With the emergence and increased adoption of digital assets in recent years, we are entering a new era of technology. Digital assets are anything that can be stored electronically and typically that have value such as currency, property titles, securities, and patents. Considering the unique properties of digital assets and the quickly evolving state of technology, it is important to value digital assets in a standardized way. You might be wondering why we should value digital assets, how they are different from traditional financial assets and how to develop a valuation framework for digital assets. Well, this article provides a comprehensive overview and analysis of digital assets and how to value them.
Digital assets and valuation
Unlike traditional financial assets such as vehicles, buildings, tools and real estate, digital assets do not have physical limitations, making them more relevant to the modern world. Digital assets are made up of algorithms and are stored over a network that represents value, they are digitized and can be moved or transmitted over the internet.
This sets digital assets apart from other assets since they are not subject to the same limitations of time, location and transferability that a traditional asset might have. While digital asset valuation is essential in order to assign a monetary value accurately. We will take a look at the different approaches to valuing digital assets in the latter part of this article.
What are digital assets?
Digital assets are defined as anything that can be stored electronically, has value and is identified by a unique address. Digital assets are created with the sole purpose of being used as either a form of payment or to represent and record ownership. In essence, digital assets are electronic representations of value that can be used as payment or as an ownership right.
Basically in businesses, the brand logo, image, documents, and any piece of information are all forms of digital assets. Since storing and transferring these assets over a network has become easy, digital asset transactions have grown exponentially. It is worth noting that the Internet is a fundamental platform for both creating digital assets and consuming them.
What are the characteristics of digital assets?
In order to address and understand the changing state of technology, it is important to understand the characteristics of digital assets. For instance, a logo of a business is a digital asset because it has been created using uniquely identifiable features, is stored over a network and has value. The key characteristics of digital assets are summarized below:
- Each digital asset is unique and consists of an identifying code, an address, and an algorithm. The unique identifying code provides a framework for digital assets and it is used to distinguish one entity from another.
- Digital assets can be sent, received and transferred over the internet in real-time and there is no need to meet up with the owner physically. This is a significant benefit as it allows for easy and secure transfer.
- Digital assets are secured in terms of their ownership and rights. For instance, there are some licensed images which are protected by copyrights and can only be used by individuals with permission.
Why are digital assets important?
The ability to save and share information has unlimited potential. Digital assets can create a platform for the exchange of ideas, ownership, customs, and even trade. The development of digital assets will be instrumental in the transition to a more efficient and effective working paradigm. Moving forward, digital assets will be able to be used for payments and for storage of things in the same way that traditional physical assets are often used.
It typically helps to streamline a business by reducing collusion, allowing for the efficient use of resources and eliminating fraud. Digital assets have the potential to affect every aspect, from business practices to human interaction, and the ability to track anything digitally will greatly simplify the world. Today, digital assets are being used for various things, such as sharing information, ownership titles and tracking the transfer of value. Thus, digital assets can be used in a multitude of ways and the potential benefits are endless.
Types of digital assets
There are numerous types of digital assets and each one of them serves a specific purpose. While all digital assets have one thing in common, which is their ability to store and transmit value, they have distinct features that distinguish them from each other. Businesses typically use the following types of digital assets in their operations and business models:
- Documents
- Photos/Logos
- Videos/Audio Files
- Spreadsheets/PDFs/Presentations
- Applications/Software
- E-books/Text
However, it is not limited to these types of digital assets, there are countless possibilities. Any creative work, idea or any form of information can be digitized and stored securely over a network. The transferability of digital assets is what sets them apart from physical assets. With the rapid increase in the number of digital assets being used in businesses, it is important to consider the value which is ascribed to these assets.
Valuation of Digital Assets
Now that you have an in-depth idea of what digital assets are, let’s discuss how to value them. Valuation is an essential aspect of the operation of a business, as it helps in financial analysis, planning, decision making and resource allocation. There are several techniques that can be used to value digital assets, and it is important to understand the different methods and approaches.
What is digital asset valuation?
Valuation methods for digital assets are as diverse as their uses. Digital asset valuation refers to an estimation of the value, worth or price of a digital asset. The valuation of digital assets is often made through the use of financial models, estimations, statistical analysis and other metrics. Although the valuation of digital assets differs based on the type of asset and use, there are generally a few common methods used to assess the value of a digital asset.
Why is the valuation of digital assets important?
Digital asset valuation is an essential part of the operation of a business. The need to understand an asset’s total value arises from more than just an accounting perspective. Whether it is for reporting purposes, planning, taxation, decision-making or distribution, understanding the value of digital assets is important for a business.
The valuation of digital assets is often used to provide management with the information needed in order to make the correct business decisions. Digital asset valuation allows businesses to assess the worth of their assets and use it as an effective tool to make important decisions. Thus, the valuation of the digital asset is required in order to use it efficiently and effectively.
What is included in the valuation of a digital asset?
Digital asset valuation is made on the basis of its potential returns. The value of a digital asset can be estimated through a more comprehensive financial model that can analyze the asset, its own performance and individual trends. Here are a few steps or principles to follow when valuing a digital asset:
- Assets that generate value - It is important to identify whether an asset generates economic returns from outside the company. Instead of having a free-market value, digital assets usually gain value when they are used in a specific context. The financial model for a digital asset must take into account not just its value to the organization, but also its recognition, popularity and value addition.
- Capability to add business value - The value proposition of a digital asset can be easily understood by assessing its potential return, usefulness and overall value to the network. Although the digital asset may not generate money immediately, it can be used to assist and add value to the company’s business. Some assets can be more valuable than others, but the main consideration is their ability to drive future growth in terms of their value to the company and its customers.
- Future-oriented assets - It is important to review the future of a digital asset’s value. Many assets start out as nothing more than an idea, but over time they can grow and build businesses in terms of their usefulness and potential return. It is important to assess the value of a digital asset based on its probability of success and its future growth. Thus, the analysis of digital assets should focus on more than just market value.
Methods for valuing digital assets
Once the key principles for valuing digital assets are established, the next step is to develop a more methodical approach by using various valuation methods. Each valuation method is based on certain approaches and can help businesses determine their asset’s worth. Digital assets have grown drastically in the last decade becoming a mainstream phenomenon and businesses must keep up with the rapid increase in demand and have a better understanding of how to properly value these assets. A digital asset valuation may include an analysis of the management team, financial standing, earnings forecasts, and market value of the company's assets. The following are some of the more common methods used in valuing digital assets:
- Market-Based Approach - This approach is used in valuing a company from a comparable market to determine its worth. The market-based approach is used in valuing a company with similar characteristics that are publicly traded or even by comparing the transaction of the company. It can be used to value digital assets in terms of similar assets or assets of a company with similar characteristics.
- Asset-Based Approach - It estimates the value of a company’s assets and then subtracts the value of liabilities. Including tangible, intangible and digital assets in the valuation allows businesses to evaluate their values. During the asset-based approach, the valuation of digital assets is essential as every item of an asset is considered. Therefore, it can be used to determine the worth of an asset.
- Income-Based Approach - It employs the use of cash flow forecasting and future earnings to estimate the value of a company. Either the predicted cash flow is discounted using the DCF method or the capitalization of earning method is used in order to estimate the value of a company. Thus, the calculations used in valuing digital assets are complex and require a great deal of analysis and interpretation.
Conclusion
The valuation of digital assets is crucial in the operations of a company. The ability to evaluate, plan and assess the value of an asset helps businesses make better decisions and enhance their business growth. However, it is quite a challenging task to value digital assets as they are complex and require the expertise of professionals.
The lead image was generated using HackerNoon's Stable Diffusion AI Image Generator feature, via the prompt "a digital hologram of a diamond".