Ripple (XRP -1.39%) had a fantastic 2023, as its price soared 81% last year, but things have cooled off since then. This digital asset is down 14% this year, and it is 86% below its peak price from about six years ago.
Should investors with $1,000 buy this cryptocurrency (the sixth most valuable in the world, with a market cap of $28 billion) hand over fist in 2024? Let's take a closer look.
Trying to disrupt a major market
Ripple is one of the oldest blockchain networks; it was launched in 2012 to facilitate cross-border transactions for financial institutions. The way it works is that one currency would be converted into Ripple's native digital token, XRP, sent using the blockchain, then converted into the currency of the receiver.
Ripple has features that make it attractive for this exact use. Transactions can settle in less than five seconds and typically cost fractions of a penny to process. This is the opposite of how the slow and expensive traditional system works. These two key features are what many believe is Ripple's advantage over Bitcoin.
What's interesting is that Ripple's focus on financial services preceded the rise of other promising networks, like Ethereum and Solana. Ethereum was the first crypto to enable capabilities for smart contracts, making it a hotbed for the development of decentralized finance protocols. And Solana, with throughput speeds of more than 2,200 transactions per second, could become a challenger in the payments market.
Both Ethereum and Solana might find that if they achieve greater adoption, particularly in financial services, they could give Ripple a run for its money for cross-border transactions. But the fact that Ripple processes nearly 700,000 transactions per day is indicative of its success thus far.
Regulatory uncertainty
When we look at the various sectors across the economy, it's hard to find any that are more burdened by regulatory oversight than financial services. And it's not surprising: Any business that deals with the movement of money has an outsize impact on consumers, enterprises, governments, and the broader economy. So legislators want to make sure that things are operating within strict guidelines.
Ripple has been in trouble with the Securities and Exchange Commission about whether its tokens are unlicensed securities. While a judge last summer partly ruled that Ripple didn't violate any laws, the ruling did assert that its sale of its securities to institutional buyers did. Consequently, this could mean more legal challenges.
Given all the scams in the cryptocurrency industry, regulatory uncertainty is amplified. And the major blow-ups of prominent players in the industry indicate how complex things are and how there is a need for regulatory clarity. This just means that the regulatory overhang is something that investors will always have to keep in mind with Ripple.
A reason to be wary
Besides that, there is another reason to think twice about adding Ripple to your portfolio. To its credit, it has brought on banking partners to use its network. But I question just how much adoption can be achieved given the regulatory issues I just described. I don't think any large financial institutions would want to open themselves up to any lawsuits should they use the crypto's system.
Moreover, JPMorgan Chase, the largest U.S. bank by assets, has a competing service, known as Onyx. With millions of individuals and businesses already as customers of the bank, not to mention its scale and long history in financial services, I suspect that Ripple's opportunity would be limited given this important competitor.
If the risks seem too high, then avoid this token. But if you believe in Ripple's long-term potential, then it could be smart to initiate a tiny position.
