Why Metaverse Cryptocurrencies Jumped This Week

What happened 

Dreams of the metaverse are alive again (for now) as the values of top metaverse-related cryptocurrencies jumped this week. Those gains were driven in part by macro news, but also due to bullishness about the metaverse. 

According to data provided by S&P Global Market Intelligence, as of 11:30 a.m. ET on Friday, Axie Infinity (AXS 4.10%) was up 22% over the past week, Decentraland (MANA 12.91%) was up 39.4%, The Sandbox (SAND 7.99%) had jumped 35.5%, and ApeCoin (APE -0.07%) had popped by 20.5%. 

So what 

The latest Consumer Price Index report, released on Thursday, showed prices declining slightly month over month in December, with year-over-year inflation continuing its decline to 6.5%. That led investors to speculate that interest rate increases will slow and potentially reverse in 2023, which caused them to bid growth stocks higher. And since most cryptocurrencies trade in correlation with high-growth assets, they rose as well. 

We can’t overlook the metaverse-specific news, though. According to new reports, not only is Apple (AAPL 0.54%) building a combination virtual- and augmented-reality headset, but the new device will also be released this year. Meta Platforms (META 0.07%) has thus far been the biggest tech name attempting to make a splash in virtual reality and metaverse applications, so getting Apple into the mix could be good for adoption and usage.

To be clear, the week’s gains for related cryptos were not driven by any indications that these metaverses or games had actually experienced increased adoption, nor was there news about any big releases. Rather, they appeared to be powered by speculation that in the future, more people will be interested in these activities.

I think it’s possible that metaverse applications, particularly those that run on blockchains, will become extremely valuable. But that hasn’t proven to be true yet. 

Now what 

One of the challenges cryptocurrencies and metaverses share is user adoption. The more users they have, the more valuable the tokens will be. And over the last year, there’s been a decline in adoption and trading activity almost across the board. But that narrative could be shifting. 

A lot of the leverage from exchanges and hedge funds has been flushed out of cryptocurrencies, and now, a more natural adoption curve is taking place. That will be good for some projects and bad for others, just like in the traditional gaming industry. 

While I do think that blockchain ownership of assets and using tokens for transactions are compelling use cases, they have yet to be proven in reality. And all of these projects have been built on the Ethereum (ETH -0.49%) blockchain, which is plagued by high transaction costs (“gas fees”) and relatively slow transaction times. I’m not sure how that dynamic will hinder these applications specifically. 

As much as investors like to see the values of their assets go up, I don’t think this week’s price gains for metaverse-related tokens will last long. There’s no indication that Apple will be supporting any of these games (yet), and users have yet to adopt them on a widespread basis. I think the right move would be to stay on the sidelines until we see real user growth gain traction in one of these metaverses.