As a coin that's inextricably linked to the volume of global money transfers, XRP (XRP -2.93%) is in a bit of a pickle at the moment. While it's unclear whether the new package of tariffs announced on April 2 by the Trump administration will actually be put into practice, it is no surprise that the coin's price fell by 8% on April 3.
But the risks facing XRP right now are even larger than what investors might be expecting. For the right investor, however, this might be a compelling time to think about buying, so let's situate ourselves and chart a path forward.
Volume-related risks involving trade just escalated substantially
For the uninitiated, XRP is a coin that helps financial institutions reduce their expenses when transferring money internationally. Its transactions close nearly instantly, and its fees are negligible compared to older transfer technologies like the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Also, because XRP is a cryptocurrency rather than a fiat currency, transfers between wallets on its blockchain do not incur currency exchange fees, which can be quite costly.
CRYPTO: XRP
Key Data Points
That makes the coin highly exposed to risks stemming from impacts to global trade. When trade across borders occurs, buyers in one country transmit their payment to the sellers in the originating country. If there is less trade happening on a value basis, there is a lower volume of money being transferred.
That equates to a somewhat lower impulse for the players involved to switch over to using XRP as the medium of exchange for the entire process, because on an absolute basis, the expenses involved are incurred less frequently due to less trade happening.
But the risks to the coin are even more numerous than the above implies.
Tariffs levied by one country on goods that are imported from another country are passed on to consumers in the buyer's country. It is a basic lesson of economics that if prices rise while supply stays constant, the level of demand for a product drops.
Thus, if the Trump administration's tariff policies are implemented as planned, domestic demand for imported goods will drop. And banks and other financial institutions in the U.S. that might already be using XRP to process international money transfers will not need to buy or hold as much of the coin to cover their needs.
As if that weren't bearish enough, there is now a financial incentive for foreign sellers to avoid using U.S.-based blockchains like XRP -- the prospect of their use being taxed somehow, especially as it pertains to making international payments for trade, is now undeniably on the table.
While the basic factors driving them to use XRP are still intact, it would be disruptive to sellers' operations if a financial technology they rely on were to be suddenly subject to a new tariff or tax. They may thus prefer to use other cryptocurrencies focused on making cheap transfers, or other solutions altogether.
On the bright side, this risk is not fully realized, and it might not ever be, since so far there has not been discussion of taxing cryptocurrencies in this way in the U.S.
This dip might be too spicy to buy
Is this tariff saga an opening for brave investors to buy the dip with XRP?
It could be. But most investors probably do not have the risk tolerance or patience for it. The coin's price could easily fall by quite a bit more in the near term if the economy in the U.S. degrades, or if the situation with tariffs becomes worse -- assuming they get implemented at all.
And it is not like these risks are only theoretical; there are clear and causal relationships between all of the factors involved, and the trend is bearish.
With that being said, XRP will survive the next few years even if the economy becomes fairly poor. The tariffs might not come to pass, or they might not be as destructive as they appear to be guaranteed today.
Buying during this volatility could well pay off, especially if it blows over sooner than anticipated. But it will almost certainly require trade and economic conditions to improve from where they appear to be headed today.
The long-term thesis for investing in XRP remains alive and well. That doesn't mean it will be a comfortable hold for those who buy it now. The best move is probably to wait for things to calm down a bit before doing anything, unless you can handle having your investment potentially be underwater for a good while.
