The concept of value has never been in more heavily called into question. As Bitcoin hits all time highs, prices for digital art NFTs (Non Fungible Tokens) soar, and a tokenized video below from NBA Top Shot sold for $208,000 (@NBA please don’t sue me for reposting), price estimates for assets have never been more divorced from fundamentals.
But what really are ~fundamentals~ when it comes to valuing something? Value can pretty simply be defined as “the importance, worth, or usefulness of something”. As a former finance major who now only uses his degree to mansplain Wall Street Bets to girls on dates and dunk on Econ majors, I was taught in college that there are 3 main ways to value a company:
But what if…
- Costs are negligible due to an asset’s digital nature
- The asset doesn’t generate cash flows
- All other assets in the market are equally unique and new
These traditional valuation concepts break down in valuing these new age assets. Some analysts resort to surmising that these assets therefore lack value. “Something, something, tulips” they say. More interested people would try to tease out what characteristics make these assets similar.
The value of these digital goods relies on 3 attributes: Scarcity, Verifiability, and a Community.
Scarcity: An asset’s controlled and dependable Scarcity is the ultimate driving force behind its value. Gold has value beyond its industrial use due to the monetary premium human put on it. San Fransisco property values remain high because supply has been limited. Blockchain technology allows digital scarcity. Bitcoin has its 21M cap, NFT art has provable scarcity, and the NBA has assured the limited quality of the cards and highlights they are offering. Below is an example of a Steph Curry 3 pointer- 99 total were made available for sale, the lowest available for sale is $43,000 (Coincidentally, that’s also the price for tickets to Warriors game in Chase Center and a large popcorn).
Verifiability: I’m in deep over my head explaining blockchain verifiability so I will simply link to various other way smarter people here. Mega high level overview is that blockchains use cryptography (fancy math) to replace the role of intermediaries to verify transactions. The main takeaway is these technologies increase the trust of ownership in these digital assets, a trust that is essential when these assets cannot actually be touched and locked away physically.
Community: Naval Ravikant recently described (1:19:45) Bitcoin as retaining value indefinitely “as long as there is 5,000 or 50,000 wealthy people who will trade it with you for hard assets”. The community around crypto generally, and Bitcoin specifically are fundamental in giving it value. For NFT art and NBA highlights, the community is less defined but equally visible. Much of the NFT art is being marketed within Crypto Twitter circles and bought by people made rich by the recently crypto pump and looking for ways to diversity their wealth. The NBA has a rapidly growing fan base that trends younger and more tech savvy than any other major sport.
All three of these asset classes combine Communities with interest in the actual asset’s properties with the underlying technologies that make value storage possible.
It’s hard watch the dramatic increases in these digital goods and not scoff at the absurdity. I wasn’t allowed to open a trading account in 1999 from my Pre-K classroom but I would have imagined similar disbelief in valuations of digital, non cash generating, unique companies back then. Marc Andreessen remarked on a podcast in 2017 that although many tech bubble companies went bankrupt in 2000, almost all of their founding ideas were recycled into companies succeeding today. The classic example he used was Pets.com failing in 2001 while Chewy sold for $3B.
So I guess the questions this time around are:
- Are we comfortable with this new way of thinking about value?
- Are these digital goods more pets.com or more Chewy?
- Which assets are the Amazons who will survive the crash regardless of being “too early”?
- Will my finance degree continue to decrease in value faster than Exxon?
Hopefully we get answers to these soon, let’s enjoy the ride.
