Ripple (XRP)
Current price: US$0.22
Market cap: US$8.8 billion
CoinMarketCap ranking: #4
Circulating supply: 38.6 billion XRP
A Truly Divisive Altcoin
Depending on who you ask, you can gain vastly different impressions of Ripple (XRP). Some people view it as the future of banking, set to revolutionise the way we send and receive currency – both fiat and crypto. On the other hand, there are many people who think Ripple should burn in eternal damnation for helping banks get a foothold in the crypto world. These folks seem to have an ideological belief that banks are public enemy number 1, nothing but centralised, oppressive money prisons, full of fat cats in suits and the source of the world’s financial problems.
If you are an ideological investor, read no further. Ripple is not for you. If, however, you are just in this game to make profit, do have a read onwards and see if XRP takes your fancy.
Ripple is a company, a blockchain, a payment protocol and a cryptocurrency. The company was founded in 2012 in San Francisco and has over 200 employees. Their key offering is the Ripple Transaction Network. This is a payment protocol built upon their own blockchain which allows interbank payments to take place extremely quickly and cheaply. The whole idea behind Ripple is to enable “secure, instant and nearly free global financial transactions of any size, with no chargebacks”.
Ripple’s Transaction Network is a form of real-time gross settlement (RTGS) system. RTGS systems are usually operated by a country's central bank and are seen as critical infrastructure for a country's economy. RTGS systems do not require any physical exchange of money. When a customer of Bank A wishes to make a payment to a customer of Bank B, the central bank makes adjustments in the electronic accounts of Bank A and Bank B, reducing the balance in Bank A's account by the amount in question and increasing the balance of Bank B's account by the same amount. Traditional RTGS systems have their limitations – they are expensive and they are slow. Because the central bank cannot immediately confirm that the customer from Bank A truly has the funds required to pay the customer of Bank B, it can require a day or two for transactions to be confirmed. There is also a risk that something could happen to the money while it is in this holding pattern – the transaction could be tampered with for example.
The Ripple Transaction Network does a similar thing, but by utilising the power of blockchain its transactions are almost immediate, almost free and completely reliable. Ripple’s network can process 1000 per second. Yes, per second. As a comparison, Ethereum can process 15 per second. Also, all transactions are perfectly logged on the Ripple blockchain Ledger and are therefore tamper-proof and immutable. Ripple’s payment protocol is being touted as a next generation RTGS system, and so far banks and financial institutions are lapping it up.
Many of you may be wondering how a coin which divides the community so much could have become a top 5 coin. Well, there is a very good reason for this. All we need to do is look at the potential of the company and the immense size of market it is entering in to.
Going International
The dollar value of non-cash payments that occurs internationally is utterly mind boggling. According to BCG Perspectives, banks handled US$410 trillion of non-cash payments globally in 2013. This number is estimated to increase to $780 trillion in 2023. We also need to look at foreign exchange transactions which also use RTGS systems – in 2014 there were approximately US$5.1 trillion worth of foreign exchange transactions which took place per day. Yes, you read that right – $5.1 trillion every single day. Currently, While we can’t expect Ripple to become the administrator of all of these transactions, even if it got a slice of the pie Ripple would be absolutely set.
Does it even have a chance? Potentially, yes.
There are currently over 100 financial institutions internationally who are working with Ripple to implement their payment protocol. This includes American Express, Santandar, MUFJ, and closer to home, Westpac and ANZ. It also includes a consortium of Japanese banks which completed a successful pilot program to make it the first country in the world to enable domestic and international real time money transfers via the cryptocurrency.
Japan is crucial to Ripple’s long term plans and prospects there are looking good. XRP is now considered legal tender in the country. As it can be exchanged for material goods and services, this means that it has the potential to achieve nationwide acceptance. It also gives XRP instant liquidity via exchange with fiat through banks. With a GDP of $6.11 trillion, if Ripple can become responsible for even a quarter of Japan’s nationwide transaction volume it would be handling roughly US$1.5 trillion annually in Japan alone. Other countries have opened their arms to XRP too, including India and the UAE. It is early days for Ripple in India with only a few banks who have signed up, however the UAE are already using Ripple for cross-border payments and its use could soon extend into other Middle Eastern countries such as Saudi Arabia and Qatar.
Where Does XRP Come In?
I want to spend a quick word on the actual cryptocurrency XRP. At the moment, the Ripple Transaction Network can function without the use of XRP. Fiat money can be transferred across its payment protocol. Ripple have said themselves that down the line they will aim to have XRP used as the medium for all domestic and international transfers, however, whether banks buy into this or not is another question. Ripple have set up a program which is designed to accelerate the uptake of XRP, which is similar to what Visa did in their early days. Ripple won’t just give banks XRP, they’ll be incentivised to use it and be granted XRP if they comply with those incentives. Despite this, banks still have the option to use USD. If banks refused to use XRP and instead stuck with fiat, I can only see that Ripple the company will become immense, but the currency has no significant reason to grow with it.
Another point worth recognising about XRP is that Ripple owns around 60% of it. This is why XRP haters call it a centralised cryptocurrency - the majority of it is held by one main institution. With these stores Ripple gradually sell off XRP back to the public, which is how they are currently staying cash flow positive and they use this money to fund further development of their network.
WARNING: Moon Talk Ahead
At this point, let’s run a few numbers just for fun. Keep in mind that this is pure speculation, but it could give us an idea of how big Ripple could go.
Scenario 1. Let’s assume that in 2020:
• XRP ends up accounting for the total exchange volume of 30% of Japan’s GDP (~$1.5 trillion), 20% of UAE’s GDP (~$0.074 trillion) and 15% of India’s GDP (~$0.31 trillion)
• All transactions are done using XRP
• Maximum XRP supply remains at 100 billion
• No other countries adopt XRP
• No major events which remove market confidence in Ripple
If this is the case, Ripple’s market cap would be $1.884 trillion and each XRP coin would be worth $18.84c.
Scenario 2. Assume that in 2025:
• XRP ends up accounting for 5% of the world’s GDP (estimated $95 trillion)
• Again, all transactions are done using XRP, maximum supply remains the same and no catastrophic events remove market confidence in Ripple
If this is the case, Ripple’s market cap would be $4.75 trillion and each XRP coin would be worth $47.5.
Scenario 3. The beyond moon, beyond the Milky Way scenario. Assume that in 2050:
• XRP accounts for 50% of the world’s GDP (estimated $182 trillion)
• Again, all transactions are done using XRP, maximum supply remains the same and no catastrophic events remove market confidence in Ripple
If this is the case, Ripple’s market cap would be $18.2 trillion and each XRP coin would be worth $182.
Okay okay, I know these scenarios are wild. There might not even be a functional world economy if something catastrophic happens along the way. But it does give a good insight into the potential long term growth of XRP if (and it is a big if) banks agree to use the currency as their transaction medium.
Let's Bring It Back Down To Earth
A bright future for Ripple is not set in stone.
The main potential risks for investment in XRP that I see are:
• Banks decide not to implement blockchain technology for RTGS systems
• Banks implement Ripple’s transaction system, but decide not to use XRP
• Banks choose to create their own blockchain and transaction network
• Ripple’s current main competitor, SWIFT, develops new technology which has advantages over Ripple’s transaction network
• A significant negative event occurs which causes the market to lose confidence in Ripple
• Global economic or financial collapse
But what is this crypto life without risk anyway? If we can put aside the ideological belief that Ripple is a centralised ‘bankchain’ working with the enemy and focus purely on potential profit, there is clear value in a long term investment here. Revolutionising frictionless payments worldwide is no simple task, but so far, it seems Ripple is successfully starting to make an impact.
Long may the swell grow.
https://coinmarketcap.com/currencies/ripple/
https://ripple.com/
