XRP (CRYPTO: XRP) is a favorite investment of many cryptocurrency enthusiasts, and for good reason. Its usage as a medium of exchange for international money transfers means that banks and perhaps even governments will continue to find a reason to buy and retain the coin, even in the face of other fintechs offering similar services, and despite the presence of deeply entrenched competition in international transfers.
But this investment might not be bulletproof, especially not in the face of two emerging risks as a result of new trade policies. Let's map out what could go wrong and how it might affect the coin's value so you'll be better equipped to make your investment decisions.
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These risks could be very formidable
As you've probably heard, U.S. trade policies are currently in flux. With the new administration's affection for imposing tariffs on all manner of goods and services, there's now the possibility that XRP's bread and butter, gathering fees from quickly and cheaply processing money transfers across borders, will start to slow. That could be caused by two related but distinct threat vectors.
The first vector is that the tariffs could cause the U.S. dollar to gain in value relative to those of the country's trade partners, assuming those partners don't impose reciprocal tariffs. That could occur because tariffs can reduce the volume of imports to a country, thereby decreasing the amount of its currency circulating on international markets, pushing its value up. When people holding dollars buy less stuff from international sellers, those sellers simply don't have as many dollars on hand, so each dollar they do have is worth a bit more.
Furthermore, when the dollar itself grow stronger, exports from the U.S. become more expensive for those trading partners. They may buy less from the U.S. as a result. That could imply less need for them to perform international money transfers using XRP to pay for goods and services. In such a case, demand for XRP would fall and that might reduce its fees.
The second vector is more insidious. If the U.S. dollar rises because of tariffs, investors internationally may be inclined to bet that it will continue to get even stronger. Therefore, they may assume that they will get a higher return by parking their capital in dollars, which are assumed to be a safer investment than a cryptocurrency like XRP.
So the coin could face a double whammy from investors fleeing to safer sources of higher returns, and also from slumping demand for XRP to do international transactions.
The core thesis still stands
As grim as the above may sound, the investment thesis for buying XRP and holding it for a long period of time is still quite strong, and the threats caused by shifting trade policy don't really change that, though they may become a headwind in time.
No matter how steep the tariffs may be, there is still going to be a vast amount of money that needs transferring across borders. Plus, the U.S. isn't the only country where financial institutions are starting to use XRP -- it's also in use in Japan, the U.K., China, and many other countries, too.
And, as long as XRP is cheaper and quicker than the legacy technologies it's designed to supplant, there will still be potent forces driving more users to adopt it. Tariffs won't change the fact that XRP is in many ways superior to those older systems. In fact, tariffs might even increase the financial pressure on institutions making cross-border transactions to cut their costs to minimize the detrimental impact of the tariffs.
So be mindful of these new threats to XRP, but don't let them convince you that the coin is worthless, or that it isn't worth buying. If you're willing to hold on to your investment for at least a handful of years, there's a very good chance that any price headwinds will dissipate, assuming they ever amount to much in the first place.
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
