For most crypto investors, Bitcoin (BTC -0.10%) probably represents their single biggest investment. Given that Bitcoin now accounts for 54% of the total market cap of the crypto market, one would expect Bitcoin to account for at least half of any single crypto portfolio.
But sooner or later, investors will probably want to diversify away from Bitcoin. Perhaps it's to reduce the overall risk of their portfolio. Or perhaps it's to gain access to even more upside potential. For investors looking to branch out, I think XRP (XRP -1.93%), formerly known as Ripple, could make an interesting under-the-radar cryptocurrency investment.
XRP has a relatively low correlation with Bitcoin
As a starting point for thinking about diversification, it's helpful to consider correlation coefficients. These are simply a statistical measure of how closely one asset tracks the price performance of another asset, and is expressed as a number between -1 and 1.
If the value is close to 0, it means the two assets don't have anything in common. And if the value is close to 1, it means the two assets move in lockstep.
The goal, quite simply, is to find a crypto that can zig when Bitcoin zags. So, we need to find a cryptocurrency that has a very low correlation with Bitcoin. This is easier said than done, since just about every major cryptocurrency is correlated with Bitcoin. Think about it this way: On days that Bitcoin spikes higher, doesn't the entire crypto 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 just 0.44. The last time I looked at a cryptocurrency correlation matrix, this was among the lowest that I could find.
The reason for this is simple: XRP is currently tied up in a blockbuster legal case with the SEC, and the only thing that really matters for XRP these days is how this case is going to turn out. Thus, it tends to move up or down based on recent legal developments, not on any macroeconomic factors, as one would expect with Bitcoin or other cryptocurrencies.
XRP has significant upside potential
Obviously, this SEC court case makes XRP a very spicy investment. If this is the type of spiciness and uncertainty that has you breaking out in a cold sweat, you should probably stop reading right now.
Image source: Getty Images.
Now that we've gotten that out of the way, we can focus on XRP's potential upside. The crypto is trading for around $0.50 these days, down from an all-time high of $3.84. That has many thinking that XRP could easily double in value, provided it can resolve its SEC court case by the end of this year.
We already saw evidence of this upside potential in July 2023. XRP doubled in value to just under $1 when it scored a major legal win against the SEC. And there are many investors who think XRP could soar well beyond $1, and potentially as high as $10.
That's because XRP is the governance token of the Ripple payment network. This gives XRP inherent economic value. Until recently, its primary purpose was to facilitate cross-border payments between individuals. It's simply faster, cheaper, and more efficient to use XRP for this than traditional money transfer networks.
The problem, though, is that the SEC case has put the kibosh on XRP's operations within the United States. So any projections for future growth need to take this into consideration. According to Brad Garlinghouse, the CEO of Ripple (the company behind the XRP crypto token), the core focus over the near term will continue to be overseas markets.
For example, there has been talk of XRP being used for the creation of a new payment network for emerging markets nations. At one time, it was even rumored that Ripple might be moving its headquarters overseas, simply to avoid the regulatory heavy hand of the SEC.
How much XRP is too much XRP?
As long as XRP trades at a bargain-basement price, it will always attract a certain amount of interest. After all, XRP is a formerly high-flying crypto 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 being said, I wouldn't allocate a large percentage of any portfolio to XRP. This crypto trades for less than $1 for a reason. But if you are looking for a low-cost, high-upside way to diversify your portfolio, it could be a compelling and very spicy addition.
