Cryptocurrencies have been a hot topic for about half a decade now, but it took Beeple’s multimillion-dollar art sale to put non-fungible tokens on the map.
In March 2021, digital artist Mike Winklemann, who goes by the moniker Beeple, sold the NFT of his work “Everydays: The First 5000 Days,” a digital collage comprised of about 5000 images, for a total of 69 million USD.
After the sale, NFTs became one of the most talked-about topics on the internet. However, its popularity also led to some confusion. Those that don’t dabble in the world of digital assets tended to conflate NFTs with crypto, even though the terms refer to two very different blockchain assets.
To catch you up to speed, we’ll discuss the main differences between NFTs and crypto.
What is Crypto?
Crypto is an umbrella term for a fungible asset that runs on the blockchain and uses cryptography to secure transactions.
Most often, when people use the term crypto, they are referring to “cryptocurrencies,” which are the most popular type of digital asset available.
However, other forms of crypto exist, including utility tokens, security tokens, and governance tokens.
Cryptocurrencies are digital assets that were designed to act as units of exchange. Cryptos are fungible assets, which means that all cryptocurrency coins are interchangeable.
Every cryptocurrency transaction is recorded on that currency’s blockchain, which makes all transaction data publicly visible. This makes it difficult for hackers to “double-spend” or commit fraud.
Because the code itself disincentivizes fraud, cryptocurrencies do not need to be managed by institutions like banks or governments.
Because the code itself disincentivizes fraud, cryptocurrencies do not need to be managed by institutions like banks or governments.
Utility tokens, security tokens, and governance tokens operate using similar technology. Utility tokens are crypto-assets that give holders access to certain privileges or services within a specific ecosystem. A popular type of utility token is the fan token, which is a token offered by sports organizations to give fans access to exclusive privileges, such as event invites, merchandise, and voting rights for official team polls.
Other types of non-currency crypto tokens include security tokens, which are digital contracts that represent shares of existing assets (such as stocks or real estate), and governance tokens, which represent a person’s stake in a decentralized autonomous organization.
What you need to know is that these cryptos are fungible, which means that they are identical/interchangeable. For example, you can’t tell the difference between two ETH coins, or two different BTC coins.
What Are NFTs?
Non-fungible tokens are also cryptographic assets that run on the blockchain.
The main difference between most crypto assets and NFTs is that they are, as the term implies, non-fungible, which means that they cannot be broken down into smaller parts, be replicated, or be interchanged with another token.
Each NFT comes with its own unique digital signature that distinguishes it as one of a kind.
The non-fungibility of NFTs has made them a good vehicle for digitally representing unique assets. Today, NFTs are mainly used to represent ownership of digital art. When a person buys an NFT, their record of ownership gets stored into the public blockchain as a transaction of the NFT token.
Basically, when trading NFT based assets like digital art of avatars, what you’re actually doing is trading the “one of a kind” tokens that proves the ownership of the specific asset.
NFTs can also be bought and sold for profit. Selling NFTs allow digital artists to earn more income from their art. Whenever an NFT gets sold to a new owner, the artist earns royalties from the sale.
The Cryptocurrency Trade vs. The NFT Trade
Cryptocurrencies were created to replace fiat currency as units of exchange. As public trust increases and pushes cryptocurrencies closer to mainstream adoption, the value of cryptocurrencies increases. People that buy cryptocurrencies are betting on their future as widely used units of exchange.
On the other hand, people that invest in NFTs do so out of appreciation for artwork.
Their non-fungible properties make them scarce, which creates a supply and demand relationship in which demand can rise but supply cannot.
And the more demand rises, the higher an NFTs value increases, which gives them high long-term potential as investments.
This past year, both cryptocurrencies and NFTs have been widely talked about as vehicles for investment. Though both run on the blockchain, there are major differences between the two markets, such as their features, purposes, and where they derive their value.
Exclusively for solberginvest.com by Bella Brown
