What makes something valuable?
Value is subjective. Many factors can interact and influence each other, and the relative importance of each factor can vary depending on the situation.
Factors of Value:
1️⃣ Scarcity
2️⃣ Utility
3️⃣ Demand
4️⃣ Quality
5️⃣ Social status
6️⃣ Historical significance
7️⃣ Personal preference
1️⃣ Scarcity: When a resource is rare or in limited supply, its value often increases. For example, gold has a current market cap estimated at $12.715 Trillion. Precious metals such as gold and silver are considered valuable because they are difficult to find and extract. Even though technology has made this easier, it’s still involves difficult work. Because of this difficulty, the amount of gold in circulation only increases on average roughly 2.5% every year, making this useful item, also scarce. Limited supply can mean that any change in demand would have an exaggerated effect on value.
Many bitcoin supporters argue that it represents the very first truly scarce asset with a programmatically fixed supply of 21 Million. There will never be more than that, ever. It’s no wonder that the term “mining” was adopted by PoW (Proof of Work) consensus mechanisms because of the similarities with mining gold. Both represent a cost for the amount of work it takes for extraction. This work also adds to the value of both assets.
2️⃣ Utility: Something is more valuable if it is useful and can satisfy a need or want. When you own something that provides access to a need or want, such as a tool that increase efficiency, exclusive membership to a private club, or an experience that increase quality of life — demand naturally follows.
3️⃣ Demand: People always want something more when it is hard to get. If many people want a certain item, its value may increase due to the competition for it. If there is a high demand for something, its value increases. Creating demand is the holy grail for product specialists and marketers alike. FOMO (fear-of-missing-out) is one of many psychological factors at play when you want to increase demand effectively.
4️⃣ Quality: Something is often more valuable if it is high quality. This can be due to durability, reliability, and superior performance. For example, a high-end car is typically more valuable than a basic model because of the materials used and the higher and longer lasting performance.
“You get what you pay for” is an old adage that implies quality always costs more, but should last longer.
5️⃣ Social status: Things that are associated with status or prestige can be considered valuable. Luxury brands and exclusive experiences are seen as valuable because of their perceived exclusivity and the status they confer on the person who possesses them. This ego-based “flex” not only provides a dopamine hit to the people who own such items, but also drives significant revenue into the luxury industry which will grow to a market cap of over half a trillion dollars in the next decade.
6️⃣ Historical significance: Something can be valuable because of its history and cultural importance. For example, artifacts, works of art, and landmarks can be valuable due to the memories and stories they evoke. If something was “first” and is still around decades later, it can dramatically increase in value over something that came after, even if that something is digital.
The first generative Pfp (Profile picture) collection Crypto Punks is considered blue-chip and is very expensive for being a “first of it’s kind”. It’s traded almost $2 Billion in volume since it was first minted on the Ethereum blockchain in June 2017.
7️⃣ Personal preference: Something may be valuable to an individual based on their personal taste or preferences. For example, someone might place a high value on a unique item or collectible because it holds personal meaning or sentiment for them. Something may be priceless to one person, and worthless to another. The ultimate subjective factor is someone’s taste.
What about preference for how something is made?
Artificial Factors
When applying any of these factors to something man-made, does that make it less valuable? In other words, if any of these factors are manipulated (like the artificial scarcity of diamonds for example) does that change it’s perceived value? To some, sure…
But I’d argue that it doesn’t really matter. As long as a market is created with a willing buyer on one side, and a willing seller on the other — a price will be negotiated and a transaction will happen.
Beauty is in the eye of the beholder.
The very fact that value is subjective is what allows for a market to be made in the first place. In any market, a price is negotiated by both sides.
So…how do you measure value?
Value = Tangible + Intangible
It’s calculated by a variety of factors.
Tangible vs Intangible Value
Tangible value refers to physical assets such as property, equipment, and inventory that have a measurable value and can be seen, touched, or held. Tangible assets can be easily quantified and valued based on their cost, replacement cost, or market price.
Intangible value refers to non-physical assets such as intellectual property, reputation, brand image, and human capital that have value but cannot be physically seen or touched. Intangible assets are often more difficult to quantify and value than tangible assets, and their value is often derived from the benefits they provide, such as increased revenue, improved customer loyalty, or enhanced brand reputation.
How much intangible value does the statue of liberty provide to US citizens?
Methods used to measure intangible value:
1️⃣ Market-based approach
2️⃣ Income approach
3️⃣ Cost approach
4️⃣ Subjective assessments
5️⃣ Financial metrics
1️⃣ Market-based approach: This involves evaluating the market price of similar intangible assets or the cost of creating a similar asset.
2️⃣ Income approach: This involves estimating the future economic benefits generated by the intangible asset. For example, calculating the future royalty streams generated by a patent.
3️⃣ Cost approach: This involves estimating the cost of replacing an intangible asset, such as the cost of creating a brand from scratch.
4️⃣ Subjective assessments: This involves using expert opinions or surveys to determine the value of an intangible asset. For example, asking consumers to rate the value of a brand.
5️⃣ Financial metrics: This involves using financial metrics such as revenue growth, market share, and return on investment to estimate the value of intangible assets.
These methods have limitations, and the choice of method depends on the specific intangible asset and the purpose of the valuation. As a result, measuring intangible value can often require a combination of methods and a deep understanding of the asset and its underlying drivers of value.
That is to say, it’s hard to get right.
When value is subjective, it leaves opportunities for arbitrage that someone is always willing to take advantage of. There will always be a winner and a loser when a market is created to trade something of value. It’s not always clear who that is as time plays a big role as well.
But ultimately, the market will decide.
