Should You Forget Bitcoin and Buy XRP Instead?

Bitcoin's (CRYPTO: BTC) price has doubled during the past 12 months. Several catalysts drove the world's top cryptocurrency higher: The approvals of the first Bitcoin spot price exchange-traded funds (ETFs) in January, its halving in April which cut its mining rewards in half, the Federal Reserve's long-awaited interest rate cut in September, and its growing adoption as a recognized currency in countries like El Salvador and the Central African Republic.

Bitcoin's recovery could convince many investors that it's a stable long-term asset like gold or silver. It already has a market cap of $1.4 trillion -- compared to gold's market cap of $18.6 trillion and silver's market cap of $1.9 trillion -- and is now the world's 10th most valuable asset.

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But as Bitcoin matures, it might have less upside potential than the market's smaller cryptocurrencies. So should growth-oriented investors shift from Bitcoin and buy XRP (CRYPTO: XRP) on the chance that it might take off?

The differences between XRP and other cryptocurrencies

XRP is the native cryptocurrency of Ripple, a blockchain ledger which is used as a cheaper, faster, and more secure alternative to the widely used SWIFT (Society for Worldwide Interbank Financial Telecommunication) protocol for money transfers. Several smaller financial institutions -- including Travelex Bank, Tranglo, and Sentbe -- use Ripple's XCurrent network for their money transfers.

But instead of gradually adopting XRP's token for payments, most of those financial clients only use XCurrent to transfer fiat currencies. That's why XRP didn't gain as much traction as other cryptocurrencies.

XRP can't be mined like Bitcoin or other proof of work (PoW) tokens. Ripple actually pre-mined its entire supply of 100 billion tokens before its launch in 2013, and it locked up more than half of those tokens in escrow accounts across its blockchain. It periodically releases some of those tokens to stabilize its liquidity.

XRP can't be staked (locked up to earn rewards) like Ethereum's (CRYPTO: ETH) Ether and other proof of stake (PoS) cryptocurrencies. Its ledger also doesn't natively support smart contracts -- which are used in PoS blockchains to develop decentralized apps (dApps), non-fungible tokens (NFTs), and other crypto assets.

Why could XRP gain more attention?

XRP's fixed supply, inability to be mined, and lack of utility made it a tough cryptocurrency to love. To make matters worse, the U.S. Securities and Exchange Commission (SEC) sued Ripple in 2020 and claimed its XRP token offerings were illegal sales of unregistered securities.

That setback caused Grayscale Investments to shut its XRP Trust in 2021. Coinbase Global (NASDAQ: COIN), one of the world's largest cryptocurrency exchanges, blocked its New York customers from trading XRP that same year.

During the past 12 months, XRP's price has declined more than 15% and underperformed Bitcoin, Ethereum, and other leading cryptos. Yet three tailwinds might lift XRP higher during the next few years. First, Ripple's protracted legal battle against the SEC finally ended in August with a lighter-than-expected fine of $125 million. The SEC is appealing that ruling, but it could be tough to overturn the results of that four-year legal battle.

Second, Grayscale recently relaunched its XRP Trust as a closed-end fund (CEF) for accredited investors in response to Ripple's partial victory. Bitwise also recently filed a registration statement with the SEC to start the market's first spot price XRP ETF. Those new funds could stabilize XRP's price and lock in more mainstream investors. Coinbase even allowed New York residents to start trading XRP again.

Lastly, Ripple plans to integrate Ethereum-compatible smart contracts into a new sidechain tethered to the XRP ledger. That's not quite the same as natively supporting smart contracts, but it could finally draw more developers to its blockchain and encourage the adoption of XRP's token.

But is XRP a worthy replacement for Bitcoin?

XRP's near-term headwinds are dissipating, but I'm less certain about its long-term tailwinds. Bitcoin has clearer catalysts on the horizon -- it will become harder to mine with each four-year halving, it will receive more funds from institutional investors, and it could be more widely adopted for payments.

With XRP, I still see a token that isn't scarce enough or useful enough to be considered a great long-term investment. It might be an interesting short-term trade, but I don't think it's time to abandon Bitcoin and bet on XRP's potential outperformance.

Should you invest $1,000 in XRP right now?

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Ethereum, and XRP. The Motley Fool has a disclosure policy.