Sam Reynolds

<div id="highlights-block_61cddad7b205e" class="highlights">
 <ul>
 <li>For the metaverse to become truly immersive, the quality of the graphics will have to rival big-budget Hollywood movies</li>
 <li>A quintessential facet of Web3 is individual ownership of assets, so companies that provide or facilitate transactions of digital assets will have a role to play</li>
 </ul>
 
</div>



So, you want to invest in the metaverse, but — as we covered in <a href="https://cms.blockworks.co/dreaming-of-the-perfect-metaverse-etf-part-1/" target="_blank" rel="noreferrer noopener">part 1</a> — the Solactive Global Metaverse Index includes some companies that are irrelevant or nearly so. With that in mind, what should belong in a metaverse investors portfolio?



Here’s a slate of companies and projects that are worth a closer look.



<h2 class="wp-block-heading">What to double-down on</h2>



<h3 class="wp-block-heading">Game engine developers, e.g. Epic Games and Unity&nbsp;</h3>



<meta charset="utf-8">If the metaverse is going to be about exploring virtual worlds with headsets, there needs to be a precursor: good VR games.



Behind the vast majority of virtual experiences, there are one of two game engines to watch: Epic Games’ Unreal and Unity’s game engine. I say virtual experiences — not games — because in the last few years we’ve seen an evolving role for this technology that goes beyond just powering games. These two game engines have evolved to a point where they can create photo-realistic imagery that rivals pre-rendered computer animation.



In &#8220;<a href="https://disneyplusoriginals.disney.com/show/the-mandalorian" target="_blank" rel="noreferrer noopener">The Mandalorian</a>,&#8221; Disney+ animators used Unreal to create the series’ visual effects for everything from spaceships in the stars to virtual backgrounds that extended sets. 



Unreal’s rival Unity completed the acquisition of Peter Jackson’s <a href="https://advanced-television.com/2021/12/02/unity-completes-weta-digital-acquisition/">visual effects house Weta Digital</a> in late November, demonstrating just how determined they are to develop this new vertical.&nbsp;



While there are other game engines out there, Unreal and Unity <a href="https://www.valuecoders.com/blog/technology-and-apps/unreal-engine-vs-unity-3d-games-development/" target="_blank" rel="noreferrer noopener">dominate</a> the market share because they are open platforms and agnostic to users while other game engines are proprietary and locked behind walled gardens. For this reason, they are the platforms that interoperable virtual experiences will be built upon.



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="556" src="https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg" alt="Strange Clan, an NFT game powered by Unreal Engine" class="wp-image-13344" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=428 428w, https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=470 470w, https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=389 389w, https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2021/12/image_15-1024x556-1.jpg?w=1247 1247w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption>Strange Clan is an NFT game powered by Unreal Engine; Source: Strange Clan Discord</figcaption></figure>



<h2 class="wp-block-heading">What to include</h2>



<h3 class="wp-block-heading">VR headset manufacturers, digital asset trusts, e.g. HTC</h3>



HTC, the company behind the Vive headset, has been notably absent from current Metaverse ETFs and indices thus far.&nbsp;



Perhaps because the stock trades in Taiwan, on the Taipei exchange, and its New York-listed American depositary receipt (ADR) was delisted long ago as investors lost interest with year-over-year declines in smartphone market share. 



But that was a different era. HTC’s Vive virtual reality (VR) headset is a portal to the metaverse. Its main rival is Facebook’s Oculus. Sony’s PSVR headset is locked down to games on the PlayStation and there’s no indication that PlayStation games are going to be part of the metaverse anytime soon.



<meta charset="utf-8">Despite VR being available since 2015, the current games on the market <a href="https://www.cnet.com/tech/computing/3-big-reasons-vr-failed-to-revolutionize-pc-gaming/" target="_blank" rel="noreferrer noopener">failed</a> to <a href="https://www.businessinsider.com/reason-virtual-reality-hasnt-taken-off-future-technology-2018-11" target="_blank" rel="noreferrer noopener">impress players</a>. For most of its life, it has been a rather niche product.



That said, demand for VR headsets is on the rise — not from the metaverse quite yet, but from games that are properly embracing the medium.



According to data from <a href="https://www.androidauthority.com/ar-vr-headset-market-share-q1-2021-1644442/" target="_blank" rel="noreferrer noopener">Counterpoint Research</a> and <a href="https://www.idc.com/getdoc.jsp?containerId=prUS48041621" target="_blank" rel="noreferrer noopener">IDC</a>, VR and augmented reality (AR) headset shipments nearly tripled year-on-year in the first quarter of 2021 because game developers and gamers finally found a product market fit.



Investors in Taiwan seem to have taken notice. <a href="https://www.google.com/finance/quote/2498:TPE?sa=X&amp;ved=2ahUKEwi7kJijy4v1AhVUIqYKHTINDgEQ3ecFegQIDBAe&amp;window=6M" target="_blank" rel="noreferrer noopener">HTC stock up nearly 120%</a> over the last six months, with the biggest gains coming since October. In a <a href="https://www.taipeitimes.com/News/biz/archives/2021/11/05/2003767317" target="_blank" rel="noreferrer noopener">recent monthly earnings report</a>, HTC said that its sales hit $20 million for September, up 64% from a year earlier, coinciding with the launch of the HTC Vive Pro 2 headset — and all of this comes as the company still loses money, a lot of it, as smartphones prove to be an anchor.&nbsp;&nbsp;&nbsp;&nbsp;



<h3 class="wp-block-heading">Grayscale’s Ethereum, Chainlink and Decentraland trusts</h3>



If the metaverse is really going to be tied together by digital assets, NFTs and the blockchain, Grayscale&#8217;s <a href="https://grayscale.com/products/grayscale-ethereum-trust/" target="_blank" rel="noreferrer noopener">Ethereum</a>, <a href="https://grayscale.com/products/grayscale-chainlink-trust/" target="_blank" rel="noreferrer noopener">Chainlink</a> and <a href="https://grayscale.com/products/grayscale-decentraland-trust/" target="_blank" rel="noreferrer noopener">Decentraland</a> listed trusts could be important in a metaverse ETF.



Ethereum, after all, is the tie that binds it all together, powering NFTs and digital asset trading.&nbsp;



<a href="https://chain.link/" target="_blank" rel="noreferrer noopener">Chainlink</a> transports real-world data onto the blockchain and has quickly become the trusted oracle for the market data that powers many of the most aggressive trading venues out there. Theoretically, it would also be useful for the metaverse by allowing data to be transported between virtual worlds.&nbsp;



Decentraland is an obvious choice. Its MANA token provides liquidity to one of the first metaverse experiments of the NFT era.



To be sure, the metaverse is a trend to watch for 2022 but whether it has sticking power remains to be seen. Let’s not forget about <a href="https://secondlife.com/" target="_blank" rel="noreferrer noopener">Second Life</a>, a 2003 centralized online multimedia platform that gives people a second life in a virtual world — it&#8217;s still quietly plugging along in the background of all this metaverse noise.



Not investment advice. The author has no positions in the above-mentioned equities.



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Dreaming of the Perfect Metaverse ETF (Part 2)

<div id="highlights-block_61cc4c1532090" class="highlights">
 <ul>
 <li>Proshares filed with the SEC late Tuesday for a metaverse ETF that will hold companies exposed to the metaverse industry through technology, platform, device and data processing</li>
 <li>Apple, Meta, game engine developer Unity and GPU designer Nvidia will be its heaviest weightings </li>
 </ul>
 
</div>



ProShares, which <a href="https://cms.blockworks.co/proshares-bitcoin-futures-based-etf-to-begin-trading-tuesday/" target="_blank" rel="noreferrer noopener">launched the first US-listed bitcoin ETF in October</a>, has filed with the SEC to list a metaverse-themed ETF that would track the performance of the Solactive Metaverse Theme Index. 



The Solactive Metaverse Theme Index, or (SOMETAV), largely holds technology stocks involved in the backend of the metaverse. Amongst those stocks are Apple, Meta, <a href="https://cms.blockworks.co/zuckerberg-says-facebooks-new-name-will-be-meta/" target="_blank" rel="noreferrer noopener">which rebranded from Facebook</a> to emphasize what Mark Zuckerberg believes is the future of social; Unity, which develops the Unreal game engine; and GPU designer Nvidia, which creates the graphics cards required to render 3D worlds. 



“Each company identified receives a score, as determined by the automated scan, that reflects its exposure to the Metaverse industry,” <a href="https://www.sec.gov/Archives/edgar/data/1174610/000168386321007439/f10626d1.htm" target="_blank" rel="noreferrer noopener">explains ProShares</a> in its prospectus. “The Index Provider then reviews each company and excludes any company that does not have relevant business exposure. The remaining companies are then ranked based on the assigned score.”



Other gaming companies like Take Two Interactive, which is behind the Grand Theft Auto franchise, Electronic Arts and Capcom Games are also on the index.&nbsp;



This isn’t the first metaverse ETF to launch. In late November, Evolve Funds launched the Evolve Metaverse ETF on the Toronto Stock Exchange, which holds many of the same stocks, and Horizons launched its Global Metaverse Index ETF in Toronto which also tracks the same Solactive Global Metaverse index.&nbsp;



In Europe, DeFi Technologies subsidiary Valour <a href="https://cms.blockworks.co/metaverse-etp-gains-approval-in-europe/" target="_blank" rel="noreferrer noopener">launched</a> a metaverse and gaming index exchange-traded product (ETP) in mid-December regulated by the Swedish Financial Supervisory Authority. This ETP holds digital assets of many of the most popular crypto games such as Decentraland’s MANA token and Axie Infinity’s AXS.



Other secondary stocks related to the metaverse also seem to have caught investor interest. Taipei-listed HTC (not included in the SOMETAV index because of its non-US listing) makes the Vive virtual reality (VR) headset — only a small percentage of the company&#8217;s handset-dominated business. Despite HTC <meta charset="utf-8">continuing to <a href="https://investors.htc.com/en/financial-information/quarterly-results/" target="_blank" rel="noreferrer noopener">post a loss</a>, its stock <a href="https://www.google.com/finance/quote/2498:TPE?hl=en&amp;window=YTD" target="_blank" rel="noreferrer noopener">is up nearly 150% since October</a> due to interest in its headset as a portal to the metaverse.



A <a href="https://www.bloomberg.com/professional/blog/metaverse-may-be-800-billion-market-next-tech-platform/" target="_blank" rel="noreferrer noopener">Bloomberg Intelligence note</a> from early December said that global metaverse revenue opportunity could approach $800 billion in 2024. Bloomberg believes that $412.9 billion of this revenue by 2024 will come from gaming, VR and augmented reality verticals.



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