The last couple of years saw a rise in the popularity of NFTs as well as a subsequent dip in their popularity when the cryptocurrency market came crashing down from its peak. Is there a correlation between NFTs and cryptocurrencies? Yes and no. Because NFTs cannot exist without cryptocurrencies but cryptocurrencies can exist independently. Their relationship is complicated. This article examines NFT vs Cryptocurrency.
Cryptocurrencies and NFTs
Cryptocurrencies are tokens that exist on a blockchain. They can be traded from one person to another. In other words, they are fungible or replaceable. For instance, 1 bitcoin is equal in value to another bitcoin.
NFTs are tokens recorded on a blockchain that represents a digital file. It could be an audio, video, image, or text. They are non-fungible, meaning they are unique and cannot be interchanged. The NFT of an image cannot be swapped for another one, because there can only be one of its kind.
Similarities between NFTs and cryptocurrencies
Both NFTs and cryptocurrencies need blockchain to exist. Hence both take advantage of the data benefits and transaction ease.
Besides, NFTs are priced in cryptocurrencies. Many blockchains such as Ethereum, Solana, Tezos, and Binance chain support NFTs.
Since anyone looking to buy NFTs must transact in cryptocurrencies, there is an unbreakable link between the two types of assets
Differences between NFTs and cryptocurrencies
We just saw the overlapping features of NFTs and cryptocurrencies. There are a few differences too. Firstly, cryptocurrencies serve as currencies but NFTs are meant to be assets. In other words, cryptocurrencies fulfill the role of money and act as a medium of exchange, a unit of account, and a store of value. But NFTs can never act as currency and they are a store of value alone.
Plus, cryptocurrencies are fungible and replaceable with cryptocurrencies but NFTs are not, as their name rightly suggests (non-fungible tokens). Hence, NFTs enjoy better scarcity compared to cryptocurrencies, even if they are limited in supply.
Relation between NFTs and cryptocurrencies
We have already seen during the last two years that people love to own an overpriced NFT, which is nothing more than a JPEG file. It doesn’t stop there though. NFTs also represent real estate, and music rights, and act as debt instruments.
NFT’s relation with cryptocurrency is similar to that of a parent and child where cryptocurrencies are the parent.
When NFTs just started out, their value wholly depended on crypto markets. However, as they matured and NFTs were adopted more and more, they became more independent.
During the crypto crash of 2022, NFTs were still popular, with the OpenSea platform witnessing record trading volumes.
When cryptocurrencies like bitcoin and the rest went up in value, NFTs took a plunge though, which pointed to a reverse relation between the two categories of assets.
However, this was just a phase and soon both seemed to be unrelated to each other.
Some of the most common observations tell us that when bitcoin and the rest of crypto fall, no one prefers to buy NFTs. Instead, they opt for stablecoins during such periods. It is understandable that people prefer NFTs as a store of value.
NFTs are moving further and further away from cryptocurrencies as separate assets, although they are never going to be fully independent. Only time will tell us the real relationship between the two classes and how one affects the other.