While Bitcoin, the “granddaddy” cryptocurrency, slipped below the six-figure mark, plenty of optimism remains ahead of the incoming Trump administration, which is seen as particularly crypto-friendly.
Despite this optimism, some investors are choosing to look elsewhere, unsure of Bitcoin’s ability to continue to deliver stellar returns. Many are flocking to alternative cryptocurrencies like XRP (XRP 3.32%). So, should you forget Bitcoin and buy XRP instead? Is XRP a worthy replacement? Let’s consider.
XRP’s primary use case is intriguing
Every year, banks and other financial institutions around the world spend hundreds of billions of dollars in fees for sending and receiving funds. Transactions can take days to settle. It is clear there is a need for innovation here.
XRP was designed to disrupt this system, allowing quick and secure transactions between financial institutions at a tiny fraction of the cost of legacy systems. Sure, Bitcoin could also be used in this context, but compared to XRP, it is slow, costly, and fails to scale (the XRP network can handle thousands of transactions a second while the global Bitcoin network can only handle seven transactions a second).
Because of these advantages, XRP is in use by real-world institutions. The network associated with it, RippleNet, is used across the globe. Given that last year, legacy systems cost the world’s banking institutions $193 billion in fees, it would seem the scale of the opportunity is massive. If XRP can capture a meaningful portion of the market, the fees collected would be enormous. Furthermore, banks would need to purchase XRP and hold it in order to transact with it, leading to a supply crunch and driving the value of the token up further.
There are some holes in this logic
That all sounds very promising, and it makes for an easy pitch, which is why, in my opinion, XRP gets so much buzz. However, there are some problems with these basic assumptions that call into question how valuable XRP really is. First of all, the fees collected by the network are, by definition, minuscule compared to traditional methods. That is the entire value proposition of XRP, and if it weren’t true, banks and financial institutions wouldn’t adopt it in the first place. The total value in fees that XRP could collect has to be orders of magnitude less.
Secondly, despite the common belief to the contrary, most of the functions of RippleNet can be used without ever using XRP. Given its volatility, banks will not want to purchase and hold XRP if they can avoid it — and they can. We already see this in practice. Many of the institutions using RippleNet do not use XRP. This undermines the “supply shock” theory.
XRP may get a boost from regulators
XRP has been facing a lawsuit from the SEC for some time. Although a judge ruled primarily in XRP’s favor, the SEC is pursuing an appeal. However, a report recently revealed the incoming administration is likely to put a pause on any SEC lawsuits that do not involve fraud, meaning XRP may soon be clear of its suit.
The question at hand
Despite this good news, overall, I find XRP’s current market capitalization of $180 billion to be overinflated and divorced from reality. So, do I think you should forget Bitcoin and buy XRP instead, as some seem to be doing? No, I don’t think you should.
In fact, I don’t think you should forget Bitcoin at all. The crypto that started it all is still arguably the best digital asset to invest in. It has proven its value as a sort of digital gold, and the importance of its legitimization by the SEC’s decision to green-light spot Bitcoin ETFs can’t be understated. And if this administration is as “crypto-friendly” as it promises to be, I would be surprised if Bitcoin wasn’t the main beneficiary of any pro-crypto actions.
If you want to invest in cryptocurrencies and don’t know where to start, consider investing in Bitcoin.
Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and XRP. The Motley Fool has a disclosure policy.
