Despite its popularity, cryptocurrency is one of the most volatile asset classes to invest in. From crypto winters to hype narratives fueling meme coins, the crypto landscape never has a dull moment.
Beyond mainstream cryptocurrencies such as Bitcoin or Ethereum, another popular investment that's emerged in recent years is XRP (XRP +3.10%), which is developed by Ripple Labs.
On March 19, Ripple received some great news from the Securities and Exchange Commission (SEC). Subsequently, the price of XRP rose about 12%, although it has since surrendered some of those gains.
Let's explore why XRP investors are cheering and assess if this important decision by the SEC could pave the way for the cryptocurrency's future.
CRYPTO: XRP
Key Data Points
Why is XRP soaring?
For the past several years, Ripple has been involved in a closely followed lawsuit with the SEC. To summarize, the SEC alleged that Ripple was selling the XRP token as an unregistered security.
The word "security" is important here. Although investing in cryptocurrency has become more common in recent years, the regulatory landscape around this asset class has been cloudy at best.
In essence, Ripple defended its actions by arguing that XRP is a commodity -- not a security such as a stock or bond. In such a case, XRP would not be held to the same rules and regulations as traditional securities.
The back and forth between Ripple and the SEC has been going on since Dec. 22, 2020. As the chart below shows, the price of XRP during the past four years has exhibited some extreme peaks and valleys.
Nevertheless, on March 19 Ripple's chief executive officer said that the SEC is withdrawing its case against the company. While some investors are expecting an announcement from the SEC later in April, the current price action isn't too surprising.
The reason I say that is because I don't find the SEC's reported decision as much of a surprise. The Trump administration has vocally supported the crypto industry -- from the campaign trail and now even in the White House. Earlier this month, the president hosted a crypto summit at the White House and even doubled down on his intention to form a Strategic Bitcoin Reserve to augment the nation's balance sheet.
Although none of these factors specifically involves XRP, I found the appearance of support for the crypto industry from the current administration as enough of a proxy to assume a positive outcome in the Ripple suit.
Image source: Getty Images.
Is XRP a good buy right now?
As of this writing, the price of XRP is roughly $2.39. While that might look cheap compared to Bitcoin's price of $84,400, looking at absolute dollars can be misleading.
Despite the appearance of a low dollar amount, XRP boasts a market cap of $139 billion. That makes XRP more valuable than Shopify, Boeing, Intel, and CrowdStrike.
To get a better sense of XRP's valuation relative to other payments networks, let's look at PayPal. According to Statista, PayPal holds an estimated 45% market share among online payments processors -- the largest in the world.
But what if I told you that XRP's market cap is roughly double that of PayPal?
Perhaps the most important thing to keep in mind with XRP is that its penetration of the global payments market is still quite low. While it's caught on in some regions such as Japan, XRP hasn't reached adoption rates anywhere near legacy processors -- and a win in the SEC case against it doesn't necessarily guarantee any near-term expansion opportunities.
I see an investment in XRP as somewhere between real utility coins like Bitcoin and meme coins such as Dogecoin. What I mean by that is XRP has a proven use case (i.e., utility), but its price action largely follows narratives (just like a meme investment).
Although I think XRP's prospects are looking brighter, I question if the current valuation is justified. Despite some good news out of the SEC, I don't see XRP as a compelling buy at its current price point.
