Over the course of the last two years, XRP, the cryptocurrency associated with Ripple, captured significant attention due to its dramatic rise in valuation and the legal battles surrounding its issuing company. Starting from just under $0.60 on July 18, 2024, XRP's price surged to a record $3.65 within a year, marking an impressive gain of over 500%. Despite this peak, by January 14 of the following year, XRP was trading at $2.14, marking a substantial gain over two years but still significantly below its all-time high.
The initial surge in XRP’s value strongly correlated with market speculation about the conclusion of Ripple’s litigation with the Securities and Exchange Commission (SEC). Following the settlement of this high-profile legal dispute, XRP's price trend reversed, exhibiting a downward momentum. While it's common in the cryptocurrency market to observe a "sell-the-news" reaction once anticipated events occur, the decline also reflects underlying challenges that cannot be ignored.
This analysis focuses on two principal concerns that temper the outlook for XRP's continued bullish performance, and suggest fundamental hurdles persist despite recent gains.
Tokenomics of XRP Present Structural Concerns
When Ripple launched XRP, it created a total supply of 100 billion tokens upfront. A significant portion of these tokens, approximately 34 billion, remains locked in escrow accounts, while about 66 billion tokens are currently circulating in the market according to data from XRPscan. This distribution raises several important considerations.
- Price Influence by Ripple’s Holdings: Because Ripple retains control of a substantial number of tokens, the company can potentially impact XRP’s market price by deciding when and how many tokens to release or sell. This situation differs from cryptocurrencies like Bitcoin, where scarcity is an inherent part of the design, limiting supply and potentially supporting price appreciation.
- Absence of Scarcity Mechanisms: Unlike Bitcoin, which has a capped supply and a mining process that controls new issuance, XRP’s large initial mint and escrow strategy mean it lacks an intrinsic scarcity factor. This makes sustainable price increases more difficult to justify on supply-demand dynamics alone.
- Market Capitalization Disproportionality: Given XRP's price fluctuations, its market capitalization experiences substantial swings. For instance, valuation projections by Standard Chartered analysts suggest XRP’s price could rise to $8, which would push its market cap to around $480 billion — a figure comparable to major US companies like Mastercard and Palantir. This valuation appears inconsistent when considering Ripple’s last private valuation at $40 billion, based on a $500 million funding round closing late last year.
These points together indicate that the tokenomics surrounding XRP may not present a sustainable basis for long-term value appreciation, and the large circulating supply controlled significantly by Ripple injects complexity into its market performance dynamics.
Questionable Utility and Shifting Use Cases for XRP
Ripple originally promoted XRP as a means to enable low-cost, efficient cross-border payment settlements. However, recent strategic developments suggest a shift away from this core mission. CEO Brad Garlinghouse has indicated that Ripple aims to acquire companies in the traditional financial sector to integrate and augment its crypto-based solutions into established financial infrastructures.
This pivot appears aligned with Ripple’s larger corporate strategy but presents ambiguity regarding XRP's role. XRP's primary function as a bridge currency within Ripple’s payment network faces increasing competition and obsolescence from multiple directions.
Traditional financial institutions are increasingly developing their own blockchain systems for cross-border payments, such as Swift’s initiatives leveraging blockchain. This encroachment on Ripple’s original territory reduces the distinctiveness and necessity of using XRP in international money transfers.
Additionally, the growing adoption of stablecoins offers users an alternative for fast, low-cost cross-border transactions without the price volatility characteristic of cryptocurrencies like XRP. Ripple acknowledges this trend by launching its own stablecoin, Ripple USD (RLUSD), and providing blockchain services beyond just cryptocurrency applications.
While the involvement of non-crypto companies with Ripple’s XRP Ledger could spell some advantages for XRP, it is not integral to Ripple’s overall corporate success. This disconnect creates a divergence between Ripple’s corporate growth prospects and XRP's direct demand, imposing significant headwinds for the token’s valuation and utility.
Conclusion
XRP's spectacular rise in price over recent years was closely tied to legal milestones and investor enthusiasm. Yet the fundamental challenges rooted in its token supply design and the evolving utility landscape for cross-border payments suggest considerable obstacles ahead. These factors indicate that investors and stakeholders should approach XRP with caution, understanding the structural and market-related risks at play as Ripple adapts its business model in a rapidly changing financial technology environment.