The equity markets are full of high-growth opportunities. For instance, stock investors have the opportunity to put their money to work in multiple trends that offer sustainable double-digit growth, such as cloud computing, cybersecurity, or even cannabis.
The same can be said of the cryptocurrency space. The financial and nonfinancial applications of blockchain technology could revolutionize certain industries over time.
But of all the eye-popping growth opportunities, none comes with a more jaw-dropping dollar figure than the metaverse.
The metaverse is a potential $30 trillion dangling carrot
The metaverse is viewed as the next iteration of the internet. It’s a 3D virtual world that will allow connected users to interact with their surroundings and one another. But it’s also a vast unknown. It’s not clear how many metaverses there will be, how they will connect to one another, and where exactly the metaverse will begin or end.
What is known is that it’s going to take a lot of moving parts to make the metaverse work. In addition to the physical devices needed to connect users to these virtual platforms, there will need to be adequate processing power, reduced latency, a lot of storage capacity, payments potential, and identity verification, just to name a few essential pieces of the puzzle.
According to Matthew Ball, CEO of venture capital company Epyllion, the metaverse could become a $10 trillion to $30 trillion market over the next 10 to 15 years. If Ball’s prognostication is accurate, these are staggering figures that justify the hype surrounding metaverse stocks and related cryptocurrencies.
Yet if there’s one given with every next-big-thing investment, it’s that not every company or player will be a winner. Although the following two companies have been popular ways for investors to play the metaverse craze in recent months, this pair of investments should be avoided like the plague.
Shiba Inu was the hottest thing since sliced bread in 2021. On an intra-year basis, SHIB tokens gained as much as 121,000,000% (not a typo!) before retracing to end the year higher by around 46,000,000%. It made millionaires out of folks who invested just a few dollars and hung on to their tokens throughout the year.
Shiba Inu’s historic gain came on the back of increased visibility and crypto market dynamics. In terms of the former, SHIB was listed for trade by numerous crypto exchanges last year and benefited from the improved liquidity and staking capacity offered by decentralized exchange ShibaSwap.
As for crypto market dynamics, it’s a lot tougher to bet against cryptocurrencies not named Bitcoin than it is to short-sell or buy put options against a publicly traded stock. With limited options for skeptics to bet against lesser-known crypto coins, a natural buy bias helped SHIB.
The metaverse buzz tied to Shiba Inu involves the announced future sale of Shiba Lands in a virtual universe. These digital plots of land, which will be stored as non-fungible tokens (NFTs), are to be auctioned or sold, with holders of Doge Killer (LEASH) being queued in line for purchase of these Lands. LEASH is a native token to ShibaSwap.
The first issue with Shiba Inu is that it can’t sell these digital plots of land until after its layer-2 blockchain project, known as Shibarium, has been launched. Shibarium is designed to significantly lower transaction fees. At the moment, Shiba Inu is nothing more than a payment coin built on Ethereum‘s blockchain. This means it’s subject to the same high fees and processing lag that occasionally plagues Ethereum’s network. There is no concrete timeline for when Shibarium will launch.
Additionally, Shiba Inu’s metaverse/NFT-based gaming looks to be, at best, a year away from launching. That’s another year when existing NFT-based gaming plays can pull away. In other words, it could be very difficult for Shiba Inu to differentiate itself by the time NFT-based gaming launches.
If you need one more good reason to keep your distance, this is it: Following life-altering short-term gains, payment coins have a tendency to retrace 93% to 99% within 12 to 26 months following their peaks. SHIB has already retraced up to 80% from its October high and could give back much more, based on what history tells us.
Coinbase was one of the hottest initial public offerings in 2021, and it backed up this hype with an incredible year, fundamentally speaking. When the curtains closed on 2021, the company had 11.4 million monthly transacting users (MTU), $278 billion in assets on its platform, and it had generated over $3.6 billion in net income. Compare that to the end of 2020 when it had 2.8 million MTU, $90 billion in assets on its platform, and $322 million in yearly net income.
Although Coinbase is considered a crypto ecosystem, the company’s trading platform accounts for the bulk of its business. In fact, Bitcoin and Ethereum contributed to 55% of the entire platform’s trading volume in 2021. Given that blockchain-based gaming and metaverses are expected to rely on digital currencies, Coinbase has a natural “in” as the most-popular crypto trading platform.
But according to a post released last year from Coinbase, the company views its role in the metaverse as an identification verifier. The company believes that there will be multiple connected metaverses that users can log in and out of. It plans to develop NFT-based digital IDs that people can use to quickly move between these virtual worlds.
While this might sound great, I’ve identified three concerns. For starters, Coinbase’s role in providing these digital IDs is probably years away from being a reality. I doubt there’s a pressing need for NFT-based IDs with the scope of the metaverse still unknown. Getting the necessary infrastructure in place for the metaverse will likely take years, thereby curbing any tangible revenue potential for Coinbase in the near term.
Second, I’m concerned about Coinbase’s overreliance on Bitcoin and Ethereum, as well as the emotions of crypto investors. Although certain innovations, like an NFT marketplace, could drive sales higher, Coinbase finds itself very dependent on investor sentiment. History has shown that trading volume dries up very quickly during crypto bear markets.
The third concern is the company’s core operating model: crypto trading. For two decades, we watched online stock brokerages undercut one another on price and eventually take commissions to $0. Since there’s virtually no barrier to entry in the crypto trading space, Coinbase’s trading platform is easily susceptible to fee-undercutting from competitors. I suspect the margins associated with trading will precipitously decline over time.
It’s for these reasons Coinbase should be shied away from as a metaverse play.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.