Bitcoin (BTC -0.54%) and XRP (XRP 4.01%) 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 the Ripple payment platform, is a much smaller token that has largely traded on the drama surrounding a U.S. Securities and Exchange Commission (SEC) lawsuit over the past four years.
Over the past 12 months, Bitcoin's price jumped 134% as XRP's price rose 14%. Over the past five years, Bitcoin's price surged 487% while XRP's price climbed 116%. So is it smarter to simply stick with Bitcoin than to bet on XRP's future growth?
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The differences between Bitcoin and XRP
Bitcoin is often compared to physical metals such as gold because it's 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.
That process gets more challenging every four years with scheduled "halvings," which reduce the rewards for mining Bitcoin by half. As of this writing, nearly 19.8 million Bitcoins (out of its maximum lifetime supply of 21 million) have already been mined. But due to the increasing difficulty of mining Bitcoin, experts don't expect the final Bitcoin to be mined until 2140. It's a tightly controlled long-term inflation policy.
Bitcoin's blockchain doesn't support smart contracts or decentralized apps (dApps) like the proof-of-stake (PoS) blockchains used by Ethereum, Solana, and Cardano. However, its simple approach to mining, its scarcity, and its increasing adoption for mainstream payments make it more comparable to gold, silver, and other precious metals than many other cryptocurrencies.
XRP is a token that was digitally minted instead of mined. Its parent company, Ripple, minted its entire supply of 100 billion tokens prior to its market debut, and it initially locked up 55 million of those tokens in escrow accounts across its blockchain. It periodically releases some of those tokens to stabilize its liquidity and supply. It isn't making new tokens, just distributing a fixed supply.
Ripple promotes its payment processing blockchain and the closely related RippleNet service as an alternative to the SWIFT (Society for Worldwide Interbank Financial Telecommunication) international payment protocol used by most banks. It says its blockchain can process real-time gross payments, remittance transfers, and currency exchange transactions at a faster rate 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 attract a bit more attention, but the SEC sued Ripple over that offering in 2020 and accused it of selling unregistered securities.
What are the near-term tailwinds and headwinds?
Bitcoin benefited from two tailwinds this year. First, the SEC approved Bitcoin's first 11 spot price exchange-traded funds (ETFs) in January. Those ETFs allowed investors to gain direct exposure to Bitcoin through their brokerage accounts without trading on a cryptocurrency exchange. Second, Bitcoin's latest halving this April made it even harder to mine new coins.
XRP's price jumped earlier this month after Ripple finally settled its SEC lawsuit. Ripple was only fined $125 million, compared to the SEC's original demand for $2 billion. A federal district court ruled its ICO didn't constitute a sale of unregistered securities. That settlement eliminates the biggest near-term headwind for XRP.
Ripple plans to launch its own stablecoin (Ripple USD) and $10 million in tokenized U.S. T-bills on the XRP blockchain this year. It's also getting ready to upgrade that ledger with new tools for developing decentralized finance (DeFi) apps and dynamic non-fungible tokens (NFTs), and those new projects could stabilize and boost XRP's market price.
Expectations for rate cuts in the near future are driving some investors back toward the cryptocurrency market. If interest rates decline over the next few quarters, Bitcoin and XRP could both stabilize and climb higher.
So which cryptocurrency is a better buy?
With a market cap of $1.2 trillion, Bitcoin accounts for more than half of the entire crypto market's combined valuation of $2.1 trillion. XRP is only worth $34 billion. I believe Bitcoin's higher value, declining supply, and rising adoption among institutional investors, businesses, and governments all make it a viable alternative to gold.
I can't say the same about XRP, which is still only loosely linked to Ripple's main payment platform and isn't widely accepted for mainstream payments. XRP also can't 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 in and recommends Bitcoin, Cardano, Ethereum, Solana, and XRP. The Motley Fool has a disclosure policy.
