Ripple (CCC:XRP-USD) is trading around $1.40 and is up 600% in 2021 as in early January 2021 it was traded at about 24 cents. XRP is on an interesting path now, with an SEC lawsuit, and a need to prove its business prospects and value, too.
Should you consider Ripple now?
After all, it is the fourth largest coin as of May 4, 2021, with a market capitalization of $65.73 billion according to CoinMarketCap.
Not all cryptos are the same, and some just hype with pure speculation. Ripple is also a highly speculative coin too, but has a strong business model that makes it interesting.
Ripple Eyes the Future
XRP describes itself “a new era of finance,” with a utility toward financial services. The power of RippleNet is based on three pillars. A decentralized infrastructure modernized messaging with a 0% failure rate and liquidity solutions. Ripple wants to be a solution for the global payments business. Or, as it states, “the financial network of the future.”
What is interesting about Ripple is that it has succeeded in building a large network of financial institutions to strengthen and develop its business model.
Banco Santander is just one large international bank that is a key business partner with Ripple. News that the world is converging on a new global standard for modern cross-border payments, the ISO 20022, is noteworthy too. And Ripple is already part of the ISO 20022 Standards Body.
XRP is designed for international commerce, with the main concept being faster and cheaper currency exchange transfers and international payment settlements. In theory, this is a business with a large opportunity. Money transfers are a huge global market.
But there is a major challenge.
Ripple’s biggest competitor is the SWIFT messaging system. A system that banks and other financial institutions have used for decades, and most probably will continue using in the future. So Ripple is facing intense competition from the traditional and highly regulated banking system.
I am not sure whether this competition with the traditional banking system will go well or bad in the future. Speaking of problems, there is also a second major problem for Ripple now.
SEC Speaks Out
On Dec. 22, 2020, the Securities and Exchange Commission alleged “an unregistered securities offering” involving the company.
The agency said:
“The Securities and Exchange Commission announced … that it has filed an action against Ripple Labs Inc. and two of its executives, who are also significant security holders, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.”
Named in the SEC complaint were co-founder and former CEO Christian Larsen and CEO Bradley Garlinghouse. The two “raised capital to finance the company’s business,” the SEC said.
In a regulated financial and investment industry, the SEC complaint is a reason for scrutiny. What is interesting now is the outcome of the lawsuit. There has been some positive news for Ripple, which has helped its rally this year. But is this rally sustainable?
I would argue that after a 600% gain in 2021, the temptation for securing big profits is justified and that could lead to a selloff for Ripple. It could be temporary, or it could last longer. For sure, the catalyst is now the SEC lawsuit and its conclusion. Any prediction for Ripple’s price should be taken with a lot of caution and uncertainty.
A Currency or a Security?
Can you classify Ripple as a security? This is important because if you can, then the SEC lawsuit could have further legal negative implications for Ripple. The SEC recently responded to Ripple’s efforts to have the suit dismissed.
An interesting precedent tries to determine whether any cryptocurrency is a security. Known as the Howey test, the standard is used globally. Factors include whether there is an investment of money, if it involves a common enterprise and an expectation of profit “from the managerial or entrepreneurial efforts of others.”
Investing in cryptos is risky, and there are no guarantees of making any profit. But at the same time, even for speculative purposes, if you invest money in Ripple, the intent is assumed to profit, not lose money.
Plus, if we focus on the business model of Ripple, then there is a clear entrepreneurial effort by its management.
Ripple Bottom Line
Ripple is an interesting case in the crypto industry. I like its business model and its utility. Ripple has a strong utility that adds value. But this does not mean that Ripple’s price is cheap after a 600% rally in 2021. It could move higher, but much lower too.
Be cautious and monitor its news. Further due diligence should be made and always assess your risk tolerance before investing in Ripple or any other crypto.
On the date of publication, Stavros Georgiadis, CFA did not hold (either directly or indirectly) any positions in the securities mentioned in this article.