Bitcoin (CRYPTO: BTC) and XRP (CRYPTO: XRP) might be a bit safer than some crypto assets, but it isn’t as though they’re rock solid when things are falling apart. As the Nasdaq Composite and S&P 500 enter correction territory, investors are starting to worry more about a potential market crash.
And some are pondering which of these two assets would hold up better in a crash and which would be worth buying in the aftermath?
To start, let’s take a look at how Bitcoin and XRP performed during the early 2020 coronavirus market crash.
Here’s the chart:
Bitcoin Price data by YCharts
As you can see, both assets dumped hard during the crash, along with the rest of the market, which is to be expected. Then, over the next five years both climbed.
Bitcoin Price data by YCharts
Bitcoin has done slightly better since the 2020 crash, and its price action was generally less volatile than XRP’s, which isn’t an advantage, except for those who like to sleep more soundly without worrying about the value of their investments.
XRP is a cryptocurrency with value that’s derived from its utility as a medium of exchange rather than as a store of value. For it to have value as a medium of exchange, it needs to be actively demanded by its users, who must then transfer the coin between each other, and who must also have a reason to need more of it in the future. Given that its users are financial institutions seeking to avoid incurring currency exchange fees and international money transfer fees, the health and activity level of those financial institutions is a key consideration for the future demand for XRP.
Market crashes tend to coincide with periods of great uncertainty, particularly economic and financial uncertainty. Financial institutions, like most businesses, are loath to make big investments or big strategic plays during such periods. And, on average, that means the odds are good that they won’t need to make as many international money transfers. So investors will likely assume that the level of demand for XRP will be lower when uncertainty is highest.
Bitcoin, on the other hand, does not have much value derived from its utility. While it can be a medium of exchange, most investors look to it as a store of value. That makes sense given its supply dynamics, which ensure that there’s a smaller and smaller quantity of Bitcoin produced over time, generating scarcity. Scarcity doesn’t necessarily create demand, but it ensures that the price level will continue to rise over time so long as there is demand.
Story Continues
Investors might tend to liquidate some of their stores of value during turbulent times so that they have enough fiat currency on hand to cover contingencies, but wise holders of Bitcoin understand that doing so is a compromise, as the odds of the coin being worth more in the long term are quite good thanks to its increasing scarcity. Therefore the odds are also good that holders who sell coins will become buyers once again, perhaps even in advance of the market deciding that the hard times have passed.
No ones knows when the next market crash will happen, but Bitcoin looks like the better market-crash play.
It is possible to imagine the circumstances of a crash being events that create a high probability of a global or localized economic recession, which could last years. Under those conditions, Bitcoin is unlikely to flourish. Still, XRP would almost certainly suffer more, as the very thing that makes it valuable, its usefulness, simply wouldn’t be very appealing anymore, as users would be scaling back investments in new financial technologies rather than deepening them.
Furthermore, Bitcoin’s supply dynamics will continue grinding onward regardless of whether there’s a lot of demand. That means when demand eventually does come back, the new buyers will be competing fiercely, driving prices up. XRP doesn’t have any similar mechanic, even if it’s a good coin to buy generally.
Don’t sweat the possibility of a market crash too much. If you’re concerned, just keep some capital on hand so that you’re ready to buy.
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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and XRP. The Motley Fool has a disclosure policy.
What if the Market Crashes? Bitcoin vs. XRP was originally published by The Motley Fool
