NOTE: This post includes some forward-looking opinions on cryptocurrencies, which are entirely personal. This is NOT financial advice, but merely personal opinions, which are not to be relied on for any investment decisions. Please research to make your own observations and analysis or get professional advice before deciding to invest any money.
Cryptocurrencies are on the road to becoming mainstream. While there is still some way to go, the last quarter of 2017 saw significant layman interest into the cryptosphere, which can only be good for the overall ecosystem in the long run, the short-term overvaluations notwithstanding. 2018 could finally be the year when the crypto-car gets onto the highway, and this has to mean two things. One - the best businesses/ coins rise to greater heights. Two - the quick money ICOs without a real product go down as well. Growth in value is meaningless in an across-the-board heating up of valuations. When the dust settles, and the weak blockchain based businesses fall by the wayside, the real companies which are moving the needle will stand up and be counted. Do not be surprised if that happens in the second half of this year.
When Bitcoin first pioneered the space, the technology was a revelation. The concept of a distributed ledger recording immutable transactions was a real novelty and a datum shift in transaction governance. The fact that trust was automatic (due to decentralization) with a blockchain was a tremendous improvement on the existing systems where you had to trust a single central player to do right by you. Now, the space has evolved so much, that this core aspect of the tech is pretty much taken for granted. Therefore, in 2018 and going forward, the focus will be more on how efficiently scale-able the blockchains are for full, unhindered mainstream usage. The comparison will stop being with Bitcoin, but instead with the incumbent at-scale services like Visa, Facebook etc.
So, the blockchains which are really likely to succeed in 2018 will be the ones which:
- Are super fast and super scale-able
- Serve a real world utility with existing/ impending need
- Provide an efficient, low-fee framework to replace/strengthen the incumbent
Ripple (XRP) scores high on all the above parameters and is well primed for serious mainstream adoption. Let us take a deeper look.
What is Ripple (XRP)?
Ripple is a distributed ledger technology which can help settle cross-border payments. Current payment systems have not seen a disruption for many years due to high concentration of power and business within the system. Current system is based on large liquidity pools maintained by the really large banks, which the smaller banks pay a fee to dip into. Apart from being slow and super-inefficient, this is also a very expensive proposition. One, the smaller banks have to pay a fee to the larger ones for access to the liquidity. Two, the setup means there are huge cash piles which are not "productive", but lying dormant only to facilitate cross border payments. Ripple fundamentally changes this by providing the XRP cryptocurrency for the liquidity requirements and then facilitating super-fast, super-cheap transactions on their blockchain.
What's to like about Ripple?
- Like already mentioned above, Ripple has all the right ingredients to be a sustainable, better solution to current system in place
- Ripple is one of the few main cryptocurrencies that is working with existing system (and regulators) to improve it and not just aiming to create a parallel system. Many existing players (100+ banks) including leading American, Japanese and Indian banks have trialed Ripple for money transfers, and while there have not been definitive noises about larger scale adoption, all the signals are in the right direction
- In case there is a large scale migration from fiat to cryptocurrencies in the long term, Ripple with its huge XRP reserves is well served. If that does not happen and the current financial systems are not fully overhauled, Ripple can still be a major force as it can complement the current system as well. Many crypto enthusiasts have a huge problem with this, we will come to this in the next section.
What's not to like about Ripple?
- Main complaint many crypto believers have about Ripple is that it is not decentralized enough. The consensus in the distributed ledger is not built through fully decentralized means. The "validator nodes" (which in very simple terms maintain the consensus) are financial organizations themselves, which goes against the spirit of crypto for a sizeable section of the crypto community. A lot of people believe XRP should not even be considered a cryptocurrency and should not even be listed on coinmarketcap as it is a controllable, centralized currency.
- Over 60% of XRP coins are still with Ripple. While this can be a strength as well (for Ripple can put them to use both in ensuring liquidity for transfers as well as in investing to improve the Ripple ecosystem), it is seen as another centralized element to the Ripple story
- There are many controversy theories on the internet that Ripple is the Trojan horse that the regulators and all the powers (basically the villains in every average Joe's mind) are using to break the back of the crypto ecosystem. The theory goes something like this - Ripple will be pumped to the moon (crypto terminology for rapid increase in price of a coin/token) prompting investors to divert their crypto earnings from other currencies into Ripple and then one fine day, a crash would somehow be effected, wiping out a lot of crypto wealth and hopefully causing a debilitating blow to the crypto ecosystem. The war against transparency will be won by the bad guys. Does it sound far fetched? It probably is. But, I am just bringing to your attention this counter view. Decide for yourself.
Outlook
- While concerns from crypto-enthusiasts are to some extent valid, the scaremongering and doomsday predictions that are abound in the internet come across as a little shallow. The use of blockchain technology to bring about a significant improvement in payment transfers is a real opportunity, whether the blockchain is public, private or semi-private. Merely fighting every authority and always gunning to create alternate/parallel systems is impractical in my point of view. Ripple's approach to the whole payments problem comes across as pragmatic. And if a large scale move to cryptos from fiat indeed happens, Ripple is covered for that as well. It is sound business strategy to try to work with the regulators in today's reality while also equipping themselves for success in a crypto-only/ crypto-heavy world.
- Many Ripple critics claim that the benefits of this improvement in payment systems will be pocketed by the banks themselves (who are inevitably the villains and not to be trusted), I would disagree slightly. Most of the banks in the world have to actually pay a fee to the larger banks to keep up this system of transfers. Hypothetically, if this system is fully replaced by Ripple, there are only a handful of banks for whom it is a negative proposition. So, there will be a host of banks who are likely to be more than happy to adopt this system. Whether they pass the benefits on to customers depends on the market equilibrium. Unless each and every bank is in a single cartel (which they clearly are not, they are competing enterprises after all) the new equilibrium will definitely be found, with someone lowering the price of transfers and the rest following suit.
- Ripple has competition mainly from existing systems like SWIFT (which are objectively less well-equipped to compete with Ripple) and other blockchain based competition like Stellar, which is a darling of the crypto enthusiasts, for being all that Ripple is not. It is unclear that this is going to be a single player market, there of course could be place for more than one, but Ripple currently stands with a huge advantage of significant mainstream adoption and a huge war chest to deploy to further drive this advantage home.
Bottom line
XRP has a lot of things going for it, not the least of which is a real-word use case. It is scale-able, fast and wider adoption looks to be just around the corner. XRP has appreciated in price a lot, with the latest rally increasing the price by around 20x. In all traditional investments, it is reason enough to take a pause and see if there is an impending correction. That level of prudence might serve us well in this case as well. But in the medium to long term, all the current facts point towards a greater role for Ripple in the financial ecosystem and that can of course mean only one thing for the price. My prediction (again, not a financial advice, mind you ;)) is that within the year, we will see Ripple upstage Bitcoin as the coin with the largest market capitalization, driven by much greater adoption. And if that happens, your average transaction costs to move money around are going in only one direction. Down. Go figure!