NFTexplained.info is a team of expert researchers and investors, with over five years of professional industry experience in the digital asset space. With the astounding rise in retail interest and market cap, digital assets have been all over the news. This begs the question – what is the difference between an NFT and a cryptocurrency?
The main distinction between the two is: crypto is fungible while NFTs aren’t, meaning NFTs cannot be substituted for another one. NFTs are unique digital assets backed by and verified on the blockchain, while crypto currencies are decentralized digital currencies with transactions recorded on the blockchain.
There are numerous differences between the two – however, it’s crucial that one understands the key differences. Blockchain technology has a promising future and the use cases are no secret, with many of the world’s most valuable companies investing heavily in this emerging technology. As an illustrative example, we looked at activity in a single important vertical – airlines. Learn more about how blockchain is being deployed here. While both NFTs and cryptocurrencies are both built on the blockchain, they serve materially different purposes.
The most popular and valuable crypto currency is Bitcoin, which was the first widely adopted digital currency created that didn’t rely on a central government. Now you may be wondering – why does that make it so valuable?
Bitcoin is often compared to gold, due to some inherent similarities. Gold is considered a “safe haven asset” meaning it’s supposed to hold its intrinsic value during an economic downturn. Furthermore, its value is derived from its scarcity and utility. Investors also perceive gold to be an “inflation hedge”, which in theory would protect investors from the effects of inflation.
Gold has been used by humans for hundreds of years, as a desirable precious metal. Aside from its common use in jewelry, gold is also used in a variety of electronics and industrial products. Gold is also challenging to mine, and therefore perceived as scarce due to the limited supply. Gold’s value also derives from what is essentially a social construct – similar to Bitcoin, gold has value because we all agree it does.
Bitcoin’s supply is fixed at 21 million, meaning unlike the dollar, there can NEVER be any more than 21 million Bitcoins ever. This capped supply makes Bitcoin incredibly scarce, which is why its proponents claim Bitcoin is comparable to gold. Although incredibly volatile, crypto investors perceive Bitcoin to also be an inflation hedge due to its scarcity and fixed supply. Since Bitcoin is a relatively new technology and asset class, some investors argue this volatility is expected and typically invest with a long term outlook.
Being the most established decentralized currency that functions without a government backing it, provides Bitcoin incredible utility. Furthermore, in their recent network update, one can now execute smart contracts on their network. This increases Bitcoin’s utility and use cases as one can now code smart contract functions on the Bitcoin network.
The discussion of gold and Bitcoin is highlighted to serve as an illustrative example of the key differences between NFTs and crypto. Crypto currencies, as the name implies, are currencies. They are fungible, meaning they can be interchanged, swapped and sold/bought in pieces.
NFTs are the opposite – NFT stands for “non fungible token”, meaning each NFT cannot be changed, substituted, interchangeable or traded in smaller pieces. There is a niche exception to that last statement – some emerging marketplaces enable the purchase of fractional art, although the ability to fractionalize any given NFT is not inherent to the asset. Learn more about purchasing fractions of an NFT here. That being said, you can easily buy/sell 0.00001 of every single Bitcoin if you wanted to, whereas fractional NFTs are only being bought on a much smaller and infrequent scale.
NFTs are also an emerging technology with compelling use cases. Everyday, we are seeing more and more mass adoption as people, investors and businesses realize this technology’s potential. You can see some of these use cases within the airline industry in our article, linked here.
At this moment, the majority of NFTs tend to be artwork built on, backed by, and verified on the blockchain. NFTs also tend to have different utilities compared to cryptocurrencies.
Common utility that holders gain access to when they purchase an NFT is airdrops, passive income, exclusiveness, community, and passes to events. NFTs are also incredibly scarce, with some of the most popular and prestigious NFT projects having a supply of 10,000. This means there will never be more than 10,000 of this unique asset.
A comparison to Bitcoin’s supply of 21 million puts NFT scarcity into perspective. Bitcoin has reached a market cap of over US$ 1 trillion. Were a top blue chip NFT project like Bored Ape Yacht Club able to gain similar demand and utility, this would imply an NFT valuation of USD one hundred million.
While it’s incredibly unlikely that the Bored Ape Yacht club will attain a similar market cap of Bitcoin, they would still be remarkably valuable if they were to achieve a fraction of that market cap. Today, the Bored Ape Yacht Club has a floor price which typically hovers around 100 ETH and has managed to reach a significant percentage of Bitcoins market cap already as the collection is currently worth over 100 billion dollars (USD) which has investors optimistic.
Do NFTs Use Cryptocurrency?
Do NFTs use crypto currencies? And vice versa, do Cryptocurrencies use NFTs?
NFTs and cryptocurrencies are built on the same digital ledger but are different. All NFTs are non fungible while cryptocurrencies are fungible. NFTs are often purchased with cryptocurrency and are typically bought with that blockchains native token (i.e. Ethereum-based NFT are bought with $ETH).
NFT projects can even create their own native cryptocurrency. This is a common way for NFT projects to raise additional capital while providing a way for investors to indirectly invest in the NFT.
One of the leading NFT projects, Bored Ape Yacht Club, created their own cryptocurrency called $APE coin.
The Bored Ape Yacht Club NFT collection has a floor price of around USD $200,000 which is a very hefty price tag for their cheapest NFT. Ape coin ($APE) is a more affordable way to indirectly invest in the project.
Do Cryptocurrencies Use NFTs?
NFTs and cryptocurrency are both built on the blockchain, this begs the question: do cryptocurrencies use NFTs?
Simply put, cryptocurrencies do not use NFTs. They use the same underlying technology but are completely different functions of the blockchain. The key difference is that cryptocurrencies are fungible while NFTs are not.
NFT projects have developed their own related crypto currencies, but an NFT is not a cryptocurrency and vice versa.
The reason why cryptocurrencies are not NFTs is that it would defeat the purpose of being a currency. Currencies need to be liquid and fungible, which is not possible with NFTs.
Are NFTs Better Than Cryptocurrency?
There’s an array of digital assets to invest in, with over 14,000 cryptocurrencies and thousands of NFTs. So, are NFTs better than cryptocurrencies?
It’s challenging to say as NFTs and cryptocurrencies are hard to compare. Despite being built on the same underlying software and technology, they’re materially different functions of blockchain technology.
NFTs tend to be unique artwork. Since they are backed by and verified on the blockchain, they are one-of-one. This makes them comparable to some alternative assets such as collector items like rare baseball cards or a Wassily Kandinsky abstract painting. The situation is complicated. A closer examination of Kandinsky’s work is illustrative; some people would not hang this wildly colorful artist’s abstract work even if it were free, whereas others find it so compelling that they are willing to pay over US $40 million for a piece. NFTs based on art have similar characteristics – there is an enormous amount of subjective assessment in the value of a piece.
An NFT is obviously not a business or a currency, so they have their own fundamentals. Investors typically seek out projects that provide excellent utility to their holders, which drives most of the NFTs perceived value.
Cryptocurrencies are decentralized digital currencies with transactions recorded on the blockchain. They have their own separate fundamentals and use cases that drive their value as well.
Crypto currencies also have utility; some currencies are attempting to replacing aspects of the traditional financial system. A common example is Ripple’s $XRP which aims to replace SWIFT, which delivers interbank and cross border payments.
SWIFT is over a century old, has high fees and is slow. $XRP proposes to deliver the same functions in seconds with materially lower fees.
In conclusion, there is no right answer regarding investing in NFTs vs cryptocurrencies as they’re not comparable. Investors commonly think of the two as different asset classes since they have different purposes.
Do You Need Cryptocurrency To Buy NFTs?
So, what currency do I need to buy an NFT?
While the vast, vast majority of NFTs are purchased using cryptocurrencies, certain NFT marketplaces have now made it possible to buy NFTs using fiat (money backed by a country’s govt.). The most common transactions for NFTs built atop the Ethereum blockchain are purchased with $ETH.
The easiest way to buy an NFT is through creating your own personal cryptocurrency wallet. You can find an in depth guide on how to accomplish this here.
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