It's been a rough few months for crypto investors, with Bitcoin down roughly 20% from its October high. XRP (XRP 0.13%) investors have felt the even more pain; the coin has slid more than 40% from its July peak, and now hovers at a little more than $2. Given the dip, is this the time to buy?
Here's what investors need to know about XRP
Despite huge advancements in technology, modern banking is still full of major inefficiencies. Transactions, especially those across national borders, can be slow and expensive. XRP aims to solve this. Bulls believe that as banking adoption grows, so too will XRP's value.
CRYPTO: XRP
Key Data Points
But there's an important distinction investors need to understand between XRP itself and related products. When people talk about adoption, they are really talking about the adoption of financial products offered by Ripple, a company founded by the creators of XRP, which uses the XRP blockchain.
The truth is that banks can and do make use of Ripple's products without needing to accumulate, or in many cases even touch, XRP itself.
Take RippleNet, Ripple's most popular product. At its core, it's a messaging service that competes directly with the legacy SWIFT system, allowing banks to settle transactions faster and more cheaply. While banks can use XRP within the system, the reality is that almost none do, instead opting to use fiat currencies and simply leveraging Ripple's messaging technology.
ODL faces major adoption hurdles
Ripple's other primary product, On-Demand Liquidity (ODL), does use XRP directly as a bridge asset for cross-border transactions. Traditionally, when sending money across borders, a bank must hold the target foreign currency in a pre-funded account. This ties up valuable liquidity that could be deployed elsewhere -- a particular burden when the target currency is volatile or sees limited transaction volume.
With ODL, the pre-funded accounts are eliminated. Instead, the currency being sent gets converted into XRP and then back into the target foreign currency.
Here too, there is a barrier to widespread adoption by major banks: Any cost savings within the actual transaction are overshadowed by the risk of holding, even for a moment, an asset as volatile as XRP. And once the scale gets large enough, there may not be enough liquidity in the system.
Ripple's stablecoin push could sideline XRP
Let's say I'm wrong, and ODL adoption grows a lot. There is still an issue.
Ripple's own push into stablecoins could mean XRP is replaced by Ripple's RLUSD as the preferred bridge asset within ODL transactions. I think this is exactly where we are headed. Ripple's $200 million acquisition of a stablecoin payment company, as well as its national bank charter application, are pretty clear signals. But if that weren't enough, the company's own website now says it is "the leading provider of stablecoin-powered cross-border payments and digital asset custody solutions."
Image source: Getty Images.
XRP's valuation doesn't add up
As for attempting to value XRP, the truth is that cryptocurrencies lack the fundamental valuation metrics we use for stocks -- there are no earnings, cash flows, or assets to analyze.
Though it's certainly an imperfect comparison, I think Visa's market capitalization is at least somewhat useful. The payment network's $630 billion market cap is less than five times that of XRP -- $130 billion -- yet the company's network processes about 640 times as many transactions.
Again, this is fundamentally not an apples-to-apples comparison, but I think it's illuminating given just how much of a disparity there is between the two.
The hype factor
At the end of the day, I believe XRP's current value is built on hype and speculation. That means it could reverse course and spike above $2.50 or higher in the near term, but it won't hold that value over the long term, and I would not own XRP.
