The Common Ground Between Crypto and NFTs
As mentioned at the start of the article, NFTs and cryptocurrencies are built on blockchain technology; they have a form of encryption and are stored digitally. None of them is issued by central governments; only cryptocurrencies like CBDC can be considered government issued, but that’s beyond the scope of what we’re trying to explain.
They belong to a new asset class for digital natives that started with the release of Bitcoin (the first cryptocurrency) in 2008 and allowed people to transact digital currencies without intermediaries. NFTs have the same characteristic, but in their smart contracts, they also include data sets of attributes pointing to a picture.
NFTs gained popularity in the cryptocurrency market because they contain attributes aside from their implied monetary value. That said, the NFTs are used for digitizing physical or digital art, as gateway tokens, or provide utility to unique holders because they couldn’t be fractionalized and sold in pieces.
Unlike traditional cryptocurrencies, you can’t divide the NFT into more parts and send just a fraction because one NFT is a single token with its characteristics embedded into the smart contract. Cryptocurrencies, for that matter, and fungible; they can be split and divided into multiple pieces as sent separately. They act as utility tokens to a specific network and are used for P2P transfers between digital wallets.
The way to buy and sell NFTs and cryptocurrencies differs because NFTs are purchased on a marketplace while cryptocurrencies are traded on centralized or decentralized exchanges. In addition, purchasing an NFT means that the new owner of the NFT will have the value transferred to your wallet, and you will have ownership of the asset.
What's Better for the Market?
Both tokens have unique characteristics. For example, cryptocurrencies facilitate value transfer within the network, while NFTs enable digital ownership that uses cryptographic data as proof of ownership.
While both are volatile assets, it’s easy to get allured by the idea that NFTs will have more value in the years to come as they act as digital guarantees of any physical or digital asset. Both NFTs and regular cryptocurrencies can be volatile; however, crypto has a higher volatility level because it’s connected to the market, which trades more volume than NFTs. On the other hand, NFTs have less liquidity than cryptocurrencies, and the risk of being unable to sell your asset is higher. On the other hand, Ethereum, or known cryptocurrencies, have higher liquidity (as larger institutional investors trade them), and they can be easy to access, including through traditional banking services.
What's More Important?
Both types of assets are essential investment tools; however, they can come with some risks. Non-fungible tokens have a higher risk level because they’re a new market, less liquid, and the way people trade them is highly speculative. Crypto has a similar risk level; however, their tokens provide utility within a decentralized ecosystem.
Investing in both assets comes with its risks and benefits, so depending on how much time you have to follow the narrative, understand market cycles and movements, follow the communities, and analyze trends; you could get exposure to one of both asset types.