Yesterday, Andrew Jaquith from Forrester blogged about digital asset value, in response to Russell Cameron Thomas’ post on the same topic, which was in response to a Jeremiah Grossman tweet*. Andrew’s post mentioned a cost-based approach I use for valuation that he aptly named “Lindstrom’s Razor” (has a nice ring to it, doesn’t it? ). Lindstrom’s Razor simply states:
The digital assets in question must be worth at least as much as you pay for them.
While this is intentionally simplistic, it is worth making a few points:
1. This is intentionally simplistic.
2. This is completely non-controversial in the world of corporate finance, and not really novel (except, perhaps, as it applies to security). Take, for example, this passage from Brealey-Myers-Allen “Principles of Corporate Finance” 8th edition (p. 19): “When an investment opportunity or “project” is identified, the financial first asks whether the project is worth more than the capital required to undertake it. If the answer is yes, he or she then considers how the project should be financed.”
3. This is intended to be a minimum baseline – the digital assets could be worth much more this (as I’ll describe in a follow-on post).
4. There are nuances associated with net present value, internal rate of return, discounting for risk, etc… that impact it over time.
5. Value starts with cost, but isn’t tied to it. The actual costs themselves are sunk. New valuations may occur based on changes in market conditions, the economic climate, or other variables.
Hope this helps!
*I intend to post a fuller essay on digital asset value in the near-term future.