Unpacking the latest cryptocurrency to receive an ETF wrapper in Canada, with a view to its utility as a facilitator of exchange
In what might be resembling a new pattern for cryptocurrency ETF launches, three new ETFs from three different providers all tracking the same cryptocurrency were released in June. This time the ETFs — from 3iQ, Purpose, and Evolve are tracking XRP, a digital asset that claims a distinct utility from more commonplace cryptocurrencies like Bitcoin, Ether, and Solana.
XRP is a cryptocurrency launched by a company called Ripple that is explicitly designed to connect the world of decentralized finance to fiat currencies and financial institutions. XRP’s blockchain can be used to rapidly exchange currencies between different holders around the world. For example, a US dollar can be exchanged for XRP which can then be immediately exchanged for Japanese Yen. The goal is to create safer, faster, and less expensive currency exchanges.
“It’s not like Bitcoin, which is used primarily as a store of value. It’s more transactional,” says Michael Zagari, Investment Advisor & Associate Portfolio Manager with Wellington-Altus Private Wealth. “It can be used for micro-payments, it can compete with e-commerce, it can compete with POS systems.”
Despite the relative novelty of XRP on the investment mainstream, Zagari notes that this particular blockchain has been used for about a decade at this point. Ripple’s stated goal in launching the coin, he notes, was to offer traditional financial institutions a secure means of transacting with one another and with decentralized finance players.
Over the past decade XRP faced some hurdles to adoption, including a four-year lawsuit against Ripple by the US SEC over alleged securities law violations through the sale of XRP tokens. That lawsuit was recently settled, which has opened up greater interest in the coin.
Zagari argues that the interest in and adoption of XRP reflects a growing need among individuals and institutions to transact quickly across borders. Issues with the SWIFT system have been highlighted in recent years, as have certain drawbacks of institutions that lack IBAN numbers — as any Canadian banking customer might know firsthand. XRP, he says, offers an alternative utility to those systems.
Using XRP to conduct a foreign currency exchange, though, comes with some theoretical risk. Buying an XRP coin to convert it into another currency could technically expose that user to the risk of XRP price fluctuating before it’s converted into the other fiat currency. Zagari notes, however, that this risk is purely a product of time lag. Blockchain transactions, he notes, are processed within one and three seconds. That speed, he says, should make the risk of price fluctuation much more manageable.
But if the token is used to facilitate exchanges, rather than store value, how could investors in a new ETF expect to see its overall price driven higher? Zagari argues that the investment growth prospects for XRP come down to network effects. The more frequently the token is used and the more deep its network becomes, the higher the price of the token should go. Zagari makes a point of separating XRP from Bitcoin, noting that Bitcoin’s rise is a product of its inherent scarcity. For a technically limitless cryptocurrency like XRP, much like Solana or Ether, network effects are necessary to drive price appreciation. Zagari sees potential utility in XRP for people who don’t have bank accounts but do have access to smartphones or the internet as a medium of transaction that works both with and around traditional financial institutions. As more of those users employ XRP to create a means of digital payment, the higher its value should go — in Zagari’s view.
Despite those apparent drivers as well as the widening shelf of different cryptocurrency ETFs available to the Canadian retail market, questions remain as to whether a more diversified portfolio of cryptocurrencies can benefit investors. Until this point there has been a high degree of correlation between Bitcoin, Ether, Solana, and even XRP. Zagari agrees that this has been the case, saying it’s a feature of the early ‘exploration stage’ of these cryptocurrencies. He expects to see an eventual winnowing of the field as the coins with more useful underlying technologies win out. He argues that as advisors consider more diversified crypto allocations they can use that approach as a guide.
“If you look at it from a point of view of just adding another crypto to your portfolio it's going to backfire on you because you're not really understanding the technology,” Zagari says. “The bigger question is, what is the technology solving? It’s like assessing any other investment, you’re looking for that gap.”
