Bitcoin (BTC -0.07%) and XRP (XRP -3.41%) are two very different types of cryptocurrencies. Bitcoin, the world’s top cryptocurrency, is often considered a “blue chip” coin that is less volatile than smaller altcoins. XRP, the native cryptocurrency of payment platform Ripple, is a much smaller token that has largely traded on the drama surrounding a US Securities and Exchange Commission (SEC) lawsuit over the past four years.
Over the past 12 months, the price of Bitcoin has jumped 134%, while the price of XRP has risen 14%. Over the past five years, the price of Bitcoin has jumped 487%, while the price of XRP has risen 116%. So is it smarter to just stick with Bitcoin than bet on XRP’s future growth?
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The differences between Bitcoin and XRP
Bitcoin is often compared to physical metals like gold because it is digitally mined through an energy-intensive proof-of-work (PoW) process. Its miners use powerful ASIC chips to process calculations and earn Bitcoin rewards from its blockchain.
This process becomes more challenging every four years with scheduled “halvings” that cut bitcoin mining rewards in half. At the time of writing, nearly 19.8 million Bitcoins (out of the maximum amount of 21 million) have already been mined. But due to the increasing difficulty of mining Bitcoin, experts do not expect the final Bitcoin to be mined until 2140. This is a tightly controlled long-term inflationary policy.
The Bitcoin blockchain does not support smart contracts or decentralized applications (dApps) like the proof-of-stake (PoS) blockchains used by Ethereum, Solanaand Cardano. However, its simple approach to mining, its scarcity, and its growing acceptance for mass payments make it more comparable to gold, silver, and other precious metals than many other cryptocurrencies.
XRP is a token that was digital cut instead of mined. Its parent company, Ripple, minted its entire supply of 100 billion tokens ahead of its market debut and initially locked 55 million of those tokens in escrow accounts on its blockchain. It periodically releases some of these tokens to stabilize its liquidity and supply. It doesn’t make new tokens, it just distributes a fixed supply.
Ripple is promoting its payment processing blockchain and closely related RippleNet service as an alternative to the SWIFT (Society for Worldwide Interbank Financial Telecommunications) international payments protocol used by most banks. He says his blockchain can process real-time gross payments, money transfers and currency exchange transactions at a faster pace with much lower fees.
Ripple promoted XRP as its native cryptocurrency, but many financial institutions simply used its blockchain to make traditional fiat currency payments. Ripple launched an initial coin offering (ICO) for XRP in 2013 to garner a bit more attention, but the SEC sued Ripple over that offering in 2020 and accused it of selling unregistered securities.
What are short-term headwinds and headwinds?
Bitcoin has benefited from two tailwinds this year. First, the SEC approved the first 11 Bitcoin exchange-traded funds (ETFs) at the spot price in January. These ETFs allowed investors to gain direct exposure to Bitcoin through their brokerage accounts without trading on an exchange for the cryptocurrency. Second, the last Bitcoin halving in April made it even more difficult to mine new coins.
The price of XRP soared earlier this month after Ripple finally settled its lawsuit against the SEC. Ripple was fined only $125 million, compared to the SEC’s initial demand of $2 billion. A federal district court ruled that his ICO did not constitute a sale of unregistered securities. This agreement eliminates the biggest short-term headwind for XRP.
Ripple plans to launch its own stablecoin (Ripple USD) and $10 million in tokenized US Treasury bills on the XRP blockchain this year. It is also preparing to upgrade this book with new tools for developing decentralized finance (DeFi) and dynamic non-fungible tokens (NFT) applications, and these new projects could stabilize and increase the market price of XRP.
Expectations of interest rate cuts in the near future are bringing some investors back to the cryptocurrency market. If interest rates decline over the next few quarters, Bitcoin and XRP could both stabilize and move higher.
So which cryptocurrency is a better buy?
With a market capitalization of $1.2 trillion, Bitcoin represents more than half of the total valuation of the entire crypto market of $2.1 trillion. XRP is only worth $34 billion. I believe Bitcoin’s higher value, shrinking supply, and growing adoption among institutional investors, businesses, and governments make it a viable alternative to gold.
I can’t say the same for XRP, which is still loosely connected to Ripple’s main payment platform and not widely accepted for mass payments. XRP also cannot be used to develop as many dApps or crypto assets as Ethereum and other PoS blockchains. So right now I think Bitcoin will continue to outperform XRP for the foreseeable future.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Bitcoin, Cardano, Ethereum, Solana, and XRP. The Motley Fool has a disclosure policy.