Aimee B. Davis Law P.C.

What is the Value of an NFT?

{4 minutes to read} 

{4 minutes to read}

 

What’s an NFT?

 

According to Christie’s, a non-fungible token (NFT) is a unique, digital certificate stored on the blockchain evidencing certain “ownership rights” in a digital asset/work of art. NFTs are easily traded by artists and others because the provenance, history, and all activities related to the work can be viewed by the public utilizing the same technology as crypto-currencies. Blockchain technology reduces counterparty risk and enables people who don’t know each other (and will never meet) to transact across borders.

Money bag NFT - non-fungible token. Digitally represented product or asset. Selling digital assets and art through auctions. Blockchain technology. Monetization, investment in cryptographic tokens

NFTs create a platform for artists to sell their work directly to a worldwide audience. So, from the artist’s perspective, I like that NFTs level the playing field by eliminating barriers to entry into the art market.


On the other hand, as an attorney and an art lover, I’ve been confused about the underlying value of NFTs, since not all of the five exclusive rights of ownership granted by The Copyright Act of 1976 are conveyed when you buy one.


What is the Value of an NFT?

 

I’ve been wondering about how to value NFTs, so I consulted with the Managing Director of Meliora Advisors, LLC. Tony Cotrupe, CFA, a valuation expert, and former economist, gave me a lesson about utility.


According to Tony:
“Value is a function of future expected benefit and the risk associated with receiving that benefit. That benefit, which economists term “utility,” can come in many forms, both tangible and intangible. In corporate finance, M&A, and private equity, we usually think of cash flow, but it can be anything.”


To amplify this, Tony offered the following:
“Let’s pretend you and I have a company and you own 49%, I own 49%, and George Clooney owns 2%. Let’s assume the company’s equity is worth $100, and we all agree on that. Now, let’s say George came to me and asked me to buy his shares. George’s shares would get me 51% ownership. I might very well pay more than $2 for those shares because of what they give me above and beyond my claim on 2% of the cash flows of the company. Maybe control means a lot to me (à la Elon Musk), and I’m willing to pay a premium for the additional utility I derive from it.


We see it all the time in exactly this scenario. People get into bidding wars over things (houses, art, companies) when no rational person would do so. Maybe the thrill of winning (i.e. bragging rights) generates utility for them. The bottom line is that if the cost is greater than the utility derived, you won’t buy it. But if the cost is less than the utility derived, you do.”


I’m learning that the value of all things (even real property) is subjective, and an NFT’s value is whatever someone is willing to pay for it.


Recently, the benefit of NFT ownership was described to me as the “Flex,” which I understand to mean bragging rights, but it also includes gaining access to a community. After 2 years of isolation, the metaverse sounds exciting. I look forward to learning more about (and maybe getting some of) that “Flex.”

Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email aimee@aimeebdavis.com.

Aimee B. Davis Law P.C.

917-617-2243
122 Ashland Place
Brooklyn, NY 11201

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