Since its inception in 2012, XRP (XRP 2.78%) has returned a respectable 12,758.41% to investors, turning a $10,000 principal into $1,265,841 within nine years. That's pretty wild, but only decent relative to the crypto world. For example, Ethereum returned 85,719% from its launch in 2015 to now, and that's still pretty small compared to the annual returns of some of the alternative cryptocurrencies out there -- looking at you, Dogecoin.
XRP has a lot going for it, but I wouldn't bet all my chips on it. Let's look at why it's a speculative investment at best.
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What's XRP used for?
RippleNet is a platform consisting of payment solutions designed to let money flow freely via XRP over a public ledger. The idea may be simple, but hundreds of financial institutions across 55 countries are already using XRP to facilitate transactions. Its biggest customers include Bank of America (BAC +0.50%) and American Express (AXP +1.79%). On July 28, Ripple, the company behind XRP, announced a partnership with SBI Remit, the largest money transfer service provider in Japan, to facilitate cross-border payments using its digital currency.
One can easily see why XRP possesses significant utility in handling credit cards, PayPal, and money orders. It takes just five seconds for a XRP transaction to go through and costs as little as 0.0001 XRP, or $0.00007525, with little energy consumption. So it's very hard for payment processors to compete against that due to their high fee structure.
XRP's utility is even better when compared to Bitcoin. Due to its increasing mining difficulty, each Bitcoin transaction costs as much as $40, takes as long as one hour, and consumes 250 kWh, which is about the same amount of energy used by a refrigerator in a year.
The biggest threat
But XRP is not without its downsides. Cryptocurrencies require constant capital inflows for price appreciation because their supply is fixed (at 100 billion for XRP). One area where XRP is lacking is its ability to facilitate large institutional capital flows, which can amount to tens of billions of dollars in one transaction.
The reason behind this is simple; the company faces stiff competition from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Over 11,000 financial institutions, including major global banks, treasuries (including the Federal Reserve), and sovereign wealth funds across 212 countries use SWIFT for cross-border payments. That represents a total of about 4 billion bank accounts.
SWIFT also has a vision to allow anyone to send money seamlessly anywhere in the world. Back in 2019, it took anywhere from 30 minutes to less than 24 hours for SWIFT to complete 50% of its transactions. On July 27, the company launched SWIFT Go -- shortening transaction times to mere seconds with full security against potential cyberattacks and greater transparency to comply with complex international regulations. Banks such as Société Générale are already praising the innovation.
If investors are hoping that SWIFT could synergize its new payment solution with that of XRP, they'd be very disappointed. Two years ago, Brad Garlinghouse, the CEO of Ripple, called SWIFT a "slow and expensive payment network." SWIFT then proceeded to ignore the company and developed its own institutional blockchain network.
Should I invest now?
It's almost a given that banks will continue to use SWIFT instead of RippleNet. For starters, Ripple is facing a lawsuit from the Securities and Exchange Commission over allegations that Ripple sold XRP as unregistered securities back in December 2020. Until that settles, not a lot of financial clients would want to deal with a potentially regulatory-rogue company. In addition, the prestige of services like SWIFT and Bank of International Settlements will continue to entice financial institutions. So at best, XRP is an OK cryptocurrency to buy on the dip, as with the rest of the cryptocurrency stocks.
