The value of any cryptocurrency can change drastically, and XRP (Ripple) (XRP 1.36%) is no exception. The coin's value has spiked about 360% over the past year, but has cooled lately and fallen about 10% over the past three months.
Many cryptocurrencies often rise and fall rapidly on small bits of news or investor sentiment, and their moves are often more drastic than the swings of share prices. This volatility has some investors wondering whether XRP is a good place to invest right now, or if it's best to avoid the coin.
Here's why investing in XRP could make sense for some investors, and why others may want to avoid it.
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The case for buying XRP
Unlike some cryptocurrency investments, XRP has a real-world use. The XRP blockchain can be used between institutions to process cross-border currency transactions across countries.
XRP's blockchain can act as a bridge currency in these transactions, transferring XRP to a company in another country, where it's eventually converted into the recipient's currency. This all happens within seconds, whereas most currency conversions and transfers take days. XRP also charges very low transaction fees, making it cheaper than some alternatives.
This real-world application has some investors optimistic that XRP could eventually become an important part of cross-country currency transactions. Their optimism is being further fueled by the fact that several XRP exchange-traded funds (ETFs) have recently launched.
While the XRP ETFs aren't yet available on U.S. exchanges, several Canadian-based ones debuted recently. This follows a trend of other cryptocurrency ETFs launching last year. These ETFs make crypto exposure more accessible by allowing investors to buy shares through traditional brokerages, without managing crypto wallets or private keys. They're also easy to trade and can offer fractional exposure to high-priced coins, making them a convenient option.
The case for staying away from XRP
Extreme volatility is the price of admission for all cryptocurrencies. Their tendency to rise and fall rapidly on news events, the moves of other cryptocurrencies, and sometimes no news at all, makes them a highly volatile investment.
What's more, buying crypto -- including XRP -- is a mostly speculative decision. While there are real-world uses for XRP, the coin's value is still closely tied to its popularity among investors. That's why its value could rise if a U.S.-based ETF launches, but it's also an indication that investor sentiment is driving its value more than the usefulness of the Ripple blockchain.
For example, some analysts estimate that XRP ETFs could initially cause XRP's value to spike to $25, up from its current value of less than $2. That massive surge would make XRP a good investment if it happens, but some of those same analysts say that the initial surge could be followed by a 90% drop in XRP's value.
That drastic price change estimate may never happen, but the fact that some investors following XRP closely believe its value could experience such a drastic rise and fall is a good example of the volatility you get when owning cryptocurrencies.
The verdict: Be cautious if you buy XRP
I don't think owning some XRP is a terrible idea, but investors should know that its value has already skyrocketed nearly 500% over the past three years as investors became highly interested in crypto. That doesn't mean it doesn't have more room to run, but some of those gains were likely in anticipation of an ETF launch. The potential gains from an XRP ETF debut could already be baked into XRP's price.
XRP is a little too speculative for my liking, but if you decide to buy it, remember that cryptocurrencies should make up no more than 10% of your portfolio, and less is usually advisable.
