This is a beginner’s guide to digital real estate investing.
Here you’ll learn:
- What digital real estate is (and what it’s not).
- The major technology breakthroughs that have led to massive growth in digital real estate.
- How to start investing in digital real estate.
What Is Digital Real Estate?
Digital real estate is a type of asset. Like other assets, it can be bought and sold.
This definition hasn’t changed since the internet first emerged. However, the types of assets that make up digital real estate certainly have changed.
In the 1990s, the big opportunity was buying and selling domain names. It was a once-in-a-lifetime opportunity, as many early adopters made thousands of times their initial investment. For example, the domain name cars.com sold for $872 million.
Over the coming years, more digital asset types came to fall under the umbrella of digital real estate investing, including blogs, apps and social media accounts.
Thanks to blockchain technology, the market for digital real estate exploded with the massive growth of cryptocurrencies, NFTs and metaverses.
In this article, we’ll look at how we got here, how big this opportunity is and where to start investing.
Digital Real Estate and Blockchain
One of the major breakthroughs to happen with digital real estate in the past few years is the widespread emergence of blockchain technology.
Think of blockchain as a type of digital ledger, where all transactions and data entries are recorded and available for everyone to see.
Blockchain technology builds trust and transparency between buyer and seller since everyone with access to the blockchain has an equal opportunity of seeing the ins and outs of a transaction.
Stored on the blockchain are smart contracts. These contract transactions execute automatically once certain conditions are met. Once smart contracts are created, there’s no way to change them.
Smart contracts living on the blockchain make it possible for two people to conduct a transaction online without an intermediary third party (like a bank) for the first time ever.
Digital Real Estate and Tokenization
What blockchain technology also creates is the ability for someone to tokenize an asset. Think of a token as simply a unit of value that can be exchanged between two people.
The most popular and widely-known tokens are cryptocurrencies like Bitcoin and Ethereum. But anything that has a value can be tokenized. For example, NBA Player Spencer Dinwiddie tokenized his contract with the Brooklyn Nets, selling shares for $150,000 each.
Since NBA contracts are guaranteed, the nine investors who purchased a share of Dinwiddle’s contract received their principal plus interest back over a three-year period. In return, Dinwiddle received cash up-front. This transaction was executed via a smart contract on the Ethereum blockchain.
Back to digital real estate: let’s say I own land in a virtual world, also known as a metaverse. The metaverse can create its own token, which acts as a unit of value. My ownership of the land can be verified on the blockchain. This then enables me to buy and sell that land with that metaverse’s native currency. And, since it’s on the blockchain, all this can happen in a secure way without a third party.
For someone new to blockchain technology, this may seem insignificant. After all, how much can land in virtual worlds really be worth? It turns out quite a lot. The largest virtual plot inside of the virtual world Decentraland just sold for nearly $1 million. In fact, at the time this article was published, Decentraland’s token had a total market value of nearly $1.8 billion.
Digital Real Estate and NFTs
Where do non-fungible tokens (NFTs) come into play here within digital real estate?
An NFT is a token that represents something unique that is verifiable on the blockchain. So, within our virtual world, an acre of land can be turned into an NFT. As this land is unique, as well as verifiable on the blockchain, it can be bought or sold.
Does Digital Real Estate Have Any Real Value?
Since a metaverse — or really anything or anyone, for that matter — can create a token, the question becomes whether these tokens have value or are a digital equivalent of monopoly money.
What determines price is the interaction between supply and demand.
If there’s demand for digital real estate within a virtual world and the supply of the asset is scarce, it becomes valuable. The greater the demand and the lower the supply, the more valuable it becomes.
Andrew Beal, crypto investor and author of the newsletter 30,000 Feet, which explores trends in blockchain and cryptocurrency, wrote:
[…] Blockchains do for the Internet what centralized administrators do for video games [or] what physics does for our physical world. They enable scarcity, which enables supply and demand, which enables an economy.
The flip side is that if there’s no demand or excess supply, the land is worth nothing. And since there’s no physical property backing up your investment, there’s a real chance your digital real estate investment can go to zero.
As for getting real dollars into or out of a digital real estate investment, the way many digital real estate investments work is that you must transact in the metaverse’s native currency. Many of these currencies run on the Ethereum blockchain, so what you’d need to do is:
- Purchase ETH, which is Ethereum’s native token, via a broker like Coinbase.
- Transfer your ETH to a wallet, like MetaMask.
- Purchase the native currency using your ETH on a decentralized exchange, such as Uniswap.
From there, you would be holding the currency necessary to transact within the virtual universe.
Below, we’ll cover some of the different ways to make money with digital real estate. But the big takeaway here is understanding how to go from U.S. dollars to a metaverse’s native token, and then from that token back to USD.
In other words, this isn’t Monopoly money.
Where to Buy Digital Real Estate
There are three opportunities emerging in digital real estate today:
- Metaverses.
- Blockchain-based games.
- Tokenized real estate.
#1. Metaverses
A metaverse refers to a virtual world. These virtual worlds act very similarly to our existing world in that they’re composed of diverse internal economies.
Decentraland is the largest blockchain-based virtual world. At the time of writing, the market cap of Decentraland’s digital token MANA, which runs on Ethereum, is about $1.8 billion.
There are a number of ways to make money with digital real estate on Decentraland, including:
- Buying and holding MANA, the price of which rose by 860.08% in the 12-month period between August 2020 and August 2021. (You can check the current value and market cap here.)
- Buying and selling land. Right now, the most expensive plot is valued at close to $1 million.
- Leasing or renting out your land.
Decentraland is much more than just owning real estate, however. Just as in the real world, there are opportunities to earn money selling goods and services within the platform. In fact, the diversified economy is part of what makes the metaverse compelling for users, and thus what gives the digital real estate within the metaverse value.
#2. Blockchain-Based Games
While blockchain-based games exist within a virtual world, what separates them from other metaverses is that they’re a game with a purpose and a set of rules for everyone to follow rather than an overall virtual environment.
The largest blockchain-based game right now is Axie Infinity. The objective of Axie Infinity is to create, train and breed Axies (digital creatures that are very similar in form and function to Pokemon). Axies then square off against one another in battles.
Each Axie is an NFT, which can be bought or sold on the blockchain. Total sales of Axies have now exceeded $1.5 billion. Within a 30-day period in July and August 2021, sales exceeded $900 million alone.
Similar to Decentraland, there is a real estate component to Axie Infinity, as users can buy and sell plots of digital land within the game. In February of 2021, nine plots of land were sold for nearly $1.5 million. At the time, this was the largest NFT sale ever.
You can transact within Axie Infinity using two Ethereum-based native tokens: AXS and SLP. The market cap of AXS is currently over $4 billion.
If you’re interested in learning more about blockchain-based games, I highly recommend a recent podcast with Gabby Dizon, co-founder of Yield Guild Games.
Related: How to Get Paid to Play Games.
#3. Tokenized Real Estate
The third and final opportunity within digital real estate is tokenization.
Property owners can now issue tokens on the blockchain via a smart contract that represent shares in physical real estate. In turn, investors can buy fractional shares of that asset and take part in both appreciation and cash flow.
It’s similar to how crowdsourced investment companies like Fundrise operate (see our Fundrise review to learn more), but here it’s all done through smart contracts on the blockchain.
MakerDAO is a decentralized autonomous organization with a valuation of $3 billion worth paying attention to in this space. The organization is governed by a smart contract, which among many other things, allows its token-holders to vote on potential investments. One recent investment was a pool of real estate loans from New Silver Lending.
There’s still a lot of uncertainty when it comes to the regulation of tokenized assets. In the long run, however, expect there to be a lot of innovation in this space, as the blockchain can eliminate many of the barriers and excessive costs associated with real estate investing.
Pros of Digital Real Estate Investing
- It’s an industry that has grown massively over the past few years.
- Earning money within different metaverses can be enjoyable.
- Blockchain enables security and trust at scale.
- Unlike other types of real estate investing, you’re not paying mortgages or interest.
Cons of Digital Real Estate Investing
- Currency risk. Even if your investments do well inside the game, there’s a risk that the currency (or the currency of the blockchain the game is built on) will decrease in value to the U.S. dollar.
- Scammers. The fact that anyone can create and sell their own token has attracted a lot of scammers to cryptocurrencies. Stick with legit projects that have been talked about on legitimate crypto news sources like coindesk.com.
- Regulation. Right now, digital real estate is an unregulated industry. That will likely change in the future, and so will tax laws.
- There are no tax incentives, which you get with traditional real estate.
Final Thoughts on Digital Real Estate Investing
Will I be putting my own money into digital real estate in the near future? No.
But if you enjoy virtual worlds or playing video games, is it worth it to jump on Axie Infinity or Decentraland, or to check out some of the other NFT-based games out there? Certainly.
There’s often no fee to explore a game and see the opportunities that exist.
Digital real estate is an exciting new world that’s showing a lot of potential. Being one of the first to really understand how these worlds operate can open up a lot of opportunities. Once that understanding is there, and you’re able to properly weigh the risk and reward trade-offs of an investment, then that’s the time to invest.
We won’t know for a bit if those spending millions on digital real estate today are the smartest people in the room. But I’m sure excited to find out.
