Should You Forget Bitcoin and Buy XRP (Ripple) Instead?

Key Points

• The theory that bank adoption will meaningfully boost XRP's price is flawed.

• Most major institutions that use Ripple's technology opt for RippleNet, bypassing the need to use XRP.

• Stablecoins could further erode the connection between adoption and price appreciation.

• 10 stocks we like better than XRP ›

While Bitcoin is the go-to for many investors, XRP (CRYPTO: XRP) bulls believe that the token is poised for mass adoption and presents a better opportunity for serious returns. That belief has helped drive XRP up nearly 1,000% over the past five years.

Proponents argue that as banks adopt the technology for faster and cheaper cross-border payments, demand for XRP will surge. Why hold Bitcoin when you could own the cryptocurrency that powers the future of banking?

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Here's the thing: I think XRP investors are misunderstanding something essential.

The idea behind XRP's value

The basic investment thesis for XRP has always been that as banks adopt the blockchain technology developed by the token's creator, Ripple, demand for XRP will increase. It's an appealing argument that seems logical on the surface. Banks need faster, cheaper international transfers. Ripple's blockchain technology delivers exactly that. Therefore, XRP -- Ripple's native token --should benefit from widespread adoption.

The problem is, most banks can capture the benefits of Ripple's technology without ever touching XRP.

The reality of bank adoption

Banks can utilize Ripple's blockchain with minimal or no exposure to XRP. Ripple's most popular product, RippleNet, gives banks most of the time and cost savings without taking on the risk of holding a volatile asset like XRP.

However, some banks that have liquidity issues opt for Ripple's On-Demand Liquidity (ODL) service. ODL eliminates the need for pre-funded accounts in foreign currencies. Instead, banks hold XRP and use it as a "bridge asset" for international transfers. This is where the popular investment case holds up.

Image source: Getty Images.

However, 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 ODL is unlikely to be adopted on a large scale. Banks want efficiency; they do not want volatility. Banks don't want to hold an asset -- even temporarily -- that could drop 20% in a day. For most institutions, that level of volatility is unacceptable.

While XRP bulls point to room for growth and expanding bank adoption, they're missing the fundamental mechanics and economics surrounding XRP. Banks have consistently chosen the path that provides Ripple's technology benefits while mitigating XRP's risks.

Adding another wrinkle, Ripple recently acquired Rail, a stablecoin payment platform, and appears to be trying to position itself as a leader in stablecoins as the market expands. While this could be lucrative for Ripple, it's unlikely to drive XRP adoption. In fact, it's more likely to hinder it. Stablecoins can serve as a bridge asset while mitigating volatility risk.

Even if the move does lead to less use of XRP itself for banks using ODL, the move makes sense for Ripple. The company can't afford to be left behind in what could be a massive market, and driving XRP value isn't its primary mission.

XRP vs. Bitcoin

XRP's market cap of nearly $180 billion reflects investor confidence in a story more than real value. I'm not saying it has no value -- far from it -- but there has been a major overvaluation by investors.

The story is compelling, and I think XRP could do well in the short to medium term, but chasing short-term gains is not the way to succeed in the market. Over time, I believe the reality will become clear, and XRP's value will deflate.

So, should you forget about Bitcoin and buy XRP instead? No. In fact, I would avoid XRP entirely. While Bitcoin may not have XRP's flashy utility narrative, it has something more valuable: A proven track record as a store of value and genuine institutional adoption. For investors seeking cryptocurrency exposure with solid fundamentals, Bitcoin remains the better choice.

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

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and XRP. The Motley Fool has a disclosure policy.