Is There a Future for XRP?

Key Points

• XRP is a bridge currency and provides on-demand liquidity for cross-border payments through RippleNet.

• While over 300 banks use RippleNet, few use XRP.

• That will need to change for this cryptocurrency to continue to grow.

• 10 stocks we like better than XRP ›

After spending years below $1, XRP (CRYPTO: XRP) has skyrocketed over the last year, gaining 385% (as of Sept. 23). That's far better than Bitcoin, Ethereum, and every other top 10 cryptocurrency.

However, growth has slowed recently, raising questions about XRP's long-term value. Here's what will make or break it.

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XRP needs increased adoption with financial institutions

Ripple, a blockchain payments company, is the issuer of XRP and the developer of a global payments network intended to serve as an alternative to SWIFT. Through RippleNet, cross-border payments are more affordable and take as little as three to five seconds.

XRP's success is largely tied to its role on RippleNet. It's the backbone of the network's on-demand liquidity (ODL) feature, where banks can use XRP as a bridge currency for international money transfers. This eliminates the need for banks to have accounts pre-funded with other currencies to send money to a recipient in another country.

The problem is that the biggest financial institutions generally don't need this service. While over 300 banks reportedly use RippleNet, most of them aren't using XRP. They can move money without ODL or a bridge currency. So, even though XRP's success depends on RippleNet, the inverse isn't true. RippleNet could continue to add banking clients without it doing anything for adoption of XRP.

Image source: Getty Images.

XRP's growth over the last year has primarily been due to the election of President Trump and the end of its legal battle with the Securities and Exchange Commission (SEC). Its future will depend on whether Ripple can get more financial institutions to adopt XRP, so that's the metric to watch for investors.

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Lyle Daly 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.