Why is XRP in the red after a year of growth?

If you have a XRP (CRYPTO: XRP) The good news for investors is that Ripple Labs (the company behind the XRP token) is finally starting to put its legal and regulatory woes behind it. This opens up new opportunities for expansion in the US market and XRP enters 2025 with renewed momentum and optimism.

The bad news, however, is that XRP’s market performance does not reflect this. In fact, XRP has fallen by about 5% year-to-date. That may not sound tragic, but a number of top cryptocurrencies, led by Bitcoinhave risen by 50% or more year-to-date, so the obvious question is: why does XRP continue to underperform the rest of the industry?

Legal and regulatory risks

The best answer is that Ripple may not be as free of regulatory issues as people would like to believe. In August, a lengthy court case with the Securities and Exchange Commission (SEC) was finally concluded, with Ripple agreeing to pay a $125 million penalty for the unlawful sale of XRP tokens to institutional investors. In theory, this should have precluded any future legal or regulatory liability and allowed Ripple to return to business as usual.

However, the SEC has until early October to appeal the case, and if it does, it could complicate matters. That could explain why the price of XRP didn't rise more in August, as many investors expected. Many thought the price of XRP would double to $1, but so far that hasn't happened. Instead, investors are sitting on the sidelines waiting to see what happens next.

Image source: Getty Images.

You can blame the crypto “flash crash” in August for some of XRP's recent lackluster performance. However, other cryptocurrencies (including Bitcoin) already appear to be recovering as investors regain their appetite for risky assets. In contrast, XRP is still down about 3% over the past 30 days.

Competitive landscape

The lengthy court case with the SEC that began in December 2020 has had a dramatic impact on competition. From 2020 to today, Ripple has lost partners and customers. The company has been forced to scale back its presence in the US market and focus on foreign markets instead. And it has had to pay an estimated $200 million in legal fees to fight the SEC. All of this, in my opinion, has taken a heavy toll on the company and XRP's future prospects.

In addition, other blockchains may have simply overtaken XRP when it comes to technological innovation. I am thinking in particular of Solanasurpassed XRP in market capitalization and will be the fifth-largest cryptocurrency by the end of 2023. This year, Solana is up about 35%, further widening the gap.

Remember: XRP was introduced in 2012, before ether revolutionized the concept of smart contracts in 2015. So, as Ripple executives recently admitted, there is still no smart contract functionality for the core XRP blockchain. While you can use this blockchain to process and record financial transactions, you cannot use it for more complex transactions that involve smart contracts. In the best case scenario, Ripple executives say, smart contract functionality could be available in 2025.

Or take the example of stablecoins. XRP was launched at a time when stablecoins were nowhere near the big business they are today, and before blockchains launched stablecoins of their own. So while it's fantastic that XRP is finally working on launching its own US dollar stablecoin, the fact remains that this new product really has a limited chance of dethroning the current titans of the $150 billion stablecoin market.

What’s next for XRP?

Still, there's still a lot for Ripple to look forward to in 2025. The company could finally focus on its core business instead of getting bogged down in legal and regulatory issues. It can look for new ways to expand in the U.S. market. And it can continue to launch new products. All of this is sure to drive up the price of XRP.

And if you're super optimistic, there's a chance we could be talking about a spot exchange-traded fund (ETF) for XRP investors sometime in 2025. If that happens, it could have a huge impact on the future price of XRP, given all the new money that could flow in from retail and institutional investors.

So it's not out of the question that the price of XRP could double to $1 in the next 12 months. But from there, things get a bit dicey. A lot of things have to go right, and Ripple needs to mend its relationship with the SEC, before the value of this former crypto darling can really skyrocket.

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Dominic Basulto has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Solana, and XRP. The Motley Fool has a disclosure policy.