Why and how to value digital assets?
In this article, you will learn about digital assets and how they are valued.
An idea has evolved as a result of technological advancements that have changed the way everyone should think about their estate strategy. Because they cannot be handled in one’s hand or transported by a moving truck, they are intangible. However, there’s no denying that such assets can be extremely valuable to you and should be included in any estate plan. Despite the fact that most people own a lot of digital assets these days, it took a long time for many estate planners to accept this concept, but the idea that protecting digital assets is crucial is now widely accepted. In this article, you will learn about digital assets and how they are valued.
Digital asset valuation
Any digital file that adds value to your business is referred to as a digital asset. These assets should ideally be arranged in a way that makes them easily available to any department within your firm and distributable. Identifying whether or not a digital asset may be used outside of the organization’s framework from which it produces value is the first step in valuing it. The worth of most digital assets is derived from the context in which they are used, rather than from an independent free-market value.
What are digital assets?
A digital asset is a piece of content that has been saved as a digital file. Examples are images, photographs, videos, text-based files, spreadsheets, and PowerPoint decks. New digital forms emerge all the time – MP3s, for example, were unheard of before the 1990s – therefore, the definition of a digital asset is perpetually changing. A digital asset can be any content, in any format, that is saved digitally and gives value to the firm, rather than a specific list of file formats that qualify (or to the user or consumer).
Understand digital assets valuation
Fiat currencies’ fundamentals are based on their usefulness as repositories of value, units of measurement, and mediums of exchange. Although most cryptocurrencies have similar characteristics, they are an asset class where technical analysis reigns supreme due to the speculative nature of much of the trade thus far. Technologists and scholars alike are still delving into the principles of cryptocurrencies.
Why do you need digital asset valuation?
Digital asset valuation is required so that accurate information is provided for its usage. Digital assets are now heavily used by businesses to influence purchasing behavior and raise brand awareness. Digital assets give your products or services a visual image, and they allow you to connect with and engage your target audience through a variety of channels and mediums.
Although all digital assets have value, not all digital assets have equal worth. Some, in fact, are irreplaceable, with a worth that considerably outweighs the cost of production. Consider digital assets that can’t be duplicated, such as images or films of once-in-a-lifetime occasions. These assets are more valuable to a firm or a person than assets that took time to build but can be recreated with a little time and effort.
How to value digital assets?
Many of these we accumulate throughout our lives are worthless. Every time you make an online purchase and are required to create an account, that account becomes a digital asset. These accounts, on the other hand, usually have little value to anyone else, and we may not even be aware that we have them. However, while many digital assets are of minor value, some might be extremely valuable. To value these digital assets, it’s important to find their sources.
Key principles to value digital assets
The first step in valuing a digital asset is to determine whether it can be used outside of the business framework from which it derives value. Most digital assets gain value when they are employed in a specific context rather than from a free-market value.
- Value-driven assets – The first step in valuing a digital asset is to determine whether it can be used outside of the business framework from which it derives value. Most digital assets gain value when they have been employed in a specific context rather than a free-market value. If you have a blog that makes you proud but produces little or no money, here is an example. While it is valuable to you, it is unlikely to be worth much money. Consider the case when your blog has hundreds of thousands, if not millions, of readers and generates a substantial amount of cash.
- Ability to create business value – The second concept entails assigning a monetary value to a digital asset based on its ability to generate revenue. It’s possible that a digital asset isn’t making you a lot of money right now, but it could assist one or more of your heirs to enhance their quality of life. Even if you don’t make any money from your domain names, they could be worth thousands of dollars if you own a couple that is sought after by multiple large organizations. Consider it similar to a baseball card collection. You might not think about it because it’s in a box in your closet, but it’s not making you money. If you start selling them on eBay, though, you might be in for a major surprise.
- Forward-looking assets – This leads to the third principle, which argues that any valuation of digital assets must be prospective. What matters is how much something might be worth to someone else in the future, not how much you paid for it. If you have an auto repair blog with hundreds of great tips for car maintenance but haven’t made any money from it yet, don’t count out the possibility that a carmaker or auto repair company will wish to buy it and use it as a marketing tool on their website in the future.
Important metrics to value digital assets
Some digital assets follow the performance and value of real-world enterprises, while others are focused on creating an alternative financial environment. Now that we have certain indicators, it’s up to us to put them to good use in describing the worth of a digital asset. The network value-to-transaction ratio, or NVT ratio, is a proposed approach that is determined by dividing the market capitalization of a digital asset by the transaction value during a certain time period. These are the important metrics that help in the valuation of digital assets.
- On-chain – On-chain metrics provide information on a blockchain’s activities, such as transaction count overtime or the total value of transactions over time, active addresses, hash rates, and fees paid. On-chain transactions are cryptocurrency transactions that take place on the blockchain and are validated by the state of the network. Only when the blockchain has been updated to reflect the transactions on the public ledger are on-chain transactions considered genuine. Because they can’t be changed once they’ve been validated and logged on the network, on-chain transactions provide security and transparency.
- Project – The rationale behind a cryptocurrency, the technology it employs, its use cases, and the token supply and distribution plan are all revealed through project metrics. The process of organizing, storing, and distributing digital assets throughout a project or organization is known as digital asset management (DAM). You may build a central center for all of your digital assets by using a project management solution that includes digital asset management capability. Any virtual file that adds value to the company is referred to as a digital asset. Images and videos are the most prevalent formats. Documents, spreadsheets, presentations, and other digital assets are examples of digital assets which are projected at various levels.
- Financial – Financial metrics reveal the asset’s market capitalization, liquidity, and volume. To obtain information about a company, financial metrics use numerical values collected from financial accounts. Quantitative analysis is used to examine a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more using numbers contained on its financial statements – balance sheet, income, and cash flow statements. The analysis has two basic goals: to track and compare corporate performance and to make comparison judgments.
Digital asset valuation methods
A review of the company’s management, financial structure, future earnings projections, or market worth of its assets could all be part of a digital asset valuation. There are several tools used for a valuation. In most valuations, there are 3 common valuation methods used: asset approach, market approach, and the income approach. Several of these strategies will be discussed further down.
- Asset Approach – A company’s value is based on its net asset value, which can be obtained by subtracting the total liabilities from the total assets. Assets include tangible assets (such as real estate and cars), as well as intangible assets (e.g. intellectual property).
- Market Approach – The value of a company is obtained by comparing market forces in similar situations. This approach relies on existing data in order to compare companies in the industry. There are two methods under this approach: public company comparables and precedent transactions method.
- Income Approach – The income approach uses the company’s future earnings or cash flows to determine its value. Compared to the market approach, the income approach does not use previous transactions to determine the company’s value. Two main methods under this approach are capitalization of earning method and discounted cash flow method.
Get experts to help with your digital asset valuation with Eqvista!
The process of valuing your company’s digital assets is crucial, but it’s also difficult. It necessitates an understanding of the underlying costs of recreating those assets to the current stage, as well as the potential of those digital assets in generating leads or sales. It also necessitates the collection and analysis of a large amount of data. It’s a good idea to keep track of the value of your digital assets over time and look for methods to use them to improve your company’s performance. Now get your digital asset valuation from Eqvista, just fill up the sign-up form and get a free consultation.