I learned about Ripple (XRP) for the first time in November 2017. After a short research, I was convinced that it had some real world use. I invested 1% of my savings and followed the market for a week. After further reflection on it, I decided to close my position.
I sold Ripple, because of two reasons.
- 100 billion Ripples were minted on day 1 and most of it was waiting in some private accounts to enter the market.
- The success of Ripple as an interbank currency depends on its price stability, which contradicts with my investment objective. I don’t want stability. I want steady increase.
A few weeks after I sold my Ripple, its price quadrupled. Am I upset? Not really, because as far as I’m concerned this price move is irrational. It contradicts with the reason of existence of Ripple.
“If Ripple becomes volatile, it will be useless as a medium of exchange or an interbank currency. If it is useless as a medium of exchange, it won’t have any value at all.”
The sentence above applies to all cryptocurrencies that don’t have any use case other than being a medium of exchange. That includes our good old friend Bitcoin. If a cryptocurrency is backed by another asset such as gold, oil, or a company’s stocks, then it’s a different story and volatility is acceptable.
How Did I Learn About Ripple?
An old friend of mine told me to check out Ripple, because they had a deal with American Express. He told me that Ripple was in an early stage. Like Bitcoin, it could boom some time later. It was still trading around $0.20. What if it boomed like Bitcoin to thousands of dollars? He literally saw Ripple as a lottery ticket and admitted that himself.
Now, it was up to me to do my homework and to research Ripple. I read that Ripple provided the infrastructure for financial organizations to settle their transactions. They were validated by Massachusetts Institute of Technology and used by companies such as American Express, UniCredit, and UBS. Ripple’s infrastructure was faster and cheaper to use than Bitcoin. Organizations could use any currency on the Ripple, including USD or the ones they issued themselves.
So far, it made sense and sounded like it was a good platform to realize the cryptocurrency vision I explained in a previous post. Next to all of that, Ripple had a cryptocurrency, native to their platform, called XRP. At the launch of the Ripple system, the developers issued 100 billion XRP coins. They took 20% of the issued coins and kept the remainder in their organization.
Any Investment Value?
I thought that Ripple was a great idea for a platform, great use cases, but what would be the motivation to invest in XRP, the currency? XRP sounded more like a test currency to test their system instead of a real investment opportunity, until I read about their anti-spam policy.
Ripple’s anti-spam policy includes 20 XRP’s being blocked in each account and 0.00001 XRP being forfeited for each transaction. If someone executes repeated transactions quickly, the transaction cost could get higher to avoid attacks on the system. When I read that, I was amazed. What a brilliant way to finance your startup and your ongoing operations. Do you get why XRP had some upside potential?
The founders collected startup capital by selling their coins. In order for them to have a successful exit, the initial 20% of the XRP’s they reserved for themselves have to be worth something. The only way that would be worth something is that they have to work very hard to make sure that the platform worked well and is actually used by as many people and organizations as possible.
As more and more people and organizations start to use the Ripple platform, more and more of those 20 XRP’s would be locked in accounts. As more and more transactions happen on the platform, more and more of those 0.00001 XRP transaction fees would be spent and disappear forever. That means we start with 100 billion XRP’s and that number will keep shrinking as the system is used.
As the supply of an asset decreases, its price increases. So, unlike fiat currencies such as USD and euro where the money supply increases as time passes, the supply of XRP will decrease as time passes by. That means, if things go according to plan while the supply of the fiat currencies increase, the supply of XRP will decrease. While the value of fiat currencies will decrease, the value of XRP will increase. Of course there are some conditions to that.
Ripple needs to be a useful, reliable, scalable platform that is used by many people and organizations. The more the platform is used and the more accounts are created on the platform, the more the XRP supply will diminish, and the more its value will increase.
Sure, other organizations could start trust accounts for XRP’s. Those organizations could hold the XRP’s for their clients to circumvent the 20 XRP lock-up per account. However, that would mean that the clients of those organizations would take the risk of those organizations. They would not have the security of an account on the Ripple platform, which will require a 20 XRP lock-up per account.
How fast is the adoption of the Ripple platform going to grow? How fast will the total base of the initial 100 billion XRP’s diminish with each 0.00001 transaction fee? Will the Ripple founders ever add new coins to the system? Will they reduce the 0.00001 XRP transaction fee? At a certain moment they might have to do that when that 100 billion figure approaches zero and the transaction fees become so high that it wouldn’t make sense to use the system. Just like the oil problem. At a certain moment, oil will be so scarce that we will probably not be able to afford it and look for another solution. Can the administrators of Ripple decide to lower the account lock-up and system use fees?
Will the platform stay reliable, fast, scalable, and safe over time? One of the main uses of XRP is to be a bridge between two fiat currencies. Suppose that I have 100 euros that I want to deposit to a USD account over the Ripple system. In order to do that, first, I have to convert the euros to XRP at the entry point of the system and then the XRP’s to USD in the exit point. There is nothing wrong with that, but what if there are huge price swings in XRP during the transaction, as it is the case with other cryptocurrencies? What if the value of my funds doubles or halves down between the time they exit my euro account and enter the counter-party’s USD account? This is something the users of the system would want to avoid. So, it is in the Ripple administrators’ best interest to keep the price of XRP stable. I read that in order to do that they are providing hedge funds with discounted XRP’s so that those hedge funds can act as market makers.
On the one hand, the administrators of the Ripple system are incentivized by higher XRP prices and on the other hand, their system would suffer from huge price swings. The best way to ensure that is through active market making by putting those 100 billion XRP’s into use. If they did that, we wouldn’t expect huge price swings and upside movements like in Bitcoin. It would be more of a mean-reverting asset. That is the price will stay around the averages even if the trend is upwards. That would mean that XRP is more of a trader’s asset than a buy-and-hold asset. In my experience, buy-and-hold assets are more profitable for the average investor than assets that require active trading, especially when you consider the commissions and time investment needed. If you like trading and it’s like a hobby for you that is something else. So, I don’t expect the price of XRP to explode like Bitcoin did, at least in the near future, but still it can be an asset to hold for diversification purposes.
Does all of this justify the current $1.00 USD per XRP price? These and potentially other questions need to be asked answered before investing in XRP, but at the end of the day, I find it a smart idea and a clever way to finance the idea.
I don’t know how the execution will turn out, but the idea matches my cryptocurrency vision, and has benefits for its users and society in general.
Markets might behave irrationally on the short term, but they behave rationally on the long term. That explains the rally, correction, bubble, crash cycles.
Adjust and diversify your positions so that you’re neither completely satisfied, nor completely upset about your portfolio whatever happens with the markets.
Disclaimer and Disclosure
At the time of writing this post, I have no investments in XRP and 2% of my savings are in Bitcoin. This post is published for information purposes only and not meant to be investment advice.