In the past few years, both cryptocurrency and non-fungible tokens (NFTs) have taken the financial world by storm. Based on the same software and technology, they offer investors an alternative way to make, spend, and share their assets.
While these two entities have many similarities in common, there are key differences to note.
Are you interested in investing in one or the other? If so, it helps to understand the breakdown between crypto vs NFT. Today, we’re sharing all the distinctions you need to know.
What Is Cryptocurrency?
Before we dive into the differences between NFTs and cryptocurrency, let’s briefly define what each system includes. First, what is crypto exactly?
Put simply, this is a decentralized and encrypted digital payment system. Cryptocurrency isn’t backed by a bank or any other type of central authority, which makes it extremely appealing to current and potential investors.
You can secure cryptocurrencies, like Bitcoin, by solving advanced encryption algorithms and other cryptographic equations, such as:
- Curve encryptions
- Public-private key pairing
- Hashing techniques
Each new transaction is added to a shared, distributed ledger that everyone can access. An expansive network of computers maintains and enforces the ledger, protecting it from outside manipulation. This makes this form of currency very secure and nearly impossible to counterfeit or replicate.
The fact that cryptocurrency is decentralized means that the government cannot interfere with it or change it in any way. This is one of the reasons why digital coins are so attractive to investors and the general public.
Another benefit of cryptocurrency is that it’s easier and faster to send and receive money this way. You can also transfer money across borders without as many restrictions and fees. While some people use crypto in the same way they would use actual cash, most people look at it as an investment in the future.
While the value of cryptocurrencies can ebb and flow depending on public perception of their value, they can be viable long-term investments for savvy users. Investors purchase these coins as commodities or securities with the expectation that they will gain value over time.
Pros and Cons of Cryptocurrency
The chief advantage of cryptocurrency is that it’s decentralized. If you’ve grown frustrated with complicated payment processing systems, this can be an ideal alternative.
With currencies like Bitcoin, there’s no intermediary financial institution involved. The transfer happens directly between the sender and receiver and there’s no middle man to enforce or track the transaction. This is only possible due to the fact that the blockchain is so secure.
Another benefit is that users can perform quick and inexpensive money transfers by using cryptocurrency. However, the time requirements can vary greatly depending on the method used and the amount of money being moved.
When crypto values are up, savvy investors can cash in on the lucrative market. Established and well-known digital coins like Bitcoin have grown exponentially since their debut. For instance, while it was valued at just over $20,000 in June 2022, experts predict that Bitcoin will reach a value of $100,000 by the end of this year.
If you know when and how to take advantage of this upswing, it could mean a big payout. This is especially the case if you’re a skilled day trader who knows how to buy low and sell high. However, this brings us to the main drawback of this form of currency: It can be incredibly volatile.
The value of crypto can change at any given moment, and it rarely stays the same minute by minute, much less day by day. If you aren’t well-versed in how this technology works, it’s easy to get in over your head. You could even lose money if you don’t time your transactions just right.
What Are Non-Fungible Tokens?
Now that we’ve covered a brief crypto guide, let’s dive into the next part of the equation. What is an NFT?
Like crypto, an NFT is an asset that’s held on a blockchain. The word “non-fungible” translates roughly to non-interchangeable, which marks a primary distinction between NFTs and fiat currency.
The latter is never interchangeable and always stays the same. For instance, a dollar will always be a dollar. However, this isn’t always the case with an NFT.
Rather, an NFT can take many different forms. As long as you can digitize the asset, it can become an NFT. Some of the most common examples include:
- Digital drawings and illustrations
- Digital artworks
- Digital sports cards
- Musical compilations
- Memes and GIFs
In this form of digital currency, each asset comes with its own unique code, as well as corresponding metadata. This makes each NFT distinct and identifiable from any other NFT, so it’s easy to track who owns what.
There are no duplicate NFTs, as each one is its own entity. You can also combine them to create new NFTs.
As NFTs grow in popularity, there are digital arts organizations (DAOs) devoted to furthering the work. They even have their own curation tokens to facilitate marketplace activity. You can click here to learn more about one such organization, called SuperRare.
Pros and Cons of NFTs
A benefit of investing in NFTs is that they can be tokenized. This process enables users to buy, sell, and trade the assets in a more organized and efficient manner. Once an NFT is created on the blockchain, it gets encoded and tokenized on a specially designated marketplace.
For artists, this process is ideal. The original creator of each work gets to maintain intellectual rights to it, regardless of how it’s purchased, sold, or traded on the web. Once a transaction is complete, the new owner gets to obtain ownership of the NFT only, not the original piece that it was created from.
Note that this ownership only applies if there’s a physical and digital form of the work. If the work is solely digital (e.g. a social media post), then it usually remains available for anyone to see and use. The only distinction is that the owner of the NFT can officially claim that they retain ownership over the piece.
Once an NFT enters the marketplace, it’s officially mined. The marketplace will charge a fee to perform this service, which brings us to our first drawback.
Not only will a creator pay to mine their NFT, but they may also encounter other fees as you use these assets. For instance, there’s usually a charge associated with selling an NFT.
In most cases, buyers will purchase an NFT using their preferred form of cryptocurrency. This is one way in which the two entities are interrelated. Like crypto, these transactions will take place on a special NFT blockchain.
For artists and creators, this is a major plus. They can sell digital copies of their work online without involving an art gallery or paying a broker, so they get paid quicker.
Crypto vs NFT: Main Differences to Note
While cryptocurrency and NFT share many similarities, they are distinct from one another. Let’s take a look at a few of the key features that set them apart.
A key distinction between cryptocurrencies and NFTs is the concept of interchangeability. With cryptocurrency, the value is set and universal across the blockchain.
For instance, one user could sell one Bitcoin to another user, and they’ll each have the same amount of “money” that they had in the beginning. It doesn’t work this way with NFTs.
You cannot exchange one NFT for another NFT of the exact same value. This is because each NFT is unique, unlike crypto. They’re worth as much as someone is willing to pay for them, and that number is based on intangible features such as popularity and desirability.
In this way, you could never use NFTs in the same manner as crypto coins. Computer networks cannot distribute them evenly as a reward across the blockchain, as each one carries its own inherent, discretional value.
As mentioned, some investors have started using their cryptocurrency investments as actual money. There are even some stores that will accept crypto as a form of payment.
This is what sets the value of assets like Bitcoin. It’s based on their ability to be used as currency or as an investment. On the other hand, you can’t use NFTs in quite the same way.
The primary reason to purchase an NFT is to retain ownership rights over the digital form of that work. While you can trade it in for a return, it holds both economic and non-economic value. In addition to monetary gain, it also provides artists the opportunity to distribute their works to a larger audience, which wouldn’t be possible without costly third-party involvement.
Choosing Your Investments Wisely
Now that we’ve broken down the main differences in the crypto vs NFT debate, which one will you invest in?
Do you want to use the blockchain to facilitate easier and quicker payments? Want to exchange money across borders without an intermediary? If so, crypto could be the way to go.
Alternatively, NFTs are ideal if you want to cash in on a potentially valuable piece of digital artwork. For savvy investors, the payout could be impressive if they’re willing to hold until the right time.
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