CAN IT WAIT? A REAL OPTIONS VALUATION APPROACH TO EVALUATING NON-FUNGIBLE TOKEN BASED PROJECTS

Abstract

NFT-based projects, while being risky, represent great business opportunities for existing businesses and start-ups.In this paper, we propose the use of the Real Options Valuation (ROV) method in evaluating their investment decisions, in which flexibility is defined as the capability to wait for making the investment.The real option model is developed under the assumption that the opportunity to invest is available for a limited time horizon.The resulting partial differential equation for the value of the option to wait can be solved through a convenient approximation that computes the ratio between project value and investment costs. Using several numerical examples, this paper examines how the input parameters entering the valuation model affect the value of its outputs: the value of the flexibility to invest and the ratio at which investment decision becomes optimal. Unlike in a static Net Present Value decision, the examples based on the ROVmethod show that the ratio of the project value to the investment cost must be substantial to justify the investment.In our hypothetical examples, the initial ratio between project value and investment cost, their respective volatility, and the time horizon have a great influence on the decision to invest.