real life?
I consider that profits from investing in Decentraland will be only available to a very niche market, even if the platform has thousands of users. The users of the platform are part of a niche market. “Fools” compete to distort how real financial markets work daily.
Does society need a shared virtual environment?
What are the real costs and benefits? Can a virtual world improve human relationships, make our lives better, more exciting? Get isolated from reality by wearing digital equipment to shop, play, work? Is this quality in our lives?
I consider Decentraland useful only for fun, not for investment. Metaverse may be a hot trend, but it is not likable by all, and to the extent that we will be forced to accept it despite our will, it poses a big defeat for the freedom of choices we have using the internet. Virtual reality is not going to be a great experience for all people online if it is to become the norm for daily tasks in the future.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.