One useful investing trick is to ask yourself to describe what needs to be true in order for an asset to deliver a good return. The more your answer depends on fickle factors like investor excitement or coverage in the media, the less likely it is that the asset in question will be a smart investment. Even if you're only allocating $2,000, it pays to make the highest-quality decision possible.
Let's take a look at one cryptocurrency that'll likely prove to be worth your $2,000 in the long run, and one that's worth avoiding in perpetuity.
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Dogecoin needs constant attention to succeed
Dogecoin (DOGE +0.12%) is a meme coin that's only capable of generating a return for its holders via periodic bubbles during times of widespread financial speculation.
It's simply not meant to work as a long-term compounding asset, and that should dissuade you from even considering buying it. It issues 10,000 DOGE per newly created block on an ongoing basis. This translates into a persistent stream of new supply hitting the market over time, thereby diluting holders' value every day. So, the supply situation gets worse the longer you retain your coins.
CRYPTO: DOGE
Key Data Points
But it's the lack of recurring sources of demand that's the real problem. There isn't anyone who needs to buy and hold Dogecoin for any economic purpose other than speculation, nor is it likely to have one in the future. Therefore, hype is the only thing driving its price, which means it's uninvestable.
XRP is worth an investment
Unlike Dogecoin, XRP (XRP 1.76%) is used for a variety of purposes on the XRP Ledger (XRPL), its blockchain.
Ripple, the issuer of XRP, is a fintech developing the XRPL to market it to financial institutions such as banks and currency exchange houses. Those organizations are incentivized to buy XRP and use it as a financial tool because its transaction costs are dirt cheap, enabling inexpensive and fast international transfers of capital, and also because the network has a suite of regulatory compliance tools that make using it less risky than other options in crypto and elsewhere.
CRYPTO: XRP
Key Data Points
Furthermore, a slate of new features is coming to the XRPL, which will sweeten the pot even more. Starting in the second quarter, the network will support confidential transfers, as well as regulator-friendly markets for exchanging tokenized assets like stocks or bonds. Every time a user opens a new account on the XRPL or takes an action, they need to have some XRP on hand to pay the required fees, so there's a flywheel that converts demand into higher coin prices.
Assuming Ripple continues to attract its target users, there will be ongoing demand for XRP. That's the main reason why it's worth an investment of $2,000 and Dogecoin isn't. Just be aware that the crypto market is even more volatile than usual right now, so you shouldn't count on XRP's price to be stable in the near term.
