What is Value?
Photo by Chris Liverani on Unsplash
The recent hype around Non Fungible Tokens (NFTs) has been interesting. A piece of ‘art’ by the artist Beeple sold for almost $60 Million. I put the word ‘art’ in quotation marks because it isn’t art in the conventional sense that most of us might think of. It’s digital and anyone can see and download it (there’s nothing physical at play here). But the NFT provides one person with indisputable proof of ownership, and that person estimated the value of that proof at $69.5 Million.
I’m not going to offer a point of view as to whether that valuation was merited - there’s clearly different points of view on this, depending on your view of art, of NFTs, etc. But it does raise an interesting question about how we value things.
We like to think of valuation as an objective process: it cost me this much to create this, I’ve made it available in this way and hence the price should be somewhat reflective (or related at least) to those elements.
The reality is, of course, not quite like that.
In reality, we see products being sold at multiples of that input cost that might seem absurd. Products that cost 50 cents selling for $20. Paintings that cost the price of a few high quality paints and the artist's inspiration and perspiration selling for $5 million (and more). Companies with a few million in revenues and generating no profits selling for hundreds of millions of dollars.
Many times, it’s hard to correlate those aspects in any rational, universally acceptable way and that’s worth bearing in mind as we look to understand whether we think the value of something is appropriate.
That is, what is it that we’re actually paying for?
Well, fundamentally, we’re paying for two things. The first is tangible i.e. the actual physical or digital or structured product that we’re buying. Broadly speaking, that thing we can touch and feel.
And the second is, for lack of a better word, the intangible - the scarcity of it (in the case of art), the prestige (in the case of high end luxury goods), the expectation of some future benefit in some form (in the case of companies as well as certain products), to name a few.
Tangible + intangible. Content + Buzz. Substance + Hype (which you can interpret positively or not). The value of something is determined based on the interplay between these two and that’s key to assessing it and (trying to) understand it.
When something is considered in fashion, the intangible tends to be valued much more than the tangible. Conversely, when it’s out of favor, the assessed value goes the other way. For example, a 1959 Gibson Les Paul guitar today will cost several hundred thousand dollars, whereas one that is a year older will cost much, much less. Yet, reasonable people might suggest they don’t sound materially different. (I know, that’s considered heresy in many guitar player circles…)
It’s worth remembering that before we get worked up about the price of a product or the fee for a piece of art or the valuation of a particular company. Price isn’t always objectively defined as it truly is in the eye of the beholder. If there are enough beholders who believe in it, then the price will climb. And, depending on the context, that number needn’t be very high. It just has to be meaningful in the context of demand and supply.
Of course, that’s not to suggest that we should chase the hype cycle in order to get the price we want for what we have to offer. I believe we always need to start with the content, the ‘thing’ itself and make that as best as we can and offer the most value from that perspective.
But it’s worth noting (if for nothing other than for our own peace of mind and sanity) that the intangibles will play out, at times, to an extreme, especially if we operate in an arena where such factors have an inordinate influence.
But to chase the buzz as the primary goal? I don’t think so. Always start with, and focus on, the content.
