Better Cryptocurrency to Buy the Dip (If There Is One): Bitcoin vs. XRP

When the cryptocurrency sector starts to drop, it's often a challenge to hold on to your investments. Still, if you can summon the courage to make a timely purchase of a quality asset like XRP (CRYPTO: XRP) or Bitcoin (CRYPTO: BTC), the upside can be quite substantial, especially when you commit to not selling anything for a handful of years afterward.

But in practical terms, when a big dip rolls around, it can be tough to decide where you'll get the best bang for your buck, especially considering that the cryptocurrency sector's volatility often makes investors question whether certain assets will ever be able to bounce back at all. Let's analyze which of these two coins is the better bet in the event that prices fall significantly in the near term.

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The factors causing a dip matter here

We live in interesting times. That means it isn't possible to offer a blanket generalization here. In short, the particular factors causing the dip matter significantly to the question of which to buy, so let's run through a couple of scenarios.

The most likely scenario is that the prices of these coins will eventually drop as a result of an inscrutable combination of market and economic factors, ever-shifting investor sentiment, and other fundamentally short-term headwinds that don't detract from the core investment thesis for either coin. These kinds of dips happen all the time, and they can be as deep as 20% or more in some cases. To be clear, these are the kinds of dips that you generally want to be buying. They represent a bargain relative to the prior price level, assuming you're willing to retain your tokens long enough for the market to correct its mistake, which could take a while.

In the context of these humdrum dips, it won't be that frightening to buy something. Hopefully, you'll appreciate that the level of uncertainty surrounding either Bitcoin or XRP stems from their short-term price action, rather than from issues that might be serious or existential. In the grand scheme of things, it's a bit safer to buy Bitcoin than XRP in this scenario. Its halving cycle means that the odds are in your favor for the price correcting upwards eventually, due to supply becoming more constrained.

Still, assuming there is no specific set of long-term headwinds causing the dip, XRP is probably the better option to capture more upside, as its value-generation flywheel operates regardless of its price. For reference, in that flywheel, banks and other financial institutions buy the coin to transact with each other. They can avoid paying expensive international money transfer fees and currency exchange fees, while also closing their transactions much faster than with traditional methods. XRP gets a small fee when those businesses transact, which it can then invest into network upgrades or onboarding more users.

Now, let's examine a scarier scenario, in which major disruptive economic, financial, regulatory, or other events seriously damage the investment thesis for these coins.

The safer choice is not necessarily the best one for everyone

Hypothetically, if the U.S. government made all cryptocurrencies illegal tomorrow, like China did in 2021, or if the global economy crashed, would that be a serious blow to the investment thesis for either coin?

For XRP, the answer is that yes, it would.

The whole point of the coin is for financial institutions to buy it, hold it, and use it for their purposes. Serious problems in the global economy, or serious disruptions to trade, would lead to significantly reduced usage of the coin, potentially for years. And disobeying the law is an unnecessary risk, so banks would likely dump the coin and not look back. In such a situation, it wouldn't make sense to buy the dip, as the factors causing the dip would be driven by a serious impediment to the coin continuing to gain value.

For Bitcoin, the same hypotheticals have the opposite answer. The appeal of Bitcoin as an investment stems from its inherent scarcity, which is hard-coded into its protocol. While its price may fall if the economy crashes, it will still continue to get scarcer over time anyway. Furthermore, it isn't issued by a single company, like XRP is, nor is it controlled by entities that are largely within any one jurisdiction.

So even if there would be a steep dip if the U.S. government banned it, its investment thesis would not be affected. That makes it the safer option.

The point of this thought exercise is to get you to understand that not all dips are alike. The reason for the dip -- or lack thereof -- is the thing that determines which coins you should buy and why.

If you're not sure what's going on or why, it's usually safer to invest in Bitcoin during a dip. But if you can prove to yourself that the market is overreacting to things that aren't going to matter in a couple of years, you'll probably get more growth mileage out of XRP.

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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.