3 Things Investors Need to Know About Ripple (XRP)

Key Points

• The terms XRP and Ripple are often used interchangeably, but there are several important differences.

• While XRP has seen some success as a cryptocurrency used by bankers, it could be susceptible to disruption from stablecoins.

• The centralized ownership of XRP became a major issue during a recent rally in the crypto's price.

• 10 stocks we like better than XRP ›

With a market cap of $177 billion, XRP (CRYPTO: XRP) now ranks as the third-largest cryptocurrency, trailing only Bitcoin and Ethereum.

But how much do investors really know about XRP? Here's a closer look at three factors that you should keep in mind when investing in XRP.

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Ripple is not the same as XRP

This is arguably the biggest mistake that many first-time crypto investors make. They interchange the terms Ripple and XRP, assuming that both apply to the cryptocurrency they are planning to buy.

Ripple is a San Francisco-based tech company that specializes in financial payment technology, while XRP is the crypto token that Ripple created in 2012. The name Ripple is also used to describe the Ripple payment network, while the name XRP is also used to describe the XRP blockchain ledger. If you were drawing a Venn diagram, there would be some overlap, because the XRP blockchain ledger is also part of the Ripple payment network.

Image source: Getty Images.

These nuanced distinctions are important because they led to one of the most dramatic court cases in crypto history. In December 2020, the SEC determined that XRP was actually a security. Based on its understanding of how the XRP token worked, what role it played in the Ripple payment network, and how investors could profit from XRP ownership, it opened a case against Ripple. And that case has gone on for years. Even today, the final appeals in the case are still being wrapped up.

XRP is sometimes referred to as "the banker's coin"

Technically, XRP is a bridge currency. If you have a fiat currency, you can convert it to XRP and then send it over the XRP blockchain ledger to someone else. The person on the receiving end can then convert XRP into a different fiat currency. For that reason, XRP was originally used for sending cross-border remittances.

Today, the primary use case for XRP is making high-value cross-border payments. Generally speaking, using blockchain technology is faster and cheaper than traditional payment technology. For that reason, banks and financial institutions have eyed XRP as a potential way to save costs and scale their operations globally. Hence, the term "the banker's coin."

This means Ripple (the company) has a very real interest in making its payment system as reliable and scalable as possible, in order to appeal to bankers. Sometimes, this means creating new use cases for XRP. Sometimes, it means introducing entirely new products that can help to drive usage of XRP. For example, last year Ripple introduced a new stablecoin called Ripple USD that was designed to boost demand for XRP.

But here's the thing: Instead of boosting XRP's future prospects, stablecoins might actually end up cannibalizing XRP's future business prospects. Why go to all the trouble of using a bridge currency, when you can simply use a stablecoin to send money across borders? Thus, if you are attempting to project future growth of XRP, you need to understand how stablecoins can both help and hurt XRP.

XRP's tokenomics matter

In crypto parlance, tokenomics refers to how tokens are created, how they are "burned" (taken out of circulation), and who owns the tokens. It also refers to the overall circulating coin supply, and how that is adjusted over time. In short, tokenomics is the economics of tokens.

This matters for XRP, because there has always been a controversy about who owns and controls XRP. The problem is that the ownership of XRP has always been very concentrated. According to the latest data, the top 10 XRP blockchain wallets control 41% of the circulating supply. The top 20 XRP wallets control a combined 50% of the circulating supply. That's incredibly high. It's a bit like saying just 20 investors own 50% of Bitcoin.

While it can be difficult to determine who owns these XRP wallets (due to their cryptographic nature), the natural inclination is to assume that they belong to core members of the management team at Ripple, as well as early VC investors in Ripple.

This might not sound problematic at first, but consider what happened in July. During the peak of XRP's summer rally, when it was close to hitting an all-time high of $4, a wave of selling suddenly appeared. As it turns out, a Ripple co-founder had dumped $175 million worth of XRP tokens.

Questions naturally began to circulate about the future of XRP. Imagine if you were investing in a company and you found out the co-founder of the company had been aggressively selling off their shares without telling anyone. You'd naturally want to know why. So, instead of soaring past the $4 mark in July, the price of XRP fell to $3.

Before you decide to buy XRP

The three factors above help to illustrate why I've never been as bullish on XRP as others. There's always been tremendous regulatory risk. Moreover, the XRP token is susceptible to disruptive change from stablecoins. And, finally, I've never been comfortable with such concentrated ownership of the token.

That being said, it's hard to find another cryptocurrency with as much upside potential as XRP. Just make sure you do your due diligence in advance. If XRP doesn't soar in value, you'll know why.

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Dominic Basulto has positions in Bitcoin, Ethereum, and XRP. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool has a disclosure policy.