XRP (XRP 1.66%) is the world's third-largest cryptocurrency, and unlike many of its peers, it has a legitimate use case in the real world. It's designed to serve as a bridging currency in Ripple's Ripple Payments network, meaning it helps financial institutions send money around the world instantly, with a very low cost.
The U.S. Securities and Exchange Commission (SEC) sued Ripple in 2020 for alleged breaches of financial securities laws, which kept the price of XRP suppressed for years. However, the two parties officially settled the case back in August, which helped catapult the token to a new record high.
But there might be a new upside catalyst on the horizon. The SEC is expected to approve the first spot XRP exchange-traded fund (ETF) by Oct. 18, which could send billions of dollars flowing into the cryptocurrency. Should investors buy it ahead of the deadline?
Spot ETFs have been great for Bitcoin
Cryptocurrencies are inherently risky, not only because of their volatility, but also because digital wallets aren't very secure. Hacks and even misplaced credentials can result in irrecoverable losses, so financial advisors and institutional investors normally can't buy cryptocurrencies directly. This leaves piles of money sitting on the sidelines.
Buying spot ETFs can be a safer way to participate in these markets, because they are overseen by regulators, so they offer protection for investors. They pool investors' funds and buy a given cryptocurrency directly, offering like-for-like returns minus an annual fee, which can range from 0.15% to 1.50% of the fund's total assets.
The first spot Bitcoin (BTC 1.29%) ETFs were approved in January 2024, and they now manage a whopping $150 billion in assets collectively. Bitcoin has soared by 167% since then, and those inflows are a big reason why.
Therefore, it's no surprise investors are excited about the idea of spot XRP ETFs. Seven different providers are waiting to hear from the SEC, but Grayscale -- which already operates two Bitcoin ETFs -- has the earliest decision deadline of the bunch (Oct. 18).
There is a chance that many of the spot XRP ETF applications will be approved much sooner, thanks to the new Generic Listing Standards (GLS) that the SEC recently adopted. These new rules streamline the approval process for ETFs looking to invest in commodities and digital assets.
Bitcoin and XRP are structurally different
Bitcoin benefited from the launch of spot ETFs because many investors already considered the cryptocurrency to be a legitimate store of value. It's completely decentralized, meaning it can't be controlled by any person, company, or government, and it has a capped total supply of 21 million coins, which creates the perception of scarcity.
XRP, on the other hand, was created by Ripple, so it's a centralized cryptocurrency. The SEC's lawsuit proved that the value of XRP is very much tied to the company's fortunes, which is a risk investors have to keep in mind.
Plus, Ripple still controls around 40 billion XRP tokens, which it releases gradually to meet demand from financial institutions. Therefore, XRP's circulating supply will continue to increase, but it does have a hard cap of 100 billion tokens, which can't be changed.
With those points in mind, spot ETFs might not benefit XRP the same way they benefited Bitcoin. Financial advisors and institutional investors already wanted to own Bitcoin, so ETFs filled an important gap in the market, but the same can't be said for XRP.
Should investors buy XRP ahead of Oct. 18?
As I mentioned earlier, XRP does play a genuine role within Ripple Payments. The network is designed to help banks settle cross-border transactions with one another directly and instantly, no matter what existing infrastructure they use, and XRP can standardize those transactions.
For example, an American bank can send XRP to a Japanese bank instead of sending U.S. dollars, which reduces costly foreign exchange fees. The transfer with XRP would cost just 0.00001 tokens, or a fraction of one U.S. cent. However, Ripple Payments does support the use of fiat currency, and the company also launched its own stablecoin called Ripple USD (RLUSD 0.01%) last year.
That means using XRP is optional, so the success of the network won't necessarily translate to a higher price per token. Plus, Ripple USD might be better suited for executing transactions through Ripple Payments because stablecoins have practically zero volatility. XRP, on the other hand, is very volatile, which leaves banks exposed to significant changes in value when they are holding tokens.
If XRP's value isn't directly tied to Ripple Payments, while at the same time investors don't view it as a legitimate store of value like Bitcoin, then I'm not convinced there will be significant demand for ETFs. Therefore, it's possible Oct. 18 won't be an important date after all.
Given XRP's shaky fundamentals, I think it might be a better idea to avoid the token entirely.
