Where Will the Cryptocurrency XRP Be in 5 Years?

Last year, Ripple, the company behind XRP (CRYPTO: XRP), finally settled its long-running lawsuit with regulators. Just months later, seven spot ETFs, including the Canary XRP ETF, launched in the U.S., quickly seeing more than $1 billion of capital inflows.

These should have been massive catalysts for the price of XRP. And they were -- for a time. But after peaking above $3.50 in July, the token is already back to $1.40 -- below where it was before the lawsuit was resolved and the ETFs launched.

So, what's going on? And what might the future hold for XRP investors?

The bank adoption thesis has a critical flaw

To understand what's happening, you have to understand the core of XRP's bull thesis. The idea has always been that as banks and major financial institutions adopt Ripple's technology, demand for XRP will rise and the price will follow. The problem is that this misunderstands what banks actually use and how they use it.

Traditionally, Ripple has provided two primary products: RippleNet and On-Demand Liquidity (ODL). Though these have since been repackaged as part of a rebranding, the distinction remains. The table below lays out the key differences you need to know.

The critical takeaway here, without getting into the nitty-gritty of how these work, is that Ripple's most popular product, RippleNet, creates no direct demand pressure -- and will not, no matter how many additional banks use the technology.

ODL, the product that uses XRP, handles less transaction volume, and, critically, even this has a much weaker effect than bulls imagine.

Image source: Getty Images.

Ripple's stablecoin makes the problem worse

Adding to the problem, Ripple has introduced a stablecoin that can take the place of XRP in cross-border transactions, further reducing the effect ODL adoption can have on XRP's price.

The stablecoin, RLUSD -- as all stablecoins are -- is engineered to hold a $1 value at all times. That is exactly what banks look for. If they can avoid the risk introduced by dealing with a volatile asset like XRP, they will.

The five-year picture

Five years from now, Ripple will likely be a meaningfully larger payments infrastructure business than it is today. I'm not disputing that.

What I don't see is that success translating into a higher XRP price -- just as we've seen up to now. The bank-adoption thesis misreads which Ripple products banks actually use. And Ripple's own stablecoin now gives institutional users a reason to bypass XRP entirely.

There will be ups and downs along the way -- there always are in crypto -- but my best guess on a five-year horizon is that XRP trades below $1, well shy of the price targets bulls have been pointing to.

Johnny Rice 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.