Future Returns: Making Sense of the Metaverse
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Future Returns: Making Sense of the Metaverse

Why Goldman Sachs sees the metaverse as a US$8 trillion global opportunity.

By Rob Csernyik
Wed, Mar 2, 2022 12:01pmGrey Clock 4 min

Goldman Sachs sees the metaverse as an US$8 trillion global opportunity, so it’s no wonder the term is on the tip of investors’ tongues. The word was mentioned only seven times during investor presentations in 2020, according to corporate research company Sentieo, but at least 128 times last year. One huge player, the gaming company Roblox, surpassed US$39 billion in market cap in its IPO last March, and last October, Facebook changed its corporate name to Meta, creating widespread interest in the metaverse concept.

Broadly speaking it’s a network of digital, interactive virtual worlds where people come together for entertainment and commerce. Some of it will be experienced through consumer headsets. But while the metaverse’s apex is far off, we’re already living in a version of this digital world. During the pandemic, events like concerts by Lil Nas X and 21 Pilots, the Electric Daisy Concert music festival and fashion shows for Balenciaga and Moncler took place on gaming platforms like Fortnite and Roblox.

Morgan Stanley says there’s been a four-year acceleration in terms of player bases for gaming adoption during the pandemic. “Going forward, we expect that technological advances (such as 5G, edge computing) coupled with more use cases (beyond gaming, social media, entertainment) are likely to drive consumer adoption,” Goldman Sachs wrote in a report.

Penta examined some research and analyses from Goldman Sachs, Morgan Stanley, Blackrock, and J.P. Morgan to identify strategies for investors who want to cut through the hype and figure out how to invest in the beginning of the metaverse’s investment cycle, which is already playing out.

On a recent podcast, Eric Sheridan of Goldman Sachs noted alternative investments are already being made in hardware, infrastructure, and even creator ecosystems for the metaverse. In December, for instance, Nike acquired virtual shoe designer RTFKT for an undisclosed sum as a foray into the metaverse. (Last year, he noted, there was about US$10 billion in private capital raised across related industries.)

Reid Menge of Blackrock wrote that recent volatility might distract investors from the long-term returns of metaverse opportunities. “Secular growth trends, such as digitalization of industries and an ever-growing reliance on data analytics, were accelerated during the pandemic and are multi-year transformations we expect to persist―regardless of the pace of reopening or moves in interest rates.”

Here are some highlights to keep under consideration when investing in the metaverse.

Decentralisation Is the Word

Decentralization is a key word when it comes to the metaverse, impacting both the tech and economic sides of this new world. Moving from central servers to peer-to-peer hosting will be essential to provide the sort of detailed, immersive experiences promised in the metaverse.

“If decentralization stays as its core, there is a debate out there in the technology industry of whether there will be large-scale winners in a Web 3.0, or if there’ll be a greater proliferation of smaller winners that take advantage of different niches,” Sheridan says. It may not mean aiming to pick one good horse from among market leaders, like in earlier iterations of the web.

This may also fundamentally change the nature of how consumers spend in the metaverse, and on what. Digital currencies offer new ways to pay and nonfungible tokens (NFTs) are a novel way to own goods.

“This democratic ownership economy coupled with the possibility of interoperability, could unlock immense economic opportunities, whereby digital goods and services are no longer captive to a singular gaming platform or brand,” J.P. Morgan wrote in a report.

Follow the Tech

Menge writes that as smartphone companies took off, they controlled both the hardware and the operating software. It helped them dominate the industry, and internet companies don’t want to miss the same opportunity in the metaverse. That’s why they want to provide both the platform and hardware as they enter this new world..

“We see the most immediate opportunity in those companies that can supply the big internet, software, and smartphone companies with the ingredients they need to develop glasses and headsets,” Menge wrote.

Two technologies that will play integral roles in this new universe are virtual and augmented reality. Market intelligence firm International Data Corporation notes VR and AR spending globally is expected to increase fivefold from US$12 billion in 2020 to US$72.8 billion in 2024.

While Goldman Sachs noted that AR represents a larger opportunity, it acknowledged both VR and AR still aren’t commonly used. “[T]he low penetration rates in the next 2 years are a key indicator around the timing of the Metaverse opportunity.”

Once the necessary hardware exists, Blackrock has its eye on “services that can be accessed by the new devices, and the software that will shape the metaverse.” It also likes firms that will design and create virtual worlds in the metaverse.

Look Carefully at Pain Points

Goldman Sachs noted that there are fundamental friction points such as “hardware form factor (especially cost curve), broadband connectivity and mass appeal use cases.” These will need to be dealt with to move forward with the metaverse, along with, as J.P. Morgan said, privacy and identity issues and regulatory infrastructure including accounting and tax.

But consumer pain points may prove the most challenging, including whether potential hundreds of millions of new users will be interested in sharing new and extensive private data. While the metaverse could impact any number of industries, such as advertising, e-commerce, education, and entertainment, the potential opportunities can vary.

Morgan Stanley points out that digital media and e-commerce offerings are already robust, and continue to improve. The firm’s Brian Nowak noted that some success stories from venture capital point to the importance of being 10 times better than the next best offering—a high watermark to clear.

“In the end, we have to ask, what consumer pain points will a metaverse solve for hundreds of millions of people?” Nowak wrote. He suggested companies with metaverse aspirations will need a “killer app” or a strong partner to drive mass adoption.


Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual

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To break the day-trading habit that cost him friendships and sleep, crypto fund manager Thomas Meenink first tried meditation and cycling. They proved no substitute for the high he got scrolling through investing forums, he said.

Instead, he took a digital breath. He installed software that imposed a 20-second delay whenever he tried to open CoinStats or Coinbase.

Twenty seconds might not seem like much, but feels excruciating in smartphone time, he said. As a result, he checks his accounts 60% less.

“I have to consciously make an effort to go look at stuff that I actually want to know instead of scrolling through feeds and endless conversations about stuff that is actually not very useful,” he said.

More people are adding friction to curb all types of impulsive behaviour. App-limiting services such as One Sec and Opal were originally designed to help users cut back on social-media scrolling.

Now, they are being put to personal-finance use by individuals and some banking and investing platforms. On One Sec, the number of customers using the app to add a delay to trading or banking apps more than quintupled between 2021 and 2022. Opal says roughly 5% of its 100,000 active users rely on the app to help spend less time on finance apps, and 22% use it to block shopping apps such as Amazon.com Inc.

Economic researchers and psychologists say introducing friction into more apps can help people act in their own best interests. Whether we are trading or scrolling social media, the impulsive, automatic decision-making parts of our brains tend to win out over our more measured critical thinking when we use our smartphones, said Ankit Kalda, a finance professor at Indiana University who has studied the impact of mobile trading apps on investor behaviour.

His 2021 study tracked the behaviour of investors on different platforms over seven years and found that experienced day traders made more frequent, riskier bets and generated worse returns when using a smartphone than when using a desktop trading tool.

Most financial-technology innovation over the past decade focused on reducing the friction of moving money around to enable faster and more seamless transactions. Apps such as Venmo made it easier to pay the babysitter or split a bill with friends, and digital brokerages such as Robinhood streamlined mobile trading of stocks and crypto.

These innovations often lead customers to trade or buy more to the benefit of investing and finance platforms. But now, some customers are finding ways to slow the process. Meanwhile, some companies are experimenting with ways to create speed bumps to protect users from their own worst instincts.

When investing app Stash launched retirement accounts for customers in 2017, its customer-service representatives were flooded with calls from panicked customers who moved quickly to open up IRAs without understanding there would be penalties for early withdrawals. Stash funded the accounts in milliseconds once a customer opted in, said co-founder Ed Robinson.

So to reduce the number of IRAs funded on impulse, the company added a fake loading page with additional education screens to extend the product’s onboarding process to about 20 seconds. The change led to lower call-centre volume and a higher rate of customers deciding to keep the accounts funded.

“It’s still relatively quick,” Mr. Robinson said, but those extra steps “allow your brain to catch up.”

Some big financial decisions such as applying for a mortgage or saving for retirement can benefit from these speed bumps, according to ReD Associates, a consulting firm that specialises in using anthropological research to inform design of financial products and other services. More companies are starting to realise they can actually improve customer experiences by slowing things down, said Mikkel Krenchel, a partner at the firm.

“This idea of looking for sustainable behaviour, as opposed to just maximal behaviour is probably the mind-set that firms will try to adopt,” he said.

Slowing down processing times can help build trust, said Chianoo Adrian, a managing director at Teachers Insurance and Annuity Association of America. When the money manager launched its online retirement checkup tool last year, customers were initially unsettled by how fast the website estimated their projected lifetime incomes.

“We got some feedback during our testing that individuals would say ‘Well, how did you know that already? Are you sure you took in all my responses?’ ” she said. The company found that the delay increased credibility with customers, she added.

For others, a delay might not be enough to break undesirable habits.

More people have been seeking treatment for day-trading addictions in recent years, said Lin Sternlicht, co-founder of Family Addiction Specialist, who has seen an increase in cases since the start of the pandemic.

“By the time individuals seek out professional help they are usually experiencing a crisis, and there is often pressure to seek help from a loved one,” she said.

She recommends people who believe they might have a day-trading problem unsubscribe from notifications and emails from related companies and change the color scheme on the trading apps to grayscale, which has been found to make devices less addictive. In extreme cases, people might want to consider deleting apps entirely.

For Perjan Duro, an app developer in Berlin, a 20-second delay wasn’t enough. A few months after he installed One Sec, he went a step further and deleted the app for his retirement account.

“If you don’t have it on your phone, [that] helps you avoid that bad decision,” he said.


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