The rapid adoption of blockchain technology has transformed how we view digital tokens.
Traditionally, a token was simply a digital coupon users could redeem for future goods or services. But thanks to blockchain technology and its ability to track in an unalterable way the ownership of these tokens, this dynamic has changed.
Today, a token is much more than just a coupon with potential value — like stocks, it’s also an asset class in its own right. In this article, we will compare and contrast non-fungible tokens (NFTs) with traditional equity as investment vehicles. In this post, you will learn about the pros and cons of each option and when one makes more sense than the other.
What is an NFT?
A non-fungible token (NFT) is a custom digital asset that is unique and cannot be replicated or replaced. There are many applications of NFTs, including tokens that can be used to represent ownership in a blockchain-based project, blockchain-based authentication systems, or digital collectibles.
The vast majority of NFTs are built on the Ethereum blockchain’s ERC-721 protocol. NFTs are very similar to cryptocurrencies in the sense that they are largely independent of centralized institutions like governments, banks, and corporations.
NFTs are a great type of digital asset to own if you’re interested in the blockchain space and want to participate in the decentralized economy.
How are NFTs different from stocks?
A stock represents ownership in a company and entitles an owner to a share of its profits and assets.
For example, if Google were to pay a cash dividend, shareholders would be entitled to a portion of the profits based on their stock ownership in the company. NFTs are more like a collectible like art or baseball cards than shares in a company.
They entitle the owner to nothing other than their future value in a secondary market. In this sense, NFTs are more like sports memorabilia than stocks. If you own a traditional stock, you receive a portion of a company’s profits through dividends.
If you own an NFT, it doesn’t entitle you to any profits or dividends. Instead, the value of the NFT is based on its utility as a functional token.
Pros of Owning NFTs
There are a variety of pros that come with holding NFTs including:
- NFTs are less regulated than stocks
- Fewer government regulations surrounding NFTs since they aren’t considered securities. This means that they can be used in more unregulated markets and a wider variety of applications.
- They are more liquid than stocks
- Since tokens don’t represent equity in a company, there are no regulatory hurdles to selling them on the secondary market. You can sell your tokens at any time on many exchanges, ensuring more liquidity and control over your assets.
- NFTs can be used to build a blockchain-based asset
- Some NFTs are designed to build functionality and serve as a utility token. This means that they can be used to do something on the blockchain (like participating in an authentication system). These tokens can be used beyond their initial intended purpose, giving them added value.
Cons of Owning NFTs
There are a few disadvantages to owning NFTs as well:
- NFTs have no guaranteed future value
- There is no guarantee that a NFT will ever appreciate in value. Some NFTs are used solely as a utility token, which means they have no future value. Others are a security token, which means they have the potential to have a future value but must pass regulatory scrutiny.
- There is no guarantee that the NFT will work – Some NFTs are simply digital representations of collectibles. They are digital representations of items, much like a digital version of a baseball card. This means that the NFT doesn’t have any functionality. It’s just a digital representation of an item.
- NFTs are riskier than stocks and debt
- While some NFTs have the potential to have a future value, there is certainly risk that they might become worthless. This is especially true of tokens that are used solely as a utility.
Pros of Owning Stocks
Owning stocks can come with its own set of benefits as well:
- Stocks are more likely to have a guaranteed future value
- While there is no guarantee that any asset will appreciate in value, stocks are more likely to have a guaranteed future value. This is because they represent a share of a company’s profits and assets.
- Stocks are more liquid than NFTs
- While you must wait for regulatory hurdles to pass before you can sell your stocks, you can sell your stocks at any time. This ensures more liquidity and control over your assets.
- Stocks are less risky than NFTs
- While some stocks have the potential to have a future value, there is certainly a lower risk that they might become worthless. This is especially true of stocks that have been in the market for multiple years.
Cons of owning stocks
There are a few drawbacks to owning stocks as well:
- Equities are more heavily regulated than NFTs
- While this is a pro for some investors, it’s certainly a con for those who like the absence of regulation in the NFT space.
- There is no guarantee that the shares will appreciate in value
- While there is more certainty of a future value, there is no guarantee that the shares will appreciate in value. In fact, they might decline in value as the company is run poorly.
Overall, NFTs and stocks are both viable options for investing and diversifying one’s portfolio. While stocks have a more well-established track record and history, NFTs are a new and innovative way to participate in the blockchain space.
While both assets can be used as a hedge against the volatility of the crypto market, they also come with their own risk factors as well. NFTs are less liquid and less regulated than stocks, meaning that there may be more risk in holding them.
However, if the NFTs are used as a utility token, the risk may be reduced since the token is providing functionality. Ultimately, the best route for you will vary depending on your goals and risk tolerance.