Over the last decade, the addition of crypto to portfolios has gained wider acceptance among investors.
Perhaps the most mainstream crypto asset to enter the spotlight in recent history is Bitcoin (BTC 1.32%), whose 28,000% return over the last decade trounces the S&P 500, Nasdaq Composite, and even the leader of the artificial intelligence (AI) revolution, Nvidia.
Sometimes when an asset rises by such abnormal levels, investors fear that they've missed the boat and begin seeking out alternative opportunities. In the crypto realm, an up-and-coming star called XRP (XRP 1.34%) is often cited as one of the next potential tokens to break out.
Let's examine the underlying features of Bitcoin and XRP to gain a deeper understanding of their respective roles in the cryptocurrency landscape. Could XRP become the next Bitcoin?
CRYPTO: XRP
Key Data Points
What is Bitcoin and how does it work?
With a market capitalization of $1.7 trillion, Bitcoin is the largest cryptocurrency in the world.
What makes Bitcoin so unique is its underlying structure. As it stands today, there are 19.9 million Bitcoins in circulation. In total, there will only ever be 21 million Bitcoins -- implying that there are roughly 1.1 million Bitcoins left to be mined.
Investing in Bitcoin is inherently tied to a scarcity mindset given its fixed supply base. In other words, many investors view Bitcoin as rare -- similar to other alternative assets such as gold or artwork.
Against this backdrop, Bitcoin is often referred to as a store of value and can act as a hedge against inflation during more turbulent economic cycles.
Image source: Getty Images.
What is XRP's value proposition?
Financial analysts, treasury managers, and accountants know all too well how arduous it can be to move funds around. Specifically, large corporations and even governments are bottlenecked by the time and cost inefficiencies associated with sending money across borders.
Sometimes, it can take days for a single transaction to settle, all for the luxury of paying a series of foreign exchange and processing fees at each intermediary bank.
Ripple is trying to disrupt the cross-border transaction market, offering a payments infrastructure that can process high volumes of transactions at significantly lower costs compared to legacy financial services providers.
XRP is a token that can be leveraged on Ripple's network. The value proposition of denominating transactions in XRP is that businesses can avoid the hefty transaction fees that come with converting funds to other currencies.
Could XRP become as big as Bitcoin?
As of Nov. 10, XRP's market value is about $120 billion. To put this into perspective, this is larger than cryptocurrency stocks such as Coinbase Global and Robinhood Markets, as well as neobanks like SoFi Technologies and Chime Financial.
While such a valuation is impressive, I think it may be unjustifiably high. What some investors may not fully understand is that adoption of Ripple's infrastructure does not necessarily lead to higher usage of XRP.
In other words, a bank could feasibly leverage Ripple's payments network for its speed and cost efficiencies, but still choose to denominate their transaction in fiat currency as opposed to XRP.
At the end of the day, Bitcoin and XRP are two fundamentally different cryptocurrencies.
On one side, Bitcoin offers a unique level of insulation from stock market volatility and could be viewed as more liquid compared to traditional alternative assets such as real estate, art, or rare collectibles.
By contrast, XRP is a component of a better mousetrap -- a more efficient way to send funds across borders relative to legacy systems.
Given the stark differences in their underlying applications, I see Bitcoin as the more durable cryptocurrency in the long run.
While XRP's prospects within decentralized finance (DeFi) could strengthen over time, its overall use case is likely not robust enough to command Bitcoin-style returns. Moreover, XRP competes with several other cryptocurrencies that offer similar solutions. By contrast, Bitcoin doesn't really have direct competition in the crypto market and is increasingly viewed on par with traditional inflation hedges like gold.
For these reasons, I do not see XRP becoming the next Bitcoin. It's like comparing digital apples to encrypted oranges.
