This 1 New Risk for XRP Could Be a Long-Term Benefit

XRP (CRYPTO: XRP) is going to navigate a mild risk fairly soon, and its price might get a bit dented for a while. But over the long term, the very same factor that could pose a bump in the road is likely to become a tailwind.

Here's the catalyst in question and when you need to be on the lookout for its impacts.

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Beware of others selling the news

One common pattern in markets is that known catalysts tend to get frontrun to a significant degree. In other words, if investors learn that there's going to be an event in the future which will probably result in higher prices of an asset, the price of the asset increases the most right when the learning occurs, not when the event itself occurs. For investors in XRP and other coins that are exposed to a lot of different catalysts (like the dates when exchange-traded funds (ETFs) or other instruments are expected to be approved by regulators to start trading), knowing this dynamic is key to avoiding getting blindsided.

What's there to get blindsided by, exactly? If you've ever heard the phrase "buy the rumor, sell the news," it's the same principle.

When catalysts that are likely going to be positive and spur higher prices in the future are frontrun, it's often accompanied by a dip in the asset's price when the catalyst actually occurs, even if it happens just as expected and is positive. The reason is that some investors opt to capture the price appreciation from the catalyst being confirmed by selling. This phenomenon tends to be pronounced when the catalyst in question would entail a lot of buying from big players.

So, when CME Group, a major financial derivatives exchange, announced on April 24 that it'd be launching the ability to trade cash-settled XRP futures contracts starting on May 19 (assuming regulators give the green light), it likely contributed to a small bump in XRP's price over the following days. More upside could be on the way. But this announcement also probably introduced a small risk for holders: On May 19, or whenever regulators confirm that the instrument is allowed for trading (assuming they do), the price will drop slightly.

There's no guarantee it'll play out like this, though the odds are fair that it will, based on how the coin has performed in similar situations in the past. Even if it does, and the price goes down, there's more than one reason to be bullish about XRP's future precisely as a result of futures trading being offered, once again assuming that it actually happens. Here's why.

This will support institutional adoption and greater liquidity

XRP's target audience is banks, currency exchange operations, institutional investors, and other financial players that command large amounts of capital and have a need to track their assets and transfer them quickly and inexpensively while maintaining regulatory compliance. For that grouping, the ability to trade futures is a key feature.

Hedge funds and banks use futures to gain risk-managed exposure to movement in assets, thereby making XRP easier to integrate into funds, structured financial derivatives, and other financial products. While this doesn't require anyone to buy XRP, it can indirectly increase demand for the coin if liquidity providers hedge exposure by buying the token, which a major provider like CME Group probably would. Furthermore, getting regulators to sign off on a new derivative is evidence that the coin is not going to be banned or have its functions significantly restricted by regulatory intervention any time soon.

So over the long term, XRP futures are more likely than not to drive higher prices of the coin. Though the strength of the price impulse is probably not sufficient to justify buying the coin on the basis of this factor alone, when paired with the other elements of its investment thesis, like XRP's utility in facilitating quick and cheap cross-border money transfers, it's worth viewing as another tailwind for adoption and higher prices down the line.

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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.