Many cryptocurrencies are still struggling to find real-world use cases, which impacts their ability to create long-term value for investors. Ripple(Cryptocurrency: XRP) This problem does not exist because it is designed as a bridge currency for the Ripple payment network, allowing banks to perform instant, low-cost cross-border remittances.
XRP became one of the few cryptocurrencies to hit new highs last year, surging to $3.65 per coin in July. However, since then, the index has plunged 61% amid a broad sell-off in the cryptocurrency industry.
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While XRP’s use cases should theoretically drive long-term gains, it faces some structural issues that may be difficult to overcome. If history is any guide, these headwinds are likely to intensify shortcoming instead. I predict that the coin will be trading within five years.
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Paying overseas through a bank can take several days and often incurs significant fees. This is because not every institution uses the same payments infrastructure – some adopt the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network and others do not, so many transfers have to go through intermediaries (middlemen), which is time-consuming and expensive.
Ripple Payments was built to facilitate direct communication between banks regardless of their existing infrastructure, allowing banks to settle transactions directly with each other. This means transfers are almost instant and have minimal fees.
Ripple launched XRP as the network’s bridge currency. Instead of sending dollars to European banks, U.S. banks can send XRP, eliminating expensive foreign exchange fees. In fact, a typical XRP transfer costs just 0.00001 tokens, a fraction of $0.01 USD.
But there are some problems. First of all, using XRP is not mandatory as Ripple Payments also facilitates fiat currency transfers. Essentially, this means that the value of XRP does not necessarily increase as network activity increases. This is a key reason why it tends to fall significantly during broader cryptocurrency market sell-offs – its performance remains largely dependent on speculative investors.
Second, banks typically don’t hold bridge currencies because they have little use other than transferring money. In my previous example, US banks would be buyers of XRP, but European banks would be equal sellers when exchanging their coins for euros. It’s worth noting that XRP is extremely volatile, so holding large amounts of the token could expose banks to significant losses.
This is part of why Ripple is launching its own stablecoin Ripple USD(Cryptocurrency: RLUSD) Late 2024, which brings me to issue three. Stablecoins have almost zero volatility, so Ripple USD is a good option for banks that want to use a bridge currency in their transactions, so it could seriously dent demand for XRP.
As I write this, XRP is trading at $1.42 per coin, 61% below last year’s all-time high. Prior to this, XRP last hit an all-time high in 2018, but it lost more than 90% of its value within a few months and traded below $1 for most of the next five years.
I think similar results are underway now. Since Ripple Payments is not a consistent source of demand for XRP, the token will either have to find new use cases or it will continue to succumb to the whims of speculative investors, who typically sell aggressively when uncertainty arises in the broader cryptocurrency market. This is definitely not a recipe for long-term value creation.
If we simply follow history, I think XRP will be trading between $0.30 and $0.50 in five years. Assuming the 2025 high remains a peak for the foreseeable future and the decline reaches a similar magnitude to the 2018 decline, there will be no meaningful recovery thereafter.
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