2 Reasons XRP Has a Tough Road Ahead

Ripple's XRP (CRYPTO: XRP) was one of last year's biggest crypto stories of last year. On July 18, 2024, it was worth just under $0.60. A year later, it had soared over 500% to a new all-time high of $3.65. On Jan. 14, it closed at $2.14 -- still a significant gain in less than two years, but a long way from its high.

Much of last year's growth was fueled by speculation about the end of Ripple's court case with the SEC. XRP has trended downward since the case was settled. In part, that sell-the-news action is common in crypto. However, it also reflects wider challenges.

Here are two reasons the forecast for XRP is not as rosy as bulls might suggest.

Image source: Getty Images.

1. The tokenomics are hard to sustain

When Ripple launched XRP, it minted 100 billion tokens straight off the bat and locked a big chunk of them up in escrow. Almost 66 billion are in circulation now, with roughly 34 billion escrowed, per XRPscan.

This presents a couple of issues. Firstly, Ripple owns enough tokens to influence the price. Second, unlike Bitcoin (CRYPTO: BTC), there's unlikely to be any scarcity to drive price action. Finally, small changes in XRP's price will translate into big shifts in market cap. Let's say Ripple's price soars over 270% to $8 this year, as Standard Chartered analysts think it could. That would take its market cap from the current $130 billion to over $480 billion.

Comparing crypto and company market caps isn't really comparing like with like. Even so, the $130 billion cap would put XRP in line with Adobe (NASDAQ: ADBE) or Interactive Brokers (NASDAQ: IBKR). A $480 billion cap would make it akin to one of the top 20 companies in the U.S. -- similar to Mastercard (NYSE: MA) or Palantir (NASDAQ: PLTR). It just doesn't add up. Particularly since Ripple, which is a private company, closed a $500 million fundraising round late last year, valuing the company at $40 billion.

2. XRP's use case is questionable

Ripple appears to be veering away from its original mission to offer low-cost cross border settlements. CEO Brad Garlinghouse recently told CNBC that Ripple is buying companies in the traditional finance space so that it can leverage its crypto solutions.

That may be the right strategic direction for Ripple, less so for XRP, which is separate. XRP's main use case is as a bridge currency in Ripple's payment network. That role in payments and international money transfers is under pressure from all sides. For example, Swift, the international banking cooperative that traditionally handles cross-border payments, is developing its own blockchain solutions.

As traditional financial firms branch into blockchain, XRP becomes less relevant. People can use stablecoins rather than XRP to move money internationally. That way, they get speedy low-cost transactions without the volatility of crypto.

Ripple even has its own stablecoin, Ripple USD (CRYPTO: RLUSD) and offers blockchain assistance to non-crypto companies. There may be benefits for XRP if some of those firms use the XRP Ledger. However, it isn't crucial for Ripple's success. And that could be a serious headwind for XRP.

Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Bitcoin, Interactive Brokers Group, Mastercard, Palantir Technologies, and XRP. The Motley Fool recommends the following options: long January 2027 $43.75 calls on Interactive Brokers Group, long January 2028 $330 calls on Adobe, short January 2027 $46.25 calls on Interactive Brokers Group, and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.