Bitcoin (BTC) and Ripple (XRP) are both popular cryptocurrencies: As of Nov. 2, 2021, Bitcoin is the No. 1 cryptocurrency by market cap, and XRP is the No. 7 cryptocurrency by market cap.
But while the two cryptos share some other characteristics, there are also some notable differences when it comes to Ripple vs. Bitcoin. To better understand those similarities and differences, first, let’s look at each cryptocurrency individually.
Related: What is a blockchain explorer?
Ripple Basics
Ripple is a payment network and is also the name of the company that created XRP. This is a distinction that often gets glossed over. Ripple and XRP are not exactly the same thing, although the terms are often used interchangeably.
Ripple refers to both the network and the privately-owned company behind it. Ripple is a payment settlement and remittance system that was created to serve as an efficient way of transferring assets from person to person, institution to institution, or across international borders. Ripple is mostly used by large financial institutions and brands itself as “the best digital asset for global payments.”
XRP is the cryptocurrency of the Ripple network.
The Ripple network achieves consensus, or makes sure its transactions are valid, by using a distributed ledger called The XRP Ledger, which is a network of nodes that validate transactions by conducting a poll. XRP, the Ripple crypto, can be sent along this network to transfer value.
Bitcoin Basics
Bitcoin is the first and largest cryptocurrency. The Bitcoin blockchain was the first decentralized blockchain to survive “in the wild,” meaning there is no central authority or company backing it. Some consider Bitcoin to be the only truly decentralized cryptocurrency for this reason.
Bitcoin also has the highest hash rate of any proof-of-work coin, which might be one of its most important distinctions. The higher the hash rate, the more secure the network.
Ripple vs Bitcoin: Similarities
Aside from the fact that both Bitcoin and Ripple are independent cryptos that can be used for payments or speculation by anyone across national borders, there are a few ways in which the two cryptos are similar.
1. Both Can Be Used Independently
With some exceptions, almost anyone can use and trade BTC or XRP. Whether someone wants to speculate on their prices, use the crypto as a store of value, or use it to send payment to someone else, doing so can be easier than other financial methods. It’s even possible to use cryptocurrencies like XRP or BTC without having a bank account. There’s no difference between XRP vs. Bitcoin in this regard.
2. Both Transcend National Borders
Both BTC and XRP can be used as payment between people living in different countries; they each exist outside the jurisdiction of any national government. While users may have to deal with taxes, banking regulations and capital controls when converting into their local fiat currency, crypto transactions can be carried out without anyone’s permission.
3. Both Are Popular Cryptocurrencies
Both cryptocurrencies are among the top 10 cryptos, at least as of November 2021. For those wondering how to buy Ripple (XRP), the process is much the same as buying Bitcoin, in that users will have to create an account on an exchange. (That said because of an ongoing lawsuit filed by the Securities and Exchange Commission, XRP has reportedly been delisted from many crypto exchanges.)
4. Both Can Be Used for Speculation
All cryptocurrencies that are traded on public crypto exchanges can be used as speculative vehicles. As with most forms of investing, investors try to buy currencies at a low price, hoping to sell again after prices rise and make a profit. While Bitcoin wins the battle of liquidity when it comes to Ripple vs. Bitcoin, they both have higher liquidity than the vast majority of cryptocurrencies. This makes them ideal for trading and arbitrage opportunities.
Ripple vs Bitcoin: Differences
Perhaps the main difference between Bitcoin vs. Ripple is the way their networks are structured. Ripple uses a distributed ledger owned by Ripple, the company. Bitcoin uses a decentralized blockchain owned by no one. But the differences don’t end there.
1. Supply of Coins and Mining Is Different
Bitcoin has a maximum supply of 21 million coins with about 18.74 million in circulation at the time of writing in mid-2021. New coins must be earned by miners solving complex mathematical problems.
XRP has a maximum supply of 100 billion with more than 45 billion in circulation at the time of writing. XRP coins are not mined. The total supply already exists and about 55% of the coins are held by Ripple.
XRP was designed as a way to settle payments fast and at a low cost. The coin likely has more utility value than it does economic value. If someone needed to send $10 to someone in another country and wanted to do so every day or every week, XRP might work better than Bitcoin due to the low fees and quick remittance times.
2. Transaction Throughput Isn’t the Same
Bitcoin transactions are decidedly slower and potentially more costly. The Bitcoin network can only handle about seven transactions per second on average. BTC transactions take about 9.2 minutes on average to be fully settled. Fees can range from a few cents to a few dollars or more depending on network congestion at the time.
The Ripple network can handle about 1,500 transactions per second. XRP transactions settle in about four seconds on average. Fees can be a fraction of a penny.
3. Use Cases Differ
At present, Bitcoin’s biggest use case is “digital gold.” People who have been using Bitcoin as a type of savings account over the last 12 years have outperformed all other investments by a wide margin. Even large corporations have begun to put BTC on their balance sheets. Bitcoin is considered by some to be a hedge against inflation due to its limited supply, and a portfolio diversifier due to its noncorrelation with other financial assets. However, cryptocurrency is exceptionally volatile, and there is no guarantee that Bitcoin will continue to outperform other investments.
Should You Buy Ripple or Bitcoin?
Before investing in either Ripple or Bitcoin, it might help to consider a few things first.
First, Bitcoin has a max supply of only 21 million coins. Bitcoins have to be mined into existence, and it’s difficult to do so. Bitcoin is the largest crypto by market cap, has the highest liquidity, the highest hash rate and the longest track record.
XRP has a max supply of 80 billion. These coins were pre-mined, meaning they were all created at once by Ripple. As long as Ripple keeps their promise of keeping some of the supply of XRP locked up, then the coins should, in theory, retain some value. XRP can be considered a more centralized coin than most since it was pre-mined by one entity and that same entity still controls much of the supply. (Additionally, keep in mind that Ripple is being sued by the SEC over its failure to register XRP as a security.)
The Takeaway
The Ripple vs. Bitcoin debate has been an intense one at times. Ripple and XRP represent a stark contrast to some of the principles that govern Bitcoin, like decentralization and an economic store of value through proof-of-work mining and a hard supply cap. Some Bitcoin proponents have referred to XRP as the “anti-Bitcoin” at times. They are clearly two very different types of cryptocurrencies.
Despite this, there are still plenty of similarities between the two. Both coins could also play a role in an investor’s crypto portfolio, rather than an investor feeling like they must choose Bitcoin vs. XRP, one or the other.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA, the SEC, and the CFPB, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
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Guide to taxes and cryptocurrency
With some investors seeing substantial profits in cryptocurrency, governments understandably want to take in cryptocurrency taxes.
But since cryptocurrency trading is a relatively new type of investment, investors are still struggling to learn how to report different cryptocurrency transactions on their taxes. Bitcoin has only been around since 2009, and it wasn’t until 2014 that the Internal Revenue Service (IRS) first acknowledged its existence.
What every cryptocurrency investor should know: The IRS treats crypto as property, so in general, a cryptocurrency tax is similar to a tax involving a property transaction.
Related: Understanding the different types of cryptocurrency
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The IRS declared cryptocurrency to be a form of property in April 2014. Broadly speaking, this makes the asset class subject to capital gains taxes.
And yet one confusing aspect of the IRS communications surrounding cryptocurrency taxes is their use of the term “virtual currency.” Despite classifying crypto as a form of property, the agency still refers to the asset class as a currency.
The official IRS website states the following: “The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.”
There is a full IRS statement on the subject called “Notice 2014-21.” This document answers many of the most frequently asked questions surrounding taxes and cryptocurrency.
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Here’s a quick rundown of four situations in which a taxpayer will need to report their cryptocurrency transactions, as covered in Notice 2014-21.
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Taxpayers, including independent contractors, who receive payment for goods or services in the form of cryptocurrency are required to factor this payment into their income.
Doing so requires including the fair market value of the cryptocurrency on the date that the crypto was received. All cryptocurrency transactions must be reported in U.S. dollars. To determine fair market value, taxpayers must determine the value of the coin as measured in U.S. dollars at the time of receipt.
IRS Publication 525 can be referenced for issues regarding taxable income.
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Individuals who pursue cryptocurrency mining as their business have to pay taxes on the cryptocurrency they earn as a result.
In this case, the crypto earned becomes subject to the self-employment tax. IRS Publication 334 has more information on self-employment taxes and Publication 535 has more information on business taxes.
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Hard forks that involve the creation of a new coin generate additional income for the recipient, and are treated as such. Bitcoin holders who received Bitcoin Cash (BCH) on August 1st, 2017, for example, might owe taxes on the BCH they received.
“Airdrops,” which are random distributions of new coins for marketing purposes, are also treated as additional income.
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When someone pays for goods or services using crypto, the IRS considers the transaction “subject to information reporting to the same extent as any other payment made in property.”
Notably, this only applies to a payment of $600 or more in a taxable year. This provision was added to spare users the almost impossible task of calculating capital gains for many small purchases made using crypto.
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In recent years, the IRS has become more targeted in their efforts to get taxpayers to report gains and losses in their crypto portfolios.
In 2019, the agency sent letters to 10,000 taxpayers notifying them that they may owe back taxes, penalties, and interest on cryptocurrency transactions.
In 2020, for the first time, all taxpayers were required to answer a question regarding cryptocurrency taxes on their 2019 tax returns.
The question simply asks if a taxpayer has engaged in taxable transactions involving cryptocurrency, including receiving, selling, sending, exchanging or otherwise acquiring any financial interest in any virtual currency. (Buying cryptocurrency does not constitute a taxable event.)
The IRS later elaborated on what it means to have a “financial interest” in virtual currency:
- Receiving crypto from a fork or airdrop
- Selling crypto
- Exchanging crypto for goods or services
- Exchanging crypto for other property, including other cryptocurrencies.
The IRS appears newly determined to find and prosecute crypto users who haven’t reported crypto taxes. Taxpayers who falsify their answer to the cryptocurrency question on their tax returns could face penalties and perhaps even criminal investigations later on.
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For investors who only buy cryptocurrency and never sell ( these investors are sometimes called “HODLers”), their taxes might be easy. With no selling activity, there are no realized gains, and so there may be no capital gains taxes to pay.
For those who have realized gains, however, there could be taxes due.
One common method for determining fair market value for anything subject to capital gains tax is the “first-in, first-out” (FIFO) method. With FIFO, the first sale made must be compared to the first purchase made to determine profits or losses.
For those who have realized gains, there could be taxes due.
For example, if 20 items were purchased for $10 and 10 more items were purchased next for $15, FIFO would assign the cost of the first item resold of $10. After 20 items were sold, the new cost of the item would become $15.
Whenever an investor sells coins, calculating the profit or loss can be accomplished by looking at the first buy order for that coin. The second sell order would then look at the second buy order. The third sell order would look at the third buy order, and so on.
Things can get tricky when trying to calculate many different transactions over time for many different coins and amounts of coins.
Luckily, exchanges and other third-parties have developed software to help investors cope with these challenges. In addition, many cryptocurrency exchanges keep logs of user transactions. This data is typically available for download as a .csv file.
FIFO isn’t the only method for calculating capital gains tax, but it’s one of the more commonly-used and straightforward ones.
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When an investor profits from crypto transactions, they can be subject to taxes. Those transactions include buying low and selling high, exchanging one crypto for another, or benefiting from a hard fork.
Of course, capital losses can also be reported and could reduce an investor’s overall tax burden in some cases.
Since the IRS first declared cryptocurrency taxable in 2014, a number of software programs and services have arisen to help investors with the complicated task of reporting cryptocurrency transactions on their taxes. There is also a growing number of tax lawyers and accountants who specialize in this area.
For investors trying to make sense of their individual cryptocurrency tax responsibilities, it may be helpful to consult with a certified tax professional to determine the best course of action for their individual situation.
Learn more:
This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB . PDF File, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
For additional disclosures related to the SoFi Invest platforms described above, please visit www.sofi.com/legal.
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