Tariffs and their impact on financial markets are the talk of the town right now, and it’s no surprise why, given the new administration’s intense interest in using tariffs as a tool of trade policy. Trade affects nearly every element of the economy, and it even has the potential to impact the cryptocurrency sector, including leading coins like XRP (XRP -1.69%).
But, contrary to most people’s expectations, tariffs are not necessarily totally detrimental, even to coins focused on international money transfers like XRP. There isn’t any guarantee that there’s a tariff-driven upside in store, though there are at least three ways in which it could be possible. Let’s explore each and put them into context so that you’ll appreciate how they might change your opinion on whether to buy, sell, or hold XRP.
1. Tariffs could drive increased adoption of cheap transfer methods
When tariffs are implemented, trade can be disrupted. When trade is disrupted, the direction and volume of the flow of money across borders also changes. For key players in the financing of international trade, like financial institutions, those changes can be detrimental, as they make money by lending to the businesses that produce goods and conduct trade.
XRP might not be able to help those financial institutions to prop up their sagging top lines in the event of trade disruptions caused by tariffs. But it could also help them to drive down their costs of transferring money across borders, because that’s one of its main use cases and drivers of adoption.
The idea here is that newly injured companies might prefer to start using XRP to soften the blow on their bottom lines, as doing so would enable them to stop paying hefty international money transfer fees on the business they have left after tariffs are implemented. And that’d drive more demand for XRP in the near term. Then, it’s also possible to imagine a future in which trade rebounds, and those same institutions continue to use XRP, especially if there’s no cheaper or faster alternative.
So, it’s possible for tariffs to stimulate some long-term growth of the coin, even if it isn’t a sure thing.
2. A stronger dollar could stimulate demand for weaker yet highly transferable currencies
One impact of tariffs is that it tends to make a country’s currency more scarce among international holders. Essentially, if there’s a new tax on imports, the foreign producers of those imports tend to experience reduced demand. Therefore, they make fewer transactions and end up with less of the importing country’s currency. With less of the currency circulating externally, each outstanding unit is worth slightly more.
When each outstanding unit of a currency is worth more, it effectively becomes more expensive for external holders to purchase goods from the currency’s issuing country, assuming prices don’t change. So they are likely to seek alternative ways of purchasing goods using weaker currencies, where they are more likely to get a better deal.
Now, imagine a world in which purchasers flock to XRP to settle their trade payments instead of the U.S. dollar. That would make sense for them to do, as it’s easily transferable across borders and is exchangeable for a variety of different fiat currencies. It wouldn’t enable them to skip paying the tariffs, but it’d soften the blow of purchasing goods from the U.S.
Plus, holders of XRP in this scenario might actually see their asset increase in value from demand stimulated by other players transitioning their trade transactions from U.S. dollars to the coin. Unlike with dollars, such a value gain is not a problem from the perspective of those doing international trade.
However, investors should keep in mind that a stronger dollar could just as easily discourage investors from holding XRP, as they might calculate their return would be higher simply by retaining dollars rather than cryptocurrencies of any sort.
3. Financial institutions might seek additional hedges against economic disruption
Financial institutions need to keep their assets hedged against all manner of disruption, including that caused by trade flows changing due to tariffs. Many major banks already hold hedge assets like gold, but they’re always on the lookout for other safe havens that could protect the value of their portfolios.
XRP is a natural fit to be one of those assets. While it’s true that it’s quite volatile, as most cryptocurrencies are, an increasing number of banks and other financial institutions already need to hold it to process their international money transfers. Holding more of it would be convenient, and it might even offer them some additional upside.
On the other hand, if tariffs cause a domestic or global recession such that there is meaningfully less demand for internationally produced goods, there does not have much chance for XRP to retain all of its value today. So keep an eye on economic indicators to see if the investment thesis for buying the coin will be resilient in the face of more serious disruption.
