Should You Buy XRP While It's Under $3?

The XRP (CRYPTO: XRP) cryptocurrency has attracted a lot of attention from investors lately as the broader cryptocurrency market has made inroads among institutional investors and they react to the Trump administration's positive stance toward digital coins. The result is that, as of this writing, the value of one XRP coin has surged more than 350% over the past year.

But there's more to this story than just a dedicated group of crypto investors getting excited about another token. XRP can and is used for real-world purposes, specifically as a bridge currency for foreign transactions. Transactions made through the RippleNet network are processed quickly and cheaply, making XRP a legitimate alternative to slower and more expensive forms of foreign transactions.

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Here's why bulls think now's the time to invest in Ripple and a few reasons you might want to tread lightly if you do.

Image source: Getty Images.

The case for buying XRP

Cryptocurrency enthusiasts already know that XRP is the third-most valuable coin after Bitcoin and Ethereum. Still, for the uninitiated, there are a few important things to know about why this coin is gaining ground so quickly.

First, XRP allows for faster and cheaper foreign transactions. When money changes hands, everyone takes a slice. XRP not only speeds up the process (think a fraction of a second instead of days) but also does it for a fraction of a penny.

That might not seem all that earth-shattering, but keeping transaction costs low could save financial institutions lots of money, and speeding up the process would be a win for customers who need timely access to their funds. More than 200 financial institutions already use XRP, including American Express, for some foreign transactions.

Second, the U.S. now has a more crypto-friendly government. The Trump administration has rolled back some restrictions on cryptocurrencies and even set up a "crypto czar" to expand crypto usage. This has given new life to many digital tokens, including XRP.

Ripple CEO Brad Garlinghouse has said the current administration is "opening doors for crypto," and the company has reoriented its business toward the U.S. due to an expected lighter touch by the Securities and Exchange Commission (SEC).

Another catalyst comes from the anticipation that an XRP exchange-traded fund (ETF) could launch in the near future. Bitcoin and Ethereum ETFs debuted last year and have become popular investment options, giving people an easy way to invest in digital currencies. A handful of financial institutions have filed applications with the SEC for an XRP ETF, which could increase the coin's value.

The case against XRP

As compelling as XRP's opportunities are, there are some legitimate reasons investors may want to avoid the XRP coin or at least be cautious if they do buy it. Most importantly, if you're considering opening a position in XRP simply because it's made impressive gains recently, that's not a good enough reason. The coin is very volatile and could retreat as easily as it's climbed higher. For example, XRP was down about 10% in just the previous five days when I wrote this article.

Part of the volatility comes from the fact that XRP's success is anything but guaranteed. Sure, it promises to be a more efficient way to process financial transactions. However, that doesn't mean it will gain widespread adoption or even take a significant share of the market away from the dominant foreign transaction processor, SWIFT, with its customer base of 11,500 financial institutions.

It's worth mentioning, too, that while the Trump administration seems very open to cryptocurrencies, that doesn't mean the next administration will be. While that may seem a long way off, a more restrictive regulatory environment could hurt XRP's value down the line.

Personally, I find XRP a bit too speculative. I think there are legitimate uses for it, and I understand why some people own it, but I'm happy to let this one go. That said, if your risk tolerance is much higher and you're considering buying a cryptocurrency, XRP has the potential to benefit by offering an important transaction technology at a time when digital tokens are gaining further legitimacy.

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American Express is an advertising partner of Motley Fool Money. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and XRP. The Motley Fool has a disclosure policy.