In this post and next one, we will talk about the key benefits of NFTs to us, individuals.
In our previous post, we started discussing about the NFT, around the concept of scarcity. In summary, digital life is made up of a bunch of 1’s and 0’s. Ability to reproduce (I.e., copy and paste) anything in digital life initially prevented us from creating scarce products. Blockchain enabled us to create scarcity without a need for an intermediary. It was cryptocurrencies that were first born out of this scarcity (ability to create in limited quantities) and that were followed by NFT’s (which are unique or numbered).
We will start with establishing the foundation. What is value and how do we determine the value? Let’s have a deep dive into it:
How do you determine the value of a piece of art?
There is no clear, globally accepted method to value any object. Valuation is an ‘art’ itself rather than a science. Even ‘boring’ subjects like the ‘value’ of a company or a business is cannot be agreed upon. Are you going to use, Discounted Cash Flows (if yes, which cash flows? Free cash flows, EBITDA, net profit or dividends distributed), or look at the valuation of comparable companies or just liquidation value?
|Image by Bernd ) from Pixabay|
It gets more difficult when it comes to art. In order to avoid any misconceptions (or just out of ignorance) let’s just assume a normal art has two major components.
First is the intrinsic value (again very subjective concept), that is the value of any cost/effort used to create the piece. An example, for a painting, that would be the cost of paints, canvas etc plus the time spent by the artist on the piece.
The second part is the speculative value. That would be the difference between intrinsic value and the final sales price of the piece. The speculative part comes mainly from the aura around the artist (the fame, awareness, cost of other pieces created by the artist, whether the artist is alive or not -I.e. scarcity - etc) as well as who is selling the piece (if it is coming from a well known-collection that adds value). Another important part is the market. If there is abundance of capital around with limited profitable opportunities, then art is considered a good alternative investment.
To be continued..
In this post, we tried to address the issue of ‘valuing an object’ through the lens of art ownership. While we accept that this is by no means the only approach this will give us a solid foundation to understand how NFT would enhance the ‘value’ of that object. We will be looking at that in our next post.
None of the views expressed in this article should be considered as investment advice