XRP and Ethereum Share This 1 Critical Problem. Should You Sell Them?

Two of the largest cryptocurrencies destroy a portion of every transaction fee incurred on their blockchains. But contrary to what most investors expect, those mechanisms aren't meaningfully boosting returns for holders.

Ethereum (CRYPTO: ETH) has seen its supply grow by more than 950,000 ETH since September 2022, so there's no case to be made for token burns decreasing its circulating supply. XRP (CRYPTO: XRP), on the other hand, has destroyed just 14 million XRP through fees over the entire 13-year life of the XRP Ledger (XRPL) -- about 0.01% of the 100 billion XRP maximum supply.

So, given that one of the pillars of each coin's value isn't really working as advertised, is it time to sell them?

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Same mechanic, different missions

Both XRP and Ethereum incur transaction fees, which are then destroyed. But the two mechanisms were built for entirely different purposes, and their failure modes share no root cause; the distinction is directly relevant for determining whether to buy them, keep holding them, avoid them, or sell them outright.

Ethereum's EIP-1559 upgrade in 2021, which destroyed part of every gas fee, was sold to holders as a scarcity-increasing mechanism. The pitch was that each transaction on the network would burn a portion of the coin's outstanding supply, thereby increasing the value of the tokens remaining in circulation, like in a stock buyback. The plan worked through early 2024, as token burns outpaced new issuance.

Then, the March 2024 Dencun upgrade slashed gas fees for Layer-2 (L2) networks, thereby pulling most activity off the Ethereum mainnet and onto those L2s, where transactions could be processed more efficiently. This is a major reason the average fees paid on Ethereum are down 97.5% over the last five years. It's also why fees are unlikely to boom and become a driver of supply pressure anytime soon; traffic was intentionally rerouted elsewhere, and at the same time, the chain's throughput was upgraded to serve the remaining traffic more cheaply.

In terms of numbers, the rate of tokens being removed from supply needs to be above average gas fees near 16 gwei (one billionth of an ETH) per transaction to offset the 1,700 ETH issued daily to the network's stakers, or else the coin's supply will be increasing rather than decreasing over time. Average gas fees on June 22 were 0.14 gwei per transaction, so Ethereum's supply will continue expanding for the foreseeable future.

The origin of XRP's situation is categorically different; the XRP Ledger's (XRPL) fees exist to deter spam and denial-of-service attacks, not to engineer scarcity. Fees of 0.00001 XRP get destroyed with each transaction because Ripple, the coin's issuer, wants attackers to be dissuaded or, at a minimum, bear a real economic cost.

Still, for holders, the rock-bottom fees mean there's no concrete link between activity on the XRPL and the price action of XRP itself. In other words, if all of Ripple's dreams for the network come true and financial institutions onboard billions in capital to the XRPL for managing payments, settling trades, and everything else, there might still not be strong demand for the coin.

And that makes the idea of buying it or holding it a bit tough to stomach.

Is there a way to get a return?

If neither of these coins is actually constraining their supply to provide holders with a return, how is anyone supposed to make money by investing in them?

For Ethereum, the story is now more about staking. Staking tokens can earn holders around 2.6% annually, which isn't much, but it shows there's a way to earn a return.

For XRP, the thesis is still about whether Ripple's institutional pipeline -- cross-border transaction settlement, stablecoin growth, tokenized asset growth, and other features -- can drive XRP toward utility-driven custody. But even at 10 times the network's current daily volume, the burn rate will barely scratch its 62 billion XRP in outstanding supply.

So this is more of a problem for XRP than it is for Ethereum. Still, you probably shouldn't sell either at the moment, as supply policies and tokenomics are tractable issues that many networks have successfully tweaked in the past. At the same time, it's a legitimate choice to invest in other assets rather than these two, since not all cryptocurrencies face the same issues.

Alex Carchidi has positions in Ethereum. The Motley Fool has positions in and recommends Ethereum and XRP. The Motley Fool has a disclosure policy.