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Even after a positive court ruling, XRP might not be the no-brainer investment you think it is.
For nearly four years, crypto investors have waited for the big breakout moment for XRP (XRP -0.45%)which is still languishing under the $1 mark. And now that moment seems to have arrived. At the beginning of August, the long-running Securities and Exchange Commission (SEC) court case against Ripple (the company behind the XRP token) finally wrapped up, and it looks like the worst of XRP’s regulatory headaches is over.
But that doesn’t necessarily mean that XRP, which has uses in cross-border payments, is a no-brainer investment these days. There’s a lot of noise out there, and not a lot of signal. So if you’re thinking about buying XRP right now, here’s what you need to know.
Impact of the SEC court case
The SEC case hinged on a single question: Is XRP a security or a cryptocurrency? The SEC claimed it was a security, while Ripple claimed it was a cryptocurrency. The court essentially ruled that XRP is a security when sold to institutional investors, but a cryptocurrency when sold to retail investors.
As a result, Ripple must pay $125 million in civil penalties. The good news is that’s significantly less than the $2 billion the SEC wanted it to pay. So Ripple is trying to spin the outcome of this case as a victory.
But is it really? This is a pyrrhic victory that comes with some heavy costs. Last year, for example, Ripple executives calculated the total cost of the legal battle as being north of $200 million. So maybe Ripple is not paying hundreds of millions of dollars to the SEC, but it is paying a lot of money to its lawyers.
Moreover, it’s not like Ripple is out of the regulatory woods quite yet. The SEC shows no signs of backing down, and has 60 days to appeal the court ruling. Moreover, the SEC is already looking at other aspects of Ripple’s business to see if other securities violations might be warranted.
And don’t forget — Ripple has suffered a severe disruption to its overall business for a prolonged period of time. That’s tough to bounce back from for any company. During that time, the XRP token was delisted from major cryptocurrency exchanges and other crypto challengers caught up with XRP. As a result, the price of XRP went literally nowhere for an extended period of time. Even after a nearly 25% boost in the immediate aftermath of the court ruling, XRP trades at just $0.57.
Key catalysts
If you ignore all of the above, though, it’s possible to paint a rosy scenario for Ripple and its XRP token. For one, Ripple can probably go back to business as usual in the U.S., and can start to build up some of its core offerings (such as a popular product for cross-border money transfers). It also has the freedom to develop new products, such as a U.S.-dollar linked stablecoin.
Image source: Getty Images.
That combination should be enough to send XRP above $1. But can XRP go much higher than that? It all comes down to two key catalysts, neither of which, in my opinion, are highly likely. For example, some crypto analysts have suggested that XRP could be next in line after Bitcoin and Ethereum to get a spot crypto exchange-traded fund (ETF). That would be huge in terms of attracting investor money back to XRP, which was once a crypto darling with a very strong retail investment base.
The other catalyst is a potential initial public offering (IPO) for Ripple. With the proceeds of the IPO, Ripple would be able to pay off its debts (including its legal debts), while also expanding its operations on a worldwide basis. That would imply more use cases for XRP, more overall activity for the XRP token, and more integration of XRP with the traditional financial system. If the Ripple IPO actually happens, then the price of XRP could skyrocket.
Beware of the XRP hype
Overall, XRP might have a lot of upside potential. But surely not as much as the XRP bulls are claiming. As soon as the SEC court ruling came out, social media was flooded with XRP bulls touting the long-term prospects of the token. One crypto trader even speculated that XRP might skyrocket as much as 45,000% by the end of 2025!
So beware of all the buzz and hype now surrounding XRP. The fact that XRP only rallied by 25% in the aftermath of the SEC court ruling — and then fell in price after that — should tell you something: The market knows something about Ripple and XRP that you and I don’t.
Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool has a disclosure policy.