Disclaimer: Novice Crytpo posts will be the resting place of my thoughts on various blockchain based technologies at a certain point in time. My thoughts should not dictate your actions or be perceived as investment advice, conduct your own research and perhaps return to this post which provides an opportunity for the community to comment and correct any misconceptions I may have.
A few months ago a friend introduced me to Ripple in the context of an Australian bank finalising its key decision, Ripple or Ethereum for international payments going forward? I got curious and ultimately added both ETH and XRP to my investment portfolio.
However, the same nagging concern plagues my mind now as it did while purchasing my XRP. Hype aside, what is XRP's true value? Subsequently please find my musings below as I start to ponder selling my XRP...
In my view, the key factors which can create value in XRP:
- We all agree that its worth something / it represents a stored value (ie. Bitcoin)
- It has a utility purpose such as NEO which generates GAS which is 'fuel' required to transact on the NEO network (ie. dividend)
- It's the required form of payment for a particular product or service with a limited supply (ie. supply vs demand)
So what is Ripples story?
Ripple has done an admirable job of winning over banks and companies which transact high volumes of international payments. But most of these customers already have agreed currency and international exchange frameworks for cross border transactions and Ripple simply provides a technology which enables them to keep using the same frameworks without any need to store value (temporarily or otherwise) in XRP or another currency. For Ripple's customers, it's a logical efficiency enhancement for international payments - faster and cheaper.
To elaborate, most of Ripples customers are simply leveraging the embedded 'smart contract' (an IOU) functionality to process transactions that in no way require value to be stored in XRP. Besides, why would we assume an intermediate currency used by Ripple customers would be XRP anyway? In fact, Ripple's underlying architecture is tasked with finding the cheapest possible route between the two parties and XRP was only ever offered up by Ripple as an option where two parties don't have an alternative or where XRP offered a cheaper path. Aside from that, XRP is only required as the means of 'payment' for transacting on the Ripple network. - finally, transaction fees offer some tangible value!
So if we move past the belief that XRP's (which is not a share in Ripple Labs) growth is tied to that of Ripple Labs the technology company, let's consider the likely scarcity of XRP over time.
As the overall supply of XRP will depreciate over time at a rate of .00001 XRP per transaction, let's see how long it might take Ripples existing customers to run out of XRP if we play the optimistic investor:
- Assuming that Ripple overtakes the incumbent SWIFT who currently handle more than 15 million transactions per day, 150 XRP would be 'used and destroyed' by Ripple customers each day.
- Extrapolated out to a full year, that's 54,750 or 0.00005475% of the total 100 billion supply.
This means that even if Ripple customers process 10 times the current volume of SWIFT were not looking at a significant change in XRP's scarcity. How patient might we be and why would we believe that Ripple is going to reach and then maintain a dominating position in international payments industry 20 years into the future?
Sadly it gets worse! Ripple Labs directly holds more than 60% of all XRP and have only promised to lock away 88% of that in smart contracts for 'at least 4.5 years' (to Ripple Labs not the market). Additionally, most of Ripples existing customers have already acquired a lifetime supply of XRP.
We seem to find more questions than answers when it comes to where XRP's value is going to come from as the risky picture of Ripple Labs holding a virtual 'anvil' over the price of XRP in the free market becomes clear. Is this just speculation? Sure, but keep in mind that Ripple Labs success is dependent on low transaction costs so it should be conceivable that Ripple Labs would use their holdings to deliberately reduce the value of XRP in the future!
Back to the optimism, let's assume Ripple Labs don't dump their XRP into the market (ie. ever) and sign-up plenty of customers. In this case, we could hope for around .0001825% appreciation in XRP's value per year assuming a transaction rate in line with SWIFT's current volume...
So again, looking at XRP as an investment, do we think the market will continue to value XRP on hype alone or will it come to realise these realities? Or perhaps we simply 'speculate' that the market decides XRP has a stored value in the same way we all agree Bitcoin has a stored value? if so, how long will it be before Ripple Labs deflate the price of XRP by selling their holdings in order to maintain a competitive transaction cost?
For me, even if XRP manages to win more transaction volume than SWIFT, by the numbers, the only thing that could perceivably make a dent in the XRP supply would be micro transactions/payments on 'IoT' devices. But can we really see that kind of mass market adoption for micro-payments and connected light bulbs within the next 10 - 20 years? And again, Ripple Labs would likely step in and lower XRP's value to maintain compeditive transaction costs.
If you currently hold XRP as I do, you may also be wondering when to hit the XRP eject button?
Firstly, lets not overlook the irony of the recent backlash in XRP's price following Ripples latest Swell conference. It would seem that the XRP price dropped in protest to Ripples negative commentary regarding Bitcoin. In reality, XRP probably should have crashed into obscurity given the realities noted here! - thankfully for those of us still holding XRP it didn't.
In a room full of Ripples customers who have long called Bitcoin a ponzie scheme, Ripple told the customer what they wanted to hear and got slammed for all the wrong reasons. - That's like jumping at shadows while the boggie man creeps up from behind...
The exit: Historically, it seems that when BTC sets new all time highs, ETH and XRP rise on the flip side when BTC holders move back into the perceived 'safe' alt coins such as XRP and ETH in the hope of profits. My fingers are crossed that that we see this pattern again which could provide many of us with an opportunity to avoid taking a loss. Otherwise, we may well become long term holders of some extremely overpriced XRP, occasionally flicking through the back pages of coin market cap in the hope of a plesent surprise.
Further Reading:
Ultimately I found myself in full agreement with Piotr's assessment on coindesk:
However, because of the high flexibility and value propositions of the IOUs on the Ripple network, they are XRP's main competitor in its home court. While XRPs are still needed to pay the network fees, most of the remaining value prepositions can be seen as overstated.The recent rise in the price of XRPs appears to be largely relying on market speculation (as is the case for all crypto) and a new exchange coming on the market.
Ripples Stated Purpose for XRP:
Why does Ripple utilize XRP holdings?
Ripple XRP holdings incentivise the company to make Ripple as useful as possible. XRP exists as a native asset on Ripple for anti-spam transaction purposes, and for currency bridging only if beneficial to users. Otherwise, the use of XRP in transactions is completely optional.
- Ripple on transaction costs: https://ripple.com/build/transaction-cost/
- Ripple on the use of XRP: https://ripple.com/technical-faq-xrp-ledger/
- Coindesk on Ripple 'locking up' their XRP: https://www.coindesk.com/ripple-pledges-lock-14-billion-xrp-cryptocurrency/
- Coindesk on XRP's real value: https://www.coindesk.com/counterargument-value-proposition-ripples-xrp-token/
Please comment, like and contribute. I'm more than happy to have my logic tested, to learn and to grow. Let's help each other lift the skirts on the hype and pick the winners in a blockchain future!