Institutional investors’ newfound interest in cryptocurrencies was one of the main investing themes coming out of 2020. Bitcoin’s (CCC:BTC) price has soared over 300% over the last year and more than 60% in the last month. Ripple (CCC:XRP) has been a different story.
While Bitcoin has seen intermittent price drops, the larger theme remains intact. However, if you are risk-averse, you should steer clear of Ripple.
A month back, XRP was the third-biggest cryptocurrency by market cap. It cratered by half since Dec. 22 mostly on news that the SEC is charging Ripple Labs, which develops the eponymous payment protocol and exchange network, with conducting a $1.3 billion unregistered securities offering when it began selling XRP in 2013.
XRP continued its plunge after Coinbase became the latest U.S. crypto exchange to remove the world’s fifth-biggest coin in the wake of the SEC lawsuit. At this point, expect the digital asset to continue losing steam moving forward. A comeback is not on the horizon.
Ripple is Scorched Earth
Volatility is nothing new to cryptocurrencies. However, last year we saw unprecedented interest because large financial institutions finally started to warm to them. At the same time, PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) now allow users to buy, sell and hold cryptocurrencies. Through the PayPal app, you can choose to buy Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
Hence, it’s no surprise that Ripple rallied late last year, rising to a two-year high of 79 cents , the highest level since May 10, 2018. However, the SEC lawsuit against Ripple Labs led to XRP cratering. The federal agency alleges that Ripple raised more than $1.4 billion through the sale of XRP without first registering it as a security.
Regardless of the suit’s result, cryptocurrency exchanges Crypto.com and OKCoin joined Coinbase in suspending trading of the XRP token when the news emerged. Phil Liu, the chief legal officer at Arca, said the coin “is one foot in the grave.”
I believe that is a bit extreme. Whatever your thoughts on Ripple’s future, XRP exists independent of the company, on a distributed ledger. The XRP ledger is an open-source and permission-less blockchain technology that can settle transactions within 3-5 seconds. It can settle 1,500 transactions per second and operate continuously. In comparison, ETC can handle about 15 transactions per second, and BTC can handle 3-6. The utility of XRP is too valuable to fade away.
There are also billions at stake here. The agency was warned that investors could lose billions, considering “the magnitude of an SEC enforcement action” against XRP. Unfortunately, Ripple has employed an aggressive strategy; thus far, with CEO Brad Garlinghouse saying the SEC “voted to attack cryptocurrencies.” Time will tell what happens with the case. But Ripple is a potential “too big to fail” case study.
Bitcoin Remains Your Best Bet
Unlike its rivals, XRP is trading at multi-year lows. The chances of a rebound are slim at the moment. I agree with InvestorPlace‘s Thomas Niel that in case you want to gain crypto exposure, Bitcoin remains your best bet at the moment. Institutional interest is sky-high for it, with PayPal and Square both backing it on their platforms. And even there, you should exercise restraint.
Earlier this month, Bitcoin slid as much as 21% over a two-day period to as low as $32,389, wiping off nearly $140 billion in total market capitalization. Bitcoin’s surge represented the embrace of risk in financial markets awash with stimulus. A weaker dollar, economic optimism, and higher institutional interest will continue to drive crypto higher. But that doesn’t mean that there won’t be peaks and valleys as we move forward.
Investors should keep an eye on updates regarding the case but avoid Ripple for now. Investing any amount of capital in it means that you are comfortable in parting with that amount.
Even after the smoke clears on the SEC investigation, it will be a long time before Ripple becomes a viable digital asset again. As we have seen in the case of Luckin stock, scandal looms large over your operations even if you are on the path to recovery.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.