Cryptocurrencies and Interactive Entertainment: Why the Gaming Sector Is So Promising

Author: Marco Manoppo

Source: substack

I played a lot of games in my life from elementary school to college. Now, I'm not going to pretend I'm a socially handicapped kid who grew up with no friends and whose only escape was games or the internet. However, whenever I have "alone time" at home (I'm an only child), I always turn to the internet, especially games, as my primary source of entertainment.

Believe it or not, my dad literally bought the Playstation 1 and 2 (video game consoles released by Sony) out of his own interest without my asking. I was too young then to comprehend the latest developments in gaming equipment, let alone ask to buy one. One of the things I remember the most was seeing my dad playing GTA 3 in the living room.

A good portion of my personal growth and knowledge has been contributed to the game over the years. Growing up in a non-English-speaking country, my main English communication was talking to people from all over the world through online games, especially MMORPGs (massively multiplayer online role-playing games). It also taught me competition, an appreciation for art/storytelling, and strategic thinking.

During my four years in college, I just observed the game industry in my spare time because I didn't have enough time to fully immerse myself in games compared to high school. Once I decided to devote myself to something, I became too competitive, and I didn't have time to play games in college.

In this article, I want to explain why I am bullish on the game industry from an investment point of view, and why I think it is closely related to the cultural development of the younger generation.

Throughout this article, I will refer to the "gaming" industry several times. Actually, this term is not entirely accurate. By "gaming" I mean a combination of gaming technology, esports, live streaming, etc.; perhaps a more appropriate term would be what Dr Disrespect once called "the interactive entertainment industry". In this article, I will simply refer to it as the gaming industry.

more technical than you realize

In the process of creating a game, apart from the creative aspect, a lot of things are high-quality simulations. When our character shoots arrows and kills enemies, it's a simulation. Basically, everything that happens in the game's virtual world is a carefully crafted simulation. Unity Technologies, one of the largest players in the gaming industry, has worked with non-gaming related industries in the past, and its software has been used by:

Hong Kong International Airport is used to simulate passenger flow

Used by filmmakers to make the movie The Lion King

The U.S. Army is using it to create an immersive 3D maintenance training app

Meanwhile, another big company, Unreal Engine (owned by Epic Games), which makes popular games like Fortnite, recently had an online interaction with Travis Scott for his Metaverse concert A breakthrough has been made in the field of entertainment. Unreal has also developed specialized software for filmmaking and has partnered with renowned studios such as The Third Floor, responsible for Marvel, Star Wars, and Game of Thrones.

As the quality of graphics processing units (GPUs) improves, gaming technology use cases will be able to transfer to and overlap other industries due to their cross-cutting nature. We often forget that the so-called game technology is no longer just N64, it now includes:

Gesture Control -> Nintendo Wii

Facial Recognition -> Far Cry 6

Virtual Reality -> Half-Life: Alyx

Augmented Reality -> Pokémon GO

Cloud Computing -> Google Stadia

Instant Gaming -> Twitch, FB Gaming, Youtube Gaming

Social Media -> 100 Thieves, TSM

...

Market opportunities

Let's look at the data.

One of the things that makes the gaming industry so appealing is that it remains deeply undervalued. Despite its enormous commercial, technological and cultural relevance, the older generations (GenX and Baby Boomers) who own most of the world's capital are not fully aware of the industry's potential.

The chart below compares the performance of the S&P 500 with the top 5 gaming ETFs. As of September 11, 2020, these gaming ETFs had a combined assets under management (AUM) of approximately $950 million.

Source: Tradingview , etfdb.com

When we compare the performance of the two largest gaming ETFs (ESPO and HERO) with other tech ETFs in the tech sector, we can see that the gaming ETF has outperformed other tech ETFs year-to-date. The caveat here is that COVID-19 has helped the industry a lot, and the relative youth of most gaming ETFs means we still have to see if they stand the test of time.

Source: etfdb.com

We can also see from the histogram below that the AUM of the two largest gaming ETFs still pales in comparison to other tech ETFs. However, that's before taking into account that many gaming companies are still privately owned.

Source: etfdb.com

Going forward, we can only imagine the scale and positive growth these gaming ETFs will experience as investors seek more growth assets in a world where risk-free rates don't exist, and as more and more gaming companies go public.

internet cultural wisdom

Perhaps, the least-discussed factor that makes the gaming industry so incredibly poised to prevail in the near future is its cultural association with "deep" internet users. Depth here refers to those who spend a lot of time online, learning about the latest developments, trends and culture. Similar to business acumen, there is another skill called internet cultural intelligence. The majority of people with this skill set are millennials and Gen Z, with the exception of a few savvy Gen Xers like GaryVee. This is because the younger generation spends more time online, especially playing games, or more broadly, the "interactive entertainment industry".

The importance of internet cultural intelligence can also be seen in the increasing embrace of online platforms by talk show hosts and celebrities, as the latest fads and cultural relevance first start to emerge from the internet. It took them years to acknowledge Youtube, but it took them even less time to acknowledge the relevance of Twitch and TikTok.

Source: Globalwebindex

We can also see that gaming-related lifestyle and media brands are becoming more important, with companies born out of esports/gaming culture like Team Solomid and 100 Thieves raising hundreds of millions of dollars from investors to expand their businesses scale. Beyond that, these types of companies will also have a huge impact on the overall influencer culture as they have started signing influencers and incorporating what would otherwise be called non-gamers into the gaming culture.

Team Solomid recently signed Hikaru Nakamura, a child chess prodigy and five-time US Grand Prix champion. 100 Thieves signed Neekolul, the Tik Tok influencer known for popularizing the slang term "Ok Boomer." Having different influencers under the same brand can almost create something akin to a network effect, multiplying the reach of a brand and making it the best in the influencer industry.

Source: Twitter

In addition, the games industry also holds many intellectual property (IP), which is one of the most important types of assets that every successful business must own. In tech or finance, this may not be so obvious, where IP is trade strategy secrets or social media algorithms. In the games industry, the importance of IP has been elevated as it is linked to art, creativity and world-building.

Similar to comic books such as Marvel, excellent games have IPs that transcend eras and cultures. No matter what language you speak, you know that Super Mario is about a guy trying to beat a level to save a princess. Big players in the entertainment industry are beginning to recognize this as well. More and more games are being adapted into movies, such as the most recent Pokémon and Netflix's The Witcher (from the books, popularized by the games).

Exciting times are coming

The gaming industry is only going to get bigger as technology and cultural relevance grow. Gamers will no longer be associated with the negative stigma of overweight individuals who have no social life and spend 12 hours a day playing games in their parents' basements, the use cases for gaming technology will no longer be limited to game design, its importance Will increasingly overlap with another emerging technology.

Disclaimer: Not financial advice, all information provided in this publication and its affiliates is for educational purposes only and should not be construed or considered as financial, legal, investment or any other form of advice.