Key Points
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XRP is up nearly 460% in a year after regulators backed off the crypto’s issuing company, Ripple.
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While adoption of Ripple’s products continues to grow, large banks prefer a product that doesn’t require the bank to touch XRP itself.
With the Securities and Exchange Commission’s (SEC) lawsuit against Ripple, the company behind XRP (CRYPTO: XRP), in the rearview mirror and a national bank charter application pending, XRP bulls feel there is a lot of momentum behind the token. Given its nearly 440% run during the past year, they have a point. So, with XRP hovering at less than $3, is now the time to buy?
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Ripple’s success is not XRP’s success
The bull case for XRP seems compelling. After years of regulatory uncertainty, Ripple finally settled litigation with the SEC in August, paving the way for increased adoption within the traditional financial system — the key to driving XRP’s price higher. This has always been the core of XRP’s investing thesis: As more banks adopt the technology, it will increase the demand for XRP, and its price will follow.
It’s not so simple. Here’s what I think a lot of investors miss: Banks can use Ripple’s payment technology without ever touching XRP.
RippleNet, Ripple’s most widely adopted product, doesn’t require banks to hold or even briefly touch XRP. They get much of the speed advantages, the cost savings, and the efficiency gains while continuing to use their preferred currencies.
Ripple’s on-demand liquidity (ODL) product, on the other hand, does often make direct use of XRP as a bridge asset for cross-border transactions. An ODL customer can send funds to a bank in another country without having to deal with the hassle and cost of currency exchange and maintaining pre-funded accounts in other countries. Instead, XRP can be used as an intermediary.
The issue is that ODL is not widely used by the larger banks that really matter. It’s designed for institutions that have problems with liquidity, and in terms of value transacted, it remains niche compared to RippleNet.
This limits ODL’s effect on XRP demand. While it’s not non-existent, I don’t think the effect is as strong as many investors believe. A dramatic increase in adoption across banking of Ripple’s technology is much more likely to be seen with RippleNet, not ODL.
Image source: Getty Images.
Ripple’s stablecoin further complicates the case for XRP
Even if ODL adoption were to accelerate, there’s an even bigger problem on the horizon: Ripple’s own stablecoin ambitions may derail XRP’s path, or at least seriously hinder it. The company’s pursuit of a national trust bank charter signals that it wants to be at the forefront of what could be a huge wave of adoption of stablecoins in banking. It’s a smart move for Ripple, as stablecoins can provide some of the same benefits that Ripple offers, and could be a several-trillion-dollar market by 2030, according to a Citigroup analysis.
Why does this matter for XRP? Ripple’s stablecoin, RLUSD, could replace XRP as the preferred bridge asset in ODL transactions, significantly reducing demand. It’s a scenario that could soon be a reality. Ripple’s stablecoin push is clear between the charter application and its $200 million acquisition of a stablecoin payment technology company.
The verdict: $3 looks expensive from here
So, should you buy XRP while it’s less than $3? I don’t think you should. Although short-term catalysts could drive speculative gains, the fundamental disconnect between Ripple’s success and XRP’s value isn’t going away. When Ripple itself is building alternatives to XRP’s primary use case, that’s not a great sign in my view.
It’s easy to get caught up in hype, but it doesn’t often lead to good outcomes. Bitcoin and Ethereum are both better options for investors who want exposure to crypto. They have proven track records of value and are more likely to succeed in the long run.
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Citigroup is an advertising partner of Motley Fool Money. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool has a disclosure policy.