Eric Sheldon CPA, PC

What’s the Difference Between Crypto and NFT?

Before exchanging payments using cryptocurrency or NFTs, it’s important to know the difference and how each might be used in your business.

 

What is cryptocurrency?

It is a digital currency that operates on a computer network, independent of a central authority. It works through a system of blocks that store the value of a currency. It’s a useful tool that can make trading easier and safer. It’s also an excellent alternative to fiat currency; offering companies options including real-time revenue sharing and back-office reconciliation.

 

What are some crypto advantages?

In addition to being an alternative to fiat currency, here are a few other advantages of its use.

  • Companies are finding important clients and vendors using crypto as a balancing asset to cash, which depreciates due to inflation;
  • It can be invested to achieve a higher return;
  • It can be traded just like traditional assets;
  • It can help your company become more familiar with the emerging technology;
  • It may lead to new sources of capital, liquidity, and asset classes, and;
  • It can help financial institutions attract new demographic groups.

 

What are NFTs?

Non-fungible tokens (NFT) are a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.

 

They are becoming an increasingly popular way to buy and sell digital artwork. NFTs are also generally one of a kind, or at least one of a very limited run and have unique identifying codes. This stands in stark contrast to most digital creations, which are almost always infinite in supply. Hypothetically, cutting off the supply should raise the value of a given asset, assuming it’s in demand.

 

So why are people willing to spend millions on something they could easily screenshot or download? Because an NFT allows the buyer to own the original item. Not only that, it contains built-in authentication, which serves as proof of ownership. Collectors value those “digital bragging rights” almost more than the item itself.

 

What’s the difference?

Physical money and cryptocurrencies can be traded or exchanged for one another. They’re also equal in value—one dollar is always worth another dollar; one Bitcoin is always equal to another Bitcoin. Crypto’s fungibility makes it a trusted means of conducting transactions on the blockchain.

 

NFTs are different. Each has a digital signature that makes it impossible for NFTs to be exchanged for or equal to one another (hence, non-fungible). Keep in mind, an NFT’s value is based entirely on what someone else is willing to pay for it. Demand drives the price rather than fundamental, technical or economic indicators, which typically influence stock prices and at least generally form the basis for investor demand. All that means, an NFT may resale for less than you paid for it.

 

In the end, approach NFTs just like you would any investment: Do your research, understand the risks—including that you might lose all of your investing dollars—and if you decide to take the plunge, proceed with a healthy dose of caution.

 

If you’re considering cryptocurrency in your company or want to know more about NFTs, give me a call.

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About the Author

Eric Sheldon

Eric Sheldon

Eric Sheldon is a certified public accountant with more than 25 years of experience in a wide variety of industries. He's the owner/operator of Eric Sheldon CPA, PC, an accounting firm that specializes in providing tax strategy and preparation, accounting, and bookkeeping services to individuals and small business owners.

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