Last year, non-fungible tokens (NFTs) became some of the most highly discussed topics on the internet. These blockchain-backed digital assets generated a total of 11 million art sales in 2021 alone, according to a report by Exploding Topics. Many of the most valuable NFTs have sold for millions of dollars. The Merge, which is the most expensive NFT ever sold, fetched a profit of $91.8 million.
Talk of NFTs often coincides with discussions about another popular digital asset in the form of cryptocurrencies. If you’re not updated with the crypto craze, then you might get NFTs and cryptocurrencies confused. Although they both rely on blockchain technology (decentralized databases that prevent fraud), there are considerable differences between the two assets, especially with regards to how they’re used. Below, we’ll answer a few common questions about cryptocurrencies and NFTs.
What Are Cryptocurrencies?
Cryptocurrencies are digital-exclusive assets that function as units of exchange. Unlike fiat currencies, cryptocurrencies don’t need to be monitored by banks and governments.
To understand how cryptocurrencies become decentralized, you first need to understand the blockchain. As explained by The Balance, The blockchain is a public database that stores information in blocks. All blocks come with unique identifiers known as hashes. Each block will carry its own hash and the hash of the block preceding it, which connects all blocks in chronological order. Users can then use previous blocks to check if new blocks have been tampered with.
Cryptocurrencies use the blockchain to prevent fraud and double-spending. Blocks on cryptocurrency blockchains store records of each transaction. The public can view the blockchain, so users of each cryptocurrency can easily verify which transactions are valid.
What Are NFTs?
Like cryptocurrencies, NFTs run on the blockchain. However, unlike cryptocurrencies, each NFT has its own unique identity. Thus, NFTs are used to represent ownership of unique assets. NFTs use the blockchain to record not just transactions, but also to store the digital signature that designates asset ownership.
NFTs can theoretically be used to represent any digital or physical asset, but today, they are primarily used for representing digital images, such as memes and works of art. To acquire an NFT, users would need to buy Ether, which is the native cryptocurrency on the platform Ethereum. The Ethereum platform was built to support blockchain applications outside of cryptocurrencies.
Cryptocurrencies are fungible, which means that each coin in a cryptocurrency network can be exchanged for a coin of equal value. A single coin can also be broken down into a group of smaller coins. For example, you can take 1 BTC and divide it into four parts worth 0.25 BTC each.
On the other hand, as their name suggests, NFTs are non-fungible. No single NFT can be replaced, replicated, or broken down into smaller parts.
As aforementioned, cryptocurrencies are currencies. They are meant to be used as units of exchange. On the other hand, NFTs are assets that function more like property. Though they can be traded, they cannot be used to purchase other items.
Cryptocurrencies derive their value from their utility as decentralized currencies. While NFTs derive their value from the underlying assets they represent.
NFTs and cryptocurrencies are some of the most popular investments today. Though similar, they differ in how they function and how they are valued. Because these investments are still relatively new, the market is somewhat erratic, so be sure to only invest what you can afford to lose. You can also look into our post entitled ‘How to Invest 200k Wisely’ to study other ways to grow your wealth.