XRP Dipped Below $3. Should Investors Be Worried?

Key Points

• XRP's price is now less than $3.

• The price is just a number.

• The main drivers for the coin to go higher are still in play.

• 10 stocks we like better than XRP ›

Investors love round numbers, and they dislike seeing the price of an asset fall. In that vein, XRP's (CRYPTO: XRP) latest price movement sent it under $3 on Aug. 20, and in doing so it triggered a predictable chorus of worry. Is this the start of a bigger slide lower, or just a breather after the cryptocurrency gained about 400% during the past 12 months?

The more important question here for investors is whether the forces that drove XRP's climb remain in place. Let's unpack what happened with the past few days of price action and put it into the asset's longer-term context to start.

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The news wasn't exactly positive

While simple volatility is the most likely explanation for XRP's dip below $3, it's also true that there was some news that could be interpreted negatively.

On Aug. 18, the U.S. Securities and Exchange Commission (SEC) opted to defer deciding on whether to approve several spot XRP exchange-traded fund (ETF) applications from asset mangers until late October. Such headlines often dent investor enthusiasm for a coin, even if it says little about the odds of approval for the ETFs -- and the odds are still quite good. So it's really not any reason for holders of XRP to worry whatsoever.

Now let's look to the forces supporting the coin's price and that could potentially keep driving it higher.

Ripple, the company that issues XRP, recently acquired Rail, a stablecoin payments platform, to accelerate institutional financial flows toward the XRP Ledger (XRPL). That move meshes neatly with Ripple's launch of RLUSD (CRYPTO: RLUSD), the stablecoin that's native to the XRPL. Between those two actions, Ripple is shoring up its appeal to banks, currency exchanges, and institutional investors, all of which it is marketing XRP to, and all of which need ample access to stores of on-chain value that mimic fiat currency, like stablecoins.

Crucially, Ripple is also working to shore up the regulatory compliance features those institutions insist on. The chain now natively supports authorized trust lines to restrict crypto token holding to approved accounts, and asset freeze controls that give asset issuers strong oversight over potentially suspicious wallets. These are the plumbing tools that let banks, fintechs, and asset issuers operate on-chain without needing to do any risky legal guesswork.

Where fresh demand can come from next

So Ripple's foray into stablecoins and institutional compliance tooling are part of the reason XRP's price rose so much during the past 12 months. And during the next few quarters, there are a handful of other things for holders to look forward to.

A small but growing set of companies have openly said they will hold XRP on their balance sheets, or create XRP-focused treasuries. This is a new buyer cohort that did not exist a year ago.

The positive impact these new buyers will have on the coin's price will depend on how much they're going to shell out on average, which is currently very unclear. Some are allocating existing capital on the order of $5 million to XRP, whereas others are looking to raise as much as $500 million via new debt or equity issuance for the sole purpose of buying an equivalent quantity of XRP. There isn't even enough data to determine what's normal just yet, but that will change if more than a small handful of companies opt to hold the coin.

That new demand source will be joined by the potential approval of regulated investment vehicles later this year.

Multiple spot XRP ETF filings are now set for approval in late October. Even if approval is not guaranteed, the mere existence of a pending ETF pipeline expands the pool of potential buyers and signals maturing market structure. And if the ETFs are actually approved, the asset issuers will need to buy a lot of XRP to back their new funds.

In summary, the recent dip below $3 is very likely to be temporary. Just as XRP's list of features is getting longer, the list of credible and deep-pocketed buyers is getting significantly longer as well.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends XRP. The Motley Fool has a disclosure policy.