Is This 1 New Problem for XRP, or 1 Reason to Buy It?

XRP-USD -7.55%

Key Points

• XRP's network doesn't incur much in the way of fees on a daily basis.

• Some investors think that's bad.

• Other investors see that it's actually good.

• 10 stocks we like better than XRP ›

For most businesses, if you charge almost nothing, it could be big trouble. And, at least according to some investors, that's one problem facing XRP (CRYPTO: XRP) right now. Data suggests that all XRP Ledger (XRPL) decentralized applications (dApps) combined are only incurring on the order of $300 in protocol fees over a typical 24-hour period.

On its face, that looks absurdly small. Is this microscopic fee figure a red flag for investors, or is it actually part of why XRP might still be a worthwhile long-term investment?

Why tiny fees look scary

If a network and its apps are collectively generating only a couple of hundred dollars of daily fee revenue while investors value the asset in the hundreds of billions, as they do with XRP, then, by the traditional valuation logic, XRP looks dramatically expensive. Other top protocols, such as Ethereum and Solana, regularly log millions of dollars in fees per day, while the XRP Ledger sits near the bottom of the rankings. If you carry over a stock investing mentality that equates higher protocol revenue with stronger fundamentals and a higher intrinsic value, XRP thus looks like a meme stock with numbers that never quite caught up to its narrative.

The critical thing to know here is that XRP is not designed to funnel the (low) fees it incurs to anyone. Each transaction on its chain must burn a small amount of XRP. That quantity is, at today's prices for the coin, worth just a fraction of a cent. More importantly, those fees are not paid to the network's validators, nor are they routed to Ripple, XRP's issuer, and they do not create a revenue stream for tokenholders via any staking process.

At current activity levels, the daily burn is estimated to be roughly 163 to 750 XRP, which barely moves the needle relative to the 100 billion maximum supply and the more than 60 billion circulating. In other words, XRP's fee mechanism is largely a spam deterrent, and secondarily, it's a very slow way of ever so slightly constraining the coin's supply over long periods of time.

This can support the bull thesis

Now let's flip the script and think about which users XRP is targeting.

In short, the XRP Ledger was not designed to be a high-margin software platform that squeezes users on every transaction. It was engineered as low-cost financial plumbing for financial institutions to process payments, simplify the foreign exchange process, and do so in a way that facilitates regulatory compliance.

For banks, payment providers, and asset managers that Ripple aims to bring onto the network, this low-cost profile is a key feature. These institutions are accustomed to paying meaningful fees to transfer money across borders, and they place a great deal of importance on predictability, low latency, and the ability to pass on minimal costs to their own clients. And that's exactly what XRP is promising to them, and for cheaper than with legacy systems.

The investment thesis, therefore, is not that XRP holders will someday harvest enormous fee distributions, but rather to own a piece of the native asset that greases the rails of a low-friction, high-volume payment and asset transfer system. Anyone who uses the chain is required to hold and use XRP as the unit that pays transaction costs, and it also provides liquidity for on-ledger instruments, such as stablecoins and tokenized real-world assets (RWAs), like U.S. Treasuries. If the XRPL continues to win mandates for cross-border flows and tokenized assets, the demand to hold XRP both as working capital and an investment can grow, even as its user-facing fees remain extremely low.

So in this light, low fees are a reason to buy XRP, not a reason to sell it.

Of course, for investors whose comfort zone requires seeing visible cash flows today, like with a company, XRP is probably not the right fit. On the other hand, for investors willing to underwrite an investment thesis centered on processing transactions with very high throughput and increasing institutional traction, and perhaps even some long-term scarcity effects, the fact that users pay almost nothing to move value is actually part of the asset's appeal.

Should you invest $1,000 in XRP right now?

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Alex Carchidi has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum, Solana, and XRP. The Motley Fool has a disclosure policy.

Is This 1 New Problem for XRP, or 1 Reason to Buy It? was originally published by The Motley Fool