One of the hottest cryptocurrencies right now is XRP (XRP -0.64%). It's up more than 30% over the past seven days, and approximately 50% since mid-June, when it was trading at just $0.30. Across social media, the "XRP Army" is mobilizing, with supporters convinced that this former crypto darling is on the cusp of a new bull cycle.
So what's all the excitement about? There is growing speculation that the Securities and Exchange Commission (SEC) will finally settle its long-standing case against XRP sometime in mid-November. All signs now suggest that the ruling will be favorable for XRP, and that's why XRP is pumping right now.
Is XRP a security or a crypto?
The fundamental question in the SEC case is whether XRP is a security or a crypto. In its December 2020 lawsuit, the SEC claimed that XRP is a security, despite all signs seeming to suggest that XRP is a crypto. The general consensus now is that, if an asset can be shown to be a simple replacement for a traditional fiat currency (e.g. the dollar), then it is not a security. However, if an asset constitutes an "investment contract" in which people are investing money in a common enterprise with the reasonable expectation of making a profit together, then it is a security. If XRP is considered to be a security, then it would be bad news and XRP could be facing huge fines or penalties. However, if XRP is considered to be a crypto, then this could finally clear the way for the future growth of its Ripple payment network.
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The SEC lawsuit has cast a pall over XRP for the past 24 months, and has made many people hesitant to buy. Some cryptocurrency exchanges, such as Coinbase Global, do not currently offer trading in XRP, as they have no desire to be caught up in a legal brouhaha. If you're an XRP investor, the good news is that the regulatory landscape has changed a lot since December 2020. The growing consensus out of Washington, DC, these days is that cryptos are not securities, and should not be regulated by the SEC.
How long can this rally last?
This could be the crypto market's equivalent of a "relief rally" for XRP. In the equity markets, a "relief rally" typically occurs when anticipated negative news winds up being positive, or at least, not as bad as originally anticipated. That seems to be the case with XRP, because nobody really expected XRP to win its legal battle with the government. But these relief rallies seldom last long, and can be easily derailed.
As Ripple CEO Brad Garlinghouse has pointed out, even if there is a motion for summary judgment in mid-November, it could be anywhere from two to eight months more before a final ruling is announced. So be wary of anyone who says that the XRP settlement will be finalized by the end of the year.
One other red flag for XRP is that the controversial question of "Is this a security or a crypto?" seems to come up continually these days. Right now, Coinbase is dealing with similar assertions that it has mistakenly listed "securities" on its platform rather than "cryptos." And even Ethereum has come under the microscope recently. As a result of The Merge, which introduced staking for Ethereum holders, the SEC is now saying that Ethereum looks and acts much more like a security than a crypto. I don't agree, but I'm not the one making decisions in Washington these days.
Is XRP safe to buy?
I'm not so sure everything will go back to normal for XRP and Ripple as soon as the lawsuit is resolved. I love all the energy and passion of the XRP Army, and I regret that I sold off the last of my XRP back in 2021 out of concern that it was eventually going to zero. However, it seems like a lot still has to go right for XRP. It worries me when I see people on Twitter saying that they hope to retire on their XRP holdings.
Even the most bullish XRP investors have to acknowledge that the playing field for Ripple is a lot more crowded in 2022 than in 2020. There are now other Layer 1 blockchains that can offer the same types of capabilities, including archrival Stellar, which is up 15% over the past seven days.
So buyer beware: If you're thinking of getting into XRP now, there is still plenty of risk. I would wait to see if this relief rally has any legs. Crypto investing is risky and volatile enough, and XRP is at the center of one of the most controversial regulatory issues in the crypto world right now. XRP is either going to the moon, or it's going to zero. Unfortunately, one of these scenarios is more likely than the other.
