Cryptocurrencies and NFTs are daily stories in the news and social media. People are trading, buying and selling, and making tons of money. A meme of a flying cat with a trailing rainbow sold for over $500,000 in cryptocurrency earlier this year!
How, why, and WTF are they? They’re a mystery to most people, so let me break it down.
Cryptocurrencies and NFTs Explained
Cryptocurrency in the simplest term is a digital form of currency. Not unlike “fiat” currencies (think “real” money like dollars or euros) that are backed by nations and banks, cryptocurrencies are kept on line and backed by high-net worth individuals who believe in their value and ability to increase in value. In other words, cryptocurrency, or “crypto,” is digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. Examples include Bitcoin, Ethereum, and Dogecoin.
So where do you get crypto?
Well, first you set up a Coinbase account (savings account), which is the easiest place to buy and sell cryptocurrencies, and then you create a digital wallet like MetaMask (checking account), which lets you create and manage your own identities (via private keys, local client wallet and hardware wallets). In other words, this “checking account” lets you manage your digital assets, including your “coin” and any NFTs you have purchased, and if an NFT wants to perform a transaction and write to the block chain, you get a secure interface to review that transaction before approving or rejecting it.
Basically, think of cryptocurrency as money, just digital and not minted or backed by governments. You can buy things (NFTs) with it, or just hold on to it and buy or sell it based on market value fluctuations.
NFT stands for Non-Fungible Token. Non-fungible?! What’s fungible?!
Fungible means that one thing can be easily exchanged for another because they have equal value, like bitcoins for bitcoins or dollars for dollars.
Non fungible means that you cannot convert that asset (let’s say a photograph or a piece of art) as easily into another type of asset or good as you can with fiat currencies. Let’s compare the difference between a dollar (fungible) and a Picasso painting (non fungible). People say a dollar is fungible because you can go into a store and buy something with it, or you can pay a contractor for services with it, and therefore you can easily change a dollar into many other types of goods and services. Each dollar has the same value attached to it.
An example of a non-fungible asset is a priceless work of art by Picasso. A Picasso certainly has value and there’s no disputing that, but you cannot go into Starbucks and buy a cup of coffee with a Picasso. So, a Picasso, while it has value, is not easily transferable or convertible into another type of asset. It’s certainly possible to do it but you’d have to go through a major auction house or broker to find a buyer willing to pay for that asset, and its value is subjective.
Another example is a house. Typically, a house is a non-fungible asset, but a bank may come along and say we will give you a loan based on the perceived or market value of your house. That’s another way of converting a non-fungible asset into a fungible asset.
Why are NFTs valuable?
So you might be asking yourself: why would I buy something that I can’t touch or hold instead of something like a like a collectible baseball card? If you bought a collectible baseball card, would you carry it around with you or keep it in a safe place like any other valuable investment? You might have a picture of it on your phone to show your jealous friends, but you’re not going to let them touch it! You bought it as investment that you hope increases in value.
It’s the same as any other non fungible digital asset. You buy it with the hopes that its value is going to increase and that other people will think it’s worth more than what you paid for it. Holds true for a baseball card, a Picasso painting, or a classic photo.
In Part 2, we’ll delve into more detail about NFTs, their value, the block chain, and the security of your investment! Check out the Manopod podcast with me and Christopher Unger here and check out nonstockagency.com for more information!