Why Ripple XRP is Overvalued

Ripple is a global settlement network which allows banks to transfer money and settle international payments in different currencies. As more banks use Ripple protocol, it is becoming more valuable.

Contrary to popular belief, XRP currency is different than the Ripple protocol. XRP is a token or a native currency that works under Ripple Transaction Protocol. XRP protects the Ripple network from DDOS attacks, and prevents spam.

Do Banks really invest in XRP?

Banks do not invest, buy or hold XRP tokens.

There are banks working with Ripple company, and they make payments to Ripple company per their use of the Ripple protocol.

Real Value of XRP

Certain amount of XRP is being destroyed to cover transaction fees. Currently, the default transaction fee is 10 drops (0.00001 XRP).

As an example, only 10 XRP tokens need to be destroyed if a bank needs to settle 1 million transactions in one year.

To have a better understanding of the real value of XRP, we need to know its destruction rate.

From the inception of XRP, only 0.00526% of all supply has been destroyed.

According to this chart, daily destruction rate fluctuates between 2k and 14k, and appears to average around 8k. As more banks start using Ripple protocol, we expect the destruction rate to gradually increase in the future.

The recent increase in the XRP destruction rate is mainly because of DDOS attacks and other factors caused by the volatility of XRP prices. After the XRP volatility goes down, the destruction rate will also be lower and less volatile.

Here is the estimated number of tokens to be destroyed in 100 years:

1st scenario (8k average daily destruction for 100 years): 100 x 8,000 x 365 = 292,000,000 (0.29% of total)
2nd scenario (100k average daily destruction for 100 years): 100 x 100,000 x 365 = 3,650,000,000 (3.65% of total)
Even if the 2nd scenario becomes reality, we will still need around 2740 years to consume all XRPs. Sadly, none of us will live that long, and it is very likely that technologies like Ripple network will be outdated and useless 1000 years from now.

In other words, it does not make any sense to invest in an asset with the assumption that it has a chance to become scarce 1000 years later.

According to these facts, XRP does not seem to be more valuable than an average Ethereum based asset on the market.

Considering that the average market cap of an Ethereum based asset is around 50 million USD, the real value of 1 XRP should not be more than 0.0005 USD.

Why Did XRP Skyrocketed?

To summarize:

Majority of people do not understand that Ripple payment protocol and XRP are different. When a private investor invests in Ripple company, people assume that the valuation of XRP should also increase. However, XRP token's valuation and Ripple company's financial situation are irrelevant.

Due to the fact that there are 100 billion XRPs created, the XRP price is low compared to other cryptocurrencies. As a result, new people who invest in cryptocurrencies ignore the market cap, and they think that XRP is very cheap and should go way higher.

As Ripple company holds 62% percent of all XRPs, the amount of XRPs in circulation is significantly low.

Since XRP price increased to unexpected levels, those who shorted XRP got liquidated and had to buy back from higher prices. These short squeezes caused the price move even higher.

With the price increase, the volume also increased to astronomical levels. Some prominent exchange sites in different countries (such as Coinone from South Korea) began to list XRP.

I hope this article will be helpful.