If you're just getting into the world of digital assets, you've likely heard all about non-fungible tokens (NFTs) and cryptocurrencies. Both are relatively new technologies with seemingly limitless potential for innovation and growth, despite a recentcrypto selloff. But what exactly are these assets, and how do they differ from each other?
Knowing the difference can spell the difference between success and failure when it comes to investing in digital assets. Here, we'll break down several pertinent factors to help you better understand how NFTs and cryptocurrencies differ.
What Cryptocurrencies and NFTs Share
Before anything else, let's discuss the blockchain. Both cryptocurrencies and NFTs are built on the blockchain, which is a distributed ledger that records and stores all transactions. But what exactly does this mean?
At its core, the blockchain is simply a digital database that allows users to record information securely and transparently. Instead of storing data in one central location (like most traditional databases), the blockchain distributes it across thousands of computers around the world, making it "decentralized". This makes it much harder for hackers to tamper with or delete data since they would need to hack into every single computer in the network simultaneously.
User error, however, can pose big problems.
For example, users may mistakenly send their cryptocurrency or NFT to the wrong recipient, hackers may steal other people's wallets and private keys, or someone could simply lose track of their digital assets if they are not stored securely. If you're a new crypto investor, be sure to look into tools and resources that prevent data loss to avoid becoming a victim yourself.
Differences Between Cryptocurrencies and NFTs
Cryptocurrencies are digital currencies that use cryptography to secure their transactions, control the creation of new units of currency, and verify the transfer of assets.
NFTs are non-fungible tokens that represent your ownership of unique digital items or collectibles such as artworks, event tickets, video game items, songs, or virtual land.
Although both assets attract similar investors, there are three main differences you have to know to understand their uses and value:
Fungibility
Cryptocurrencies and NFTs are both digital assets that can be bought, sold, or traded online.
Cryptocurrencies, such as Bitcoin, are fungible, which means that each unit is interchangeable with another. In other words, one Bitcoin is worth the same as any other Bitcoin. You can also use cryptocurrencies to purchase goods and services online, as well as exchange them for other cryptocurrencies or fiat currencies like the US dollar.
NFTs, on the other hand, are non-fungible. This means that each unit is unique and has its own distinct value. For example, an NFT could be used to represent collectibles like baseball cards or rare art pieces. Because the value of NFTs is based on their scarcity and uniqueness, they are often used to trade in the secondary market, such as through online auction sites.
Purpose
The chief purpose of cryptocurrencies is to serve as a medium of exchange, like regular fiat currencies. Their usage is similar to that of regular currencies, but without a centralized authority, like a government or financial institution, backing them.
NFTs are not meant to be used as a currency or medium of exchange. Rather, the purpose of NFTs is to provide an ironclad guarantee of one's ownership of a digital asset, like an authenticity certificate. Millions of people can download a jpeg file of a Bored Ape NFT for free, but only those who own a Bored Ape NFT can sell or trade it on the open market.
Volatility
As an emerging technology, blockchain-powered digital assets like cryptocurrencies and NFTs are more volatile than traditional investments like stocks and bonds. The prices of these assets can swing rapidly in response to news and events—failing to check your phone for an hour can mean missing out on a significant gain or loss.
Cryptocurrency and NFT values are also influenced by speculative trading. When investors believe the price of an asset will continue to rise, they buy it. This can create a feedback loop that eventually leads to an unsustainable "bubble" where the prices become divorced from the underlying value of the asset.
There is no clear consensus as to which digital asset is more volatile, but NFTs appear to be taking the lead.
While cryptocurrencies have endured wild price swings in the last decade, things have been more stable this year. The development ofstablecoins, which are tethered to another currency—whether fiat, crypto, or commodity-backed—to maintain a consistent value, has also become a popular way for risk-averse investors to join in on the fun.
The volatility of NFT markets is much less understood. Although the underlying technology of NFTs ishere to stay, NFTs seem to be onshakier ground than cryptocurrencies. The utility of cryptocurrencies is easy to grasp: they're digital cash. NFTs, on the other hand, don't have an agreed-upon use case. Their value depends on their popularity, which can be difficult to predict.
Entering the crypto space right now is undoubtedly an exciting—and risky—proposition. But if you're looking to get in on the action, it's important to understand the key differences between NFTs and cryptocurrencies.
Which one is best for investors? The answer here will, of course, vary. A great question you can ask yourself is: Which blockchain technology function is likelier to stay—is it cryptocurrencies' role as a secure medium of exchange or NFTs' role as proof of ownership? Whichever way you go, remember to stay safe, do your research, and never invest more than you're willing to lose.
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