Warren Buffett's famous value investing philosophy is why he bought shares in companies ranging from American Express to Apple and beyond. But could he one day want to invest in a money transfer fintech like XRP (XRP +0.28%), finally overcoming his extreme distaste for cryptocurrencies?
There's no telling if the Oracle of Omaha would actually want to buy this coin. But there are a handful of things that he might like about it, assuming he was willing to entertain the idea at all. So, let's take a look at how XRP could mesh with the principles behind some of his greatest investments.
CRYPTO: XRP
Key Data Points
There's a lot for traditional value investors to like here
Let's quickly recap the investment thesis for XRP to show why it might appeal to Buffett.
In a nutshell, XRP is a coin that aims to offer inexpensive, rapid, and highly reliable money transfers across international borders. Financial institutions like banks and currency exchange clearing houses, both of which typically need to process a lot of these transfers, are the target user base. But, with the legacy technology that's currently in use, those users need to pay as much as $50 or more per transfer, and their transactions can take as long as five business days to settle and be subject to currency exchange fees. In contrast, XRP's transactions settle in a couple of minutes, and cost just fractions of a penny on average; the network uses those fees to pay for tech upgrades and marketing.
Buffett certainly likes to invest in financial technology companies and payment processors, so long as he can buy them at the right price. Aside from American Express, he also has substantial positions in Visa as well as Mastercard, all of which were innovators in the payments processing market.
These companies' business models reflect Buffett's favorite approach. Rather than selling a product directly to consumers, the card companies facilitate payments from consumers to businesses to streamline the process for both ends of the transaction, capturing a small portion of each payment.
The idea isn't to make a lot of revenue immediately, but to slowly scale the payment networks by onboarding more businesses and cardholders, capturing more payments and a regular inflow of increasing fees. Those fees readily fall to the bottom line because processing each additional payment costs very little after the enormous cost of building the network has been absorbed. Once those players reached a certain size, they effectively had an economic moat that protected their margins, as new entrants to the market would have to struggle to get established by rolling out new hardware and offering new cards to users who were already accustomed to using competing products.
Look at how well that process has played out in Buffett's favor during the past 10 years alone:
SPY Total Return Level data by YCharts
Now, consider the position of XRP today.
It's offering a service that's cheaper, faster, and more convenient than the existing ways of making international money transfers. Processing each transaction is not a major expense, but it can reliably reap fees from any given user for years and years. XRP's price has increased more than 800% during the past five years alone. It isn't anywhere close to onboarding all of the potential users globally that could benefit from using the coin instead of older systems, so it likely has many years of growth ahead.
In other words, XRP looks a lot like a Buffett stock even though he doesn't own it.
Think for yourself
Don't hold your breath waiting for Buffett to buy XRP. It's unlikely that he would even consider it to be a real investment opportunity because it's a cryptocurrency rather than a traditional company with a stock he could size up with a valuation calculation.
But XRP is a popular cryptocurrency for a reason. There are many arguments for why buying it today will mean having more money in the future, when its core value-generation process will have had even more time to generate fees, and many more users turn to it for processing cross-border transactions. And unlike the credit card businesses Buffett bought, XRP's biggest competition right now is stuck with obsolete technologically, so it isn't much of a threat.
That is no guarantee that the coin will go up in the near term. Still, if you're willing to hold onto your XRP for a Buffett-esque period of time -- many years -- the odds of reaping big profits are in your favor.
