Digital Asset Valuation and Cyber Risk Measurement

Principles of Cybernomics

Keyun Ruan

• Publisher: Academic Press
• Year: 2019
• Print ISBN: 9780128121580
• eBook ISBN: 9780128123287
• Topic: Economics
• Subtopic: Business Development
• Index: Economics

Digital Asset Valuation and Cyber Risk Measurement: Principles of Cybernomics is a book about the future of risk and the future of value. It examines the indispensable role of economic modeling in the future of digitization, thus providing industry professionals with the tools they need to optimize the management of financial risks associated with this megatrend. The book addresses three problem areas: the valuation of digital assets, measurement of risk exposures of digital valuables, and economic modeling for the management of such risks. Employing a pair of novel cyber risk measurement units, bitmort and hekla, the book covers areas of value, risk, control, and return, each of which are viewed from the perspective of entity (e.g., individual, organization, business), portfolio (e.g., industry sector, nation-state), and global ramifications. Establishing adequate, holistic, and statistically robust data points on the entity, portfolio, and global levels for the development of a cybernomics databank is essential for the resilience of our shared digital future. This book also argues existing economic value theories no longer apply to the digital era due to the unique characteristics of digital assets. It introduces six laws of digital theory of value, with the aim to adapt economic value theories to the digital and machine era.- Comprehensive literature review on existing digital asset valuation models, cyber risk management methods, security control frameworks, and economics of information security- Discusses the implication of classical economic theories under the context of digitization, as well as the impact of rapid digitization on the future of value- Analyzes the fundamental attributes and measurable characteristics of digital assets as economic goods- Discusses the scope and measurement of digital economy- Highlights cutting-edge risk measurement practices regarding cybersecurity risk management- Introduces novel concepts, models, and theories, including opportunity value, Digital Valuation Model, six laws of digital theory of value, Cyber Risk Quadrant, and most importantly, cyber risk measures hekla and bitmort- Introduces cybernomics, that is, the integration of cyber risk management and economics to study the requirements of a databank in order to improve risk analytics solutions for (1) the valuation of digital assets, (2) the measurement of risk exposure of digital assets, and (3) the capital optimization for managing residual cyber risK- Provides a case study on cyber insurance

Chapter 1

Digital Assets as Economic Goods

Abstract

This chapter first looks at the origins and philosophical concept of value, the different schools of thoughts from the subjective and objective views of value, the differences between intrinsic and extrinsic value, the definition of traditional assets, the definition of economic goods, and current asset valuation methods. Then, five unique characteristics of digital assets distinct from traditional assets are outlined. For example, the most fundamental assumptions of the discipline of economics are that: (1) the amount of resources available for a society is limited; and (2) the market exists as a measure of substitutability of those limited resources. To find optimal distribution of resources by means of free competition under these assumptions has always been thought to be the fundamental purpose of economics. Today, some argue “limitless” computing has arrived, making digital value theory inherently unique from past theories. This chapter then defines intrinsic digital value, extrinsic digital value, and a digital value matrix for categorizing digital assets according to their economic functions, this is, core value versus supporting value, digitized versus digital native, rather than technical functions, for example, software, hardware, etc. Attributes of digital assets that contribute to intrinsic and extrinsic value creation are then discussed along with measurement methods. This chapter closes with a review of current methods used for digital asset valuation.

Keywords

Intrinsic digital value; extrinsic digital value; digital asset valuation; digital value matrix; characteristics of digital assets

Chapter Outline

• 1.1 Origins and Philosophical Concepts of Value 2
  • 1.1.1 Subjective View Versus Objective View 2
  • 1.1.2 Intrinsic Value Versus Extrinsic Value 4
• 1.2 What Is an Economic Good? 4
• 1.3 What Is an Asset? 5
  • 1.3.1 Definition of Asset 5
  • 1.3.2 Current Asset Valuation Methods 5
• 1.4 What Are Digital Assets? 6
  • 1.4.1 Categorization of Digital Assets 7
    • 1.4.1.1 (Networked) System Assets 7
    • 1.4.1.2 Software Assets 7
    • 1.4.1.3 Hardware Assets 7
    • 1.4.1.4 Service Assets 7
    • 1.4.1.5 Robotic Assets 8
    • 1.4.1.6 Data Assets 8
    • 1.4.1.7 Metadata Assets 8
    • 1.4.1.8 Digitally Enabled Devices 8
  • 1.4.2 Managing Digital Assets in an Organization 8
    • 1.4.2.1 Information Resource Management 9
    • 1.4.2.2 Digital Assets Management 9
• 1.5 Unique Attributes of Digital Assets 9
  • 1.5.1 Characteristic 1: Digital Value Creation Does Not Decrease but Increases Through Usage 10
  • 1.5.2 Characteristic 2: Duplication Does Not Increase Digital Value 10
  • 1.5.3 Characteristic 3: Digital Value Production and Distribution Entails Higher Fixed Costs and Lower Variable Costs 10
  • 1.5.4 Characteristic 4: Digital Value Can Be Distributed via Multi-Sided Markets 10
  • 1.5.5 Characteristic 5: Digital Value Is Limitless 11
    • 1.5.5.1 Characteristic 5a: Digital Value Has Limitless Utility to the Owner 11
    • 1.5.5.2 Characteristic 5b: There Are Limitless Opportunities to Distribute and Consume Digital Value 11
• 1.6 Digital Value Matrix: Categorization of Digital Assets Based on Their Economic Functions 11
  • 1.6.1 Digital Asset on an Individual Level 13
  • 1.6.2 Digital Asset on an Organizational Level 13
  • 1.6.3 Digital Asset on a National Level 14
  • 1.6.4 Digital Asset on the Global Level 14
• 1.7 Valuation of Digital Assets as Economic Goods 14
  • 1.7.1 Attributes of Digital Assets Contributing to Intrinsic Digital Value Creation 14
    • 1.7.1.1 Data Quality 14
    • 1.7.1.2 Risk Exposure 15
    • 1.7.1.3 Age 15
    • 1.7.1.4 Data Volume 18
    • 1.7.1.5 System Quality 19
    • 1.7.1.6 Production Cost 19
  • 1.7.2 Attributes of Digital Assets Contributing to Extrinsic Digital Value Creation 19
    • 1.7.2.1 Exclusivity 19
    • 1.7.2.2 Network Connectivity 20
    • 1.7.2.3 Accessibility 20
    • 1.7.2.4 Reproduction Cost 21
    • 1.7.2.5 Economies of Scale 21
    • 1.7.2.6 Data Format 21
    • 1.7.2.7 Level of Structure 22
    • 1.7.2.8 Delivery Cadence 22
    • 1.7.2.9 Power Supplies 22
• 1.8 Existing Challenges for Digital Asset Valuation 23
  • 1.8.1 Inherent Challenges 23
  • 1.8.2 Market Challenges 23
  • 1.8.3 Taxation Challenges 23
  • 1.8.4 Regulatory and Standardization Challenges 23
• 1.9 Current Methods for Digital Asset Valuation 23
  • 1.9.1 Intrinsic Value 24
  • 1.9.2 Direct Conversion of Financial Value 24
  • 1.9.3 Business and Performance Value 24
  • 1.9.4 Cost-Based Models 25
  • 1.9.5 Market-Based Models 26
  • 1.9.6 Income-Based Models 27
  • 1.9.7 Option Models 27

What you risk reveals what you value.

Jeanette Winterson

1.1 Origins and Philosophical Concepts of Value

The concept of value lies at the core of the economic adjustment process, which organized the economic life of society as the basis for deciding what to produce, how to produce, and who gets it. The debate of how value itself was formed has lasted for millennia, dating back to pre-Christian times, when Aristotle (384 BC–322 BC) famously argued that value is based on the need of exchange (Aristotle, 350 BC). It is a fundamental subject of study in philosophy, economics, finance, and risk management (Fogarty, 1996). Theory of value is a generic term that encompasses all the theories within economics that attempt to explain the exchange value or price of goods and services. Key questions in economic theory include why goods and services are priced as they are, how the value of goods and services are determined, and how to calculate the correct prices of goods and services. Value theory is the major intersection between economics and philosophy. The search for a theory of value is really a search for a consistent foundation for economic theory (Taylor, 1996).

1.1.1 Subjective View Versus Objective View

The historical evolution of the value debate has been locked into centuries of old dialectical conflict between objective and subjective approaches, which focus, respectively, on the conditions of production and on the preferences of consumers.

The objective approach is taken primarily in classical political economy, the labor theory of value and the Sraffian revival of classical value theory in the 20th century. Intrinsic theories hold that the price of goods and ser...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• Dedication
• Preface
• Introduction
• Chapter 1. Digital Assets as Economic Goods
• Chapter 2. Digital Theory of Value
• Chapter 3. Cyber Risk Management: A New Era of Enterprise Risk Management
• Chapter 4. Cyber Risk Measurement in the Hyperconnected World
• Chapter 5. Economic Modeling and the Implementation of Effective Mitigating Controls
• Chapter 6. The Point of Diminishing Return on Cyber Risk Investment
• Chapter 7. Kilogram of Cyber Risk: Introducing Bitmort and Hekla
• Chapter 8. Three Views of Cybernomics: Entity View, Portfolio View, and Global View
• Chapter 9. Principles of Cybernomics
• Chapter 10. Case Study: Insuring the Future of Everything
• References
• Index