Although the cryptocurrency market is rarely -- if ever -- boring, this year has been a particularly wild ride for investors. Bitcoin has more than doubled since last August and reached a new all-time high well above the six-figure mark.
While Bitcoin remains the top dog, two of the most popular and well-established altcoins -- Ethereum (ETH 2.59%) and XRP (XRP +0.09%) -- have grabbed headlines of their own with big gains. Though in many ways they are very different, their futures are both heavily tied to the legacy financial system. Both will also be affected significantly if there's mass adoption of stablecoins, and with the recent passage of the Genius Act, that looks entirely possible.
So, which is the better long-term pick? I believe that if you look past the hype, there's a clear answer.
Mass adoption could drive XRP's price
The technology underpinning legacy banking's settlements (how banks actually send and receive funds) is extremely useful and secure, but it has some pretty significant shortcomings. Transactions can take days or even weeks to finalize. The process -- especially when sending money across borders -- often involves several intermediaries, and the fees can stack up quickly.
CRYPTO: XRP
Key Data Points
Ripple, the company behind XRP, set out to solve those problems. It created the XRP blockchain and its native token to make financial transactions faster, cheaper, and more secure.
The basic investment thesis for XRP has always been that as banks adopt Ripple's technology, demand for XRP will rise and its price will follow. The more widespread the adoption, the higher XRP's value.
Here's the thing: Banks can use Ripple's blockchain with little or no exposure to XRP at all. In fact, that's how most banks -- especially the largest ones -- choose to interact with the technology. They can capture most of the time and cost savings without taking on the risk of holding a volatile asset like XRP.
Ripple's on-demand liquidity (ODL) product is the exception. ODL helps institutions that face liquidity issues in cross-border payments by eliminating the need for pre-funded accounts in foreign currencies. Instead, banks use XRP as a bridge asset. This is where the popular investment case holds up.
The problem is, most major financial institutions don't face liquidity issues -- at least not to the extent that holding a risky asset like XRP would justify -- and I believe ODL is unlikely to be adopted at scale.
Image source: Getty Images.
Adding another wrinkle, Ripple just bought Rail, a stablecoin payment platform, and looks to be trying to position itself as a leader in stablecoins as the market takes off. This could further reduce demand for XRP, offering another payment system that doesn't require direct XRP exposure, and even potentially replacing XRP as the asset needed for ODL. The success of stablecoins could actually hurt XRP's value.
Ethereum is the backbone of the stablecoin market
That isn't the case for Ethereum. The pioneer of smart contracts underpins a large portion of stablecoin usage. By far, the most USDC transactions happen on its blockchain. As stablecoins grow in adoption, demand for Ethereum is likely to grow, not diminish.
CRYPTO: ETH
Key Data Points
Every stablecoin transaction on the Ethereum network requires a small payment in Ether (ETH) -- the actual coin investors hold -- for gas, or transaction fees. Part of that fee is automatically burned, meaning that the ETH is permanently destroyed and removed from circulation. The more activity on Ethereum, the more ETH is burned.
But wait, XRP works the same way, correct? XRP has to be burned for every transaction on its network. Why is this different? The mechanisms are similar, but the economics are very different. A minuscule amount of XRP is burned for each transaction; it has very little effect on price. In contrast, enough ETH is burned in each transaction to meaningfully affect the price.
The better long-term bet
Stablecoins could define the next wave of crypto adoption. For XRP, that's more risk than reward, and it's just the opposite for Ethereum. Stablecoin growth directly boosts activity on its network, burns ETH, and reduces supply.
Beyond stablecoins, the possibilities offered by Ethereum's smart contracts in finance, the tokenization of stocks, and more make it the clear answer. It is the better crypto buy.
