I've been suggesting that investors consider buying XRP (XRP 0.46%) for almost a couple of years now. But the coin's 37% decline over the last 12 months, as well as gaining a deeper understanding of the mechanics of its blockchain, are forcing me to reassess my views.
In short, the investment thesis for this asset is changing. Now I see a structural flaw I didn't fully appreciate before, which is making me a bit more bearish.
Here's how my thinking is shifting.
Image source: Getty Images.
There's a value gap hiding in plain sight
XRP's original appeal, per the company that issues it, Ripple, rested on its potential role as a bridge currency for cross-border payments.
That thesis has since been made obsolete by the proliferation of stablecoins, including one issued by Ripple itself. RLUSD, Ripple's dollar-pegged stablecoin, now has a market cap above $1.5 billion, and it can be used either on the XRP Ledger (XRPL) or on other chains. For most users in financial institutions seeking to make their money transfers cheaper and faster, RLUSD is the obvious choice over XRP, as it has no volatility, and XRP has plenty.
One newer investment thesis focuses on the XRP Ledger becoming a hub for tokenized real-world assets (RWAs), which are traditional assets like bonds whose ownership is recorded on a blockchain. As of May 12, XRPL hosts about $428 million in tradeable tokenized assets, up from $117 million a year ago. That growth is real, but almost none of it creates significant demand for XRP.
The issue is that the network's transaction fees cost roughly 0.00001 XRP per transaction, and the fees are burned (destroyed) after being paid. The sum total of all of the burns since the coin's inception equals just 0.014% of the supply. It'd take an almost unthinkably massive amount of activity on the XRPL to ever burn enough XRP to put real upward pressure on its price in any way that holders would notice over the course of a year.
To make matters worse, nothing in Ripple's business model inherently creates any organic buy demand for XRP. So the disconnect between XRP's merits as an investment and its growing success as a financial platform is the core issue making me bearish.
CRYPTO: XRP
Key Data Points
Why haven't I given up on it, then?
I don't think it's time to sell XRP yet. Ripple has a large vested interest in increasing the coin's price and has been consistently investing in upgrades to the XRPL as well as finding new potential customers to test it out.
But the gap between Ripple's success in attracting capital to its network and XRP's abysmal returns looks like it's more likely to be structural rather than temporary in nature. Things like the apportioning of transaction fees do change, as do blockchains' supply policies, albeit rarely.
The odds of Ripple actually directly trying to make XRP a bit better for holders don't look very high at the moment, though.
