Right now, digital assets are all the rage. Interest in cryptocurrencies like bitcoin, as well as NFTs (non-fungible tokens), is on the rise. But what's the connection between these digital assets? Does it make sense for you to get involved? Let's take a look at the latest crypto-craze to see what all the fuss is about.
In this Comparison:
What Are NFTs?
A non-fungible token (NFT) is a unit of data stored on a blockchain (a digital ledger) and represents a digital asset. It's basically a digital file that tracks ownership of a digital item, such as a JPEG (photo file) or MPEG (video file).
For this article, we use NFT when we discuss the digital item, but keep in mind that the NFT is actually the proof of ownership of that item.
What Is Bitcoin?
Bitcoin on the other hand is fungible. It's a type of digital currency. It can be used in transactions and when it changes hands, it's still worth a bitcoin. While bitcoin might go up or down in value relative to other currencies, such as the U.S. dollar, a bitcoin is still worth a bitcoin. You can use it as a store of value, but it can also be used as an accepted medium of exchange for goods and services.
What Does Fungible Means and Why is it Important?
The word “fungible” refers to the quality of two items being the same, so that one item can be substituted for another or one portion of the item for another portion the same size.
- One bitcoin is always worth one bitcoin. It's not unique. You can use one bitcoin in the same way you would use another — it's fungible.
- NFTs are digital assets that are each completely unique. The value of each NFT is different from others. You can't exchange one NFT for another and expect the value to be the same.
NFTs are non-fungible because they aren't interchangeable. I can trade one-quarter dollar for another quarter and each will be worth 25 cents. But if I trade a Mox Pearl card (from the game, “Magic: The Gathering”) for a Black Lotus card, they have different effects in the game and are worth different amounts. I can't use one in place of the other, and they have different values.
It's the same with NFTs. They are digital assets that are mostly displayed online. They can change ownership but aren't used as currency.
How Are Each Being Used?
Even though bitcoin is a cryptocurrency and can be used as a medium of exchange, many people use it as a store of value, much like gold.
People invest in bitcoin in the hope that it will increase in price. However, it can also be used in general transactions. For example, it's possible to buy a Tesla using bitcoin, much as you would buy a car with U.S. dollars.
NFTs on the other hand are seen more as digital assets and there is speculation that some may become valuable. For example, having a unique video clip of a slam dunk by LeBron James could be considered valuable. You “own” that moment, and the blockchain records that ownership. Later, you can decide to sell it. And because most NFTs are on the Ethereum blockchain, you can potentially execute a sale of the NFT for more than you paid.
Similarities and Differences of Bitcoin and NFTs
First of all, both bitcoin and NFTs are digital assets. They exist digitally. On top of that, they are blockchain assets. So they make use of blockchain technology to verify ownership and transactions.
However, it's important to note that bitcoin is on its own blockchain platform. Bitcoin is both a platform for transactions and a cryptocurrency. NFTs on the other hand exist for the most part on the Ethereum blockchain, which is a different platform from Bitcoin.
Additionally, NFTs aren't usually considered a medium of exchange. While someone could accept an NFT as payment for a good or service, your NFT might not be worth the same amount to two different vendors.
What Are the Benefits of Each One Over the Other?
Because these are different digital assets, it's hard to compare the benefits of one over the other.
- Bitcoin is beneficial because it's fungible. People use it as a medium of exchange as well as a store of value. And because bitcoin has been around for more than a decade now, various places accept it as a currency. On top of that, it's possible to divide bitcoin. You can own a fraction of a bitcoin — it's impossible to divide an NFT.
- NFTs are completely unique and some people see them as collectible assets, like artwork. A good example is the use of NFTs of sporting moments, particularly with websites like NBA Top Shot. You can buy an NBA moment and then sell it later, potentially for more than you paid for it.
- NFTs can also be used by digital artists to control their work. It's possible to create something unique and sell it. Unlike a JPEG or MPEG, an NFT can't be copied.
What Makes Each so Appealing to Investors?
For those looking for alternative investments, both bitcoin and NFTs can be interesting for speculation.
- Bitcoin is appealing because blockchain technology is becoming more accepted and popular. Plus, bitcoin is easy to invest in, since it's possible to buy fractions of bitcoin and it could potentially continue to rise in value.
- NFTs are appealing because they represent a new digital asset that could be profitable as a collectible. Each is completely unique and verifiable, so you can trust the provenance and no one else can make a copy. If NFTs catch on, they could potentially offer a good return on investment.
Are NFTs Here to Stay?
It's hard to say whether NFTs are here to stay — especially when it comes to collectibles. However, there are some other uses already.
It's also possible to use NFTs for supply chain and inventory management. That's one reason that some investors like Ethereum more than bitcoin. Most NFTs use the Ethereum blockchain platform and there are multiple uses beyond just collecting crypto assets.
However, whether NFTs are here to stay depends on widespread adoption by mainstream investors.
Will One Replace the Other?
While possible that NFTs could replace bitcoin, it's unlikely. Mostly because these are two different types of digital assets.
- Bitcoin is fungible and can be used as a widespread medium of exchange. NFTs are non-fungible and can't be used widely as a medium of exchange.
- While Ethereum can be used as a medium of exchange, it's not as widely used as bitcoin or bitcoin cash. However, if there are multiple uses for ethereum, it could replace bitcoin in the long run.
- Digital and crypto assets are too new an asset class to know what will happen though or even whether any digital asset will become widely adopted and accepted.
Risks of Bitcoin and NFTs
As with any asset or investment, there's the risk of loss.
- If you invest in bitcoin, you could lose money if bitcoin doesn't continue in popularity. The value of bitcoin relative to the U.S. dollar could fall.
- NFTs are also potentially risky. There's no guarantee that the ownership and display of digital assets will catch on with the mainstream and be popular. You could buy NFTs and end up unable to sell them to anyone.
- Until we know more about where digital assets are going and how accepted they will be by society at large, investing in any crypto asset is risky. Both bitcoin and NFTs are subject to price volatility and it's impossible to say what's next.
Bottom Line — Which Is Better?
Neither is better than the other. These are two different types of assets and which you choose depends on your goals. If you want something that can be used as a medium of exchange as well as a store of value, bitcoin makes sense. On the other hand, if you're looking for something unique and that could potentially increase in value over time, an NFT could be a valuable addition to your portfolio.
And of course it's possible to invest in both bitcoin and NFTs as part of your portfolio. However, it's important to carefully consider your individual investment strategy and needs and understand that you could lose your investment.