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Spice up your portfolio diversification with this hidden cryptocurrency
An investment in XRP could be a low-cost way to diversify your cryptocurrency portfolio, as long as you understand the risks.
For most cryptocurrency investors, Bitcoin (Bitcoin -2.23%) probably represents their largest investment. Given that Bitcoin now represents 54% of the total market capitalization of the cryptocurrency market, one would expect Bitcoin to represent at least half of every single cryptocurrency portfolio.
But sooner or later, investors will likely want to diversify away from Bitcoin. Maybe it’s to reduce the overall risk of their portfolio. Or maybe it’s to gain access to even more upside potential. For investors looking to expand, I think XRP (XRP -1.56%), formerly known as Ripplecould make for an interesting hidden cryptocurrency investment.
XRP has a relatively low correlation with Bitcoin
As a starting point for thinking about diversification, it is useful to consider correlation coefficients. It is simply a statistical measure of how closely an asset follows the price of another asset and is expressed as a number between -1 and 1.
If the value is close to 0 it means that the two assets have nothing in common. And if the value is close to 1, it means that the two assets move together.
The goal, quite simply, is to find a cryptocurrency that can move forward when Bitcoin moves forward. So, we need to find a cryptocurrency that has a very low correlation with Bitcoin. This is easier said than done, since almost all major cryptocurrencies are related to Bitcoin. Think of it this way: on days when Bitcoin rises, doesn’t the entire cryptocurrency market seem to move with it?
But XRP is different. While other major cryptocurrencies typically have a correlation of 0.65 or higher with Bitcoin, XRP’s correlation is only 0.44. The last time I looked at a cryptocurrency correlation matrix, this was among the lowest I could find.
The reason for this is simple: XRP is currently involved in a successful lawsuit with the SEC, and the only thing that really matters for XRP these days is how this case will end. Therefore, it tends to rise or fall based on recent legal developments, not macroeconomic factors, as you would expect with Bitcoin or other cryptocurrencies.
XRP has significant upside potential
Obviously, this SEC court case makes XRP a very attractive investment. If this is the kind of spiciness and uncertainty that makes you break out in a cold sweat, you should probably stop reading right now.
Image source: Getty Images.
Now that we have that out of the way, we can focus on XRP’s upside potential. These days the cryptocurrency is trading for around $0.50, down from the all-time high of $3.84. This has led many to think that XRP could easily double in value, provided it manages to resolve the SEC court case by the end of this year.
We have already seen evidence of this upside potential in July 2023. XRP doubled in value to just under $1 when it scored a major legal victory against the SEC. And there are many investors who think XRP could rise well above $1, and potentially as high as $10.
This is because XRP is the governance token of the Ripple payment network. This gives XRP intrinsic economic value. Until recently, its main purpose was to facilitate cross-border payments between individuals. It is simply faster, cheaper and more efficient to use XRP for this than traditional money transfer networks.
The problem, however, is that the SEC case put an end to XRP operations in the United States. Therefore, any projection for future growth must take this into account. According to Brad Garlinghouse, CEO of Ripple (the company behind the XRP crypto token), the main focus in the short term will continue to be on foreign markets.
For example, there has been talk of using XRP to create a new payment network for emerging market countries. There were even once rumors that Ripple might move its headquarters overseas, simply to avoid the heavy regulatory hand of the SEC.
How much XRP is too much XRP?
As long as XRP is trading at a cheap price, it will always attract some interest. After all, XRP is a previously very successful cryptocurrency with an impressive pedigree and a loyal investor base (known as the XRP Army). And as noted, XRP continues to power the Ripple payment network.
That said, I wouldn’t allocate a large percentage of any portfolio to XRP. This cryptocurrency trades for less than $1 for a reason. But if you’re looking for a low-cost, high-upside way to diversify your portfolio, it could be a very interesting and interesting addition.