Guest Contributor – Exponential Investor (United Kingdom) –
Ripple – one of the world’s biggest cryptos – has been in the lines this month, and for good reason.
Between 10 December and 4 January it shot up by over 1,500%. Gains like this are not uncommon in crypto, but they usually happen in smaller coins with very low market caps.
The difference this time was Ripple was already a top ten crypto with a market cap of around $9bn.
To think of it in stockmarket terms, that would put it at about 70th place in the FTSE 100.
Less than one month later it was up to $148.8bn – more than Lloyds and Barclays banks combined. That $148.8bn market cap would put it at 4th place on the FTSE 100, just above oil giant BP.
And this move happened, not over the course of decades, but in 25 days.
Think about that. Many people made 16 times their money betting on a “safe” crypto over the Christmas holidays.
With a move like that it’s easy to see why Ripple has been hitting so many lines.
So what’s going on, and should you invest?
In today’s essay, I’ll explain:
- What Ripple is
- Why Ripple gets so much hate from the crypto community
- What caused the move
- And why I’m not putting any of my own money into it.
Is Ripple even a real cryptocurrency?
Ripple is designed to be used by banks, not by ordinary people.
It’s supposed to be used to make settlements and cross-border payments faster and cheaper – for the banks.
Many people latch on to the idea that this will be the most widely adopted crypto by the biggest financial institutions in the world and thus, it must be a good investment.
The thing is, the banks don’t really use it in the same way as an ordinary investor does. In fact, they don’t currently use the native currency of Ripple (XRP) at all.
As reported by CoinDesk:
While XRP investors might be charmed by the thought of holding a cryptocurrency that one day a large swath of the banking system may use, the vast majority of Ripple’s banking clients are using the company’s xCurrent product – a glorified messaging platform…
xCurrent is the platform American Express is using. In mid-November, Amex announced that it had partnered with Ripple to connect Amex customers in the U.S. using U.S. dollars to Santander bank accounts in the U.K. using British pounds.
During the launch, Ripple’s global of strategic accounts, Marcus Treacher, told CoinDesk that Amex and Santander were connected directly with no need for an intermediary cryptocurrency.
Yet, the price of XRP rallied on that news, hitting a high, for the time, around $0.30 per coin.
In short: the product that Ripple investors are buying into isn’t really the product these banks are using.
But this isn’t even most people’s biggest beef with Ripple. The problem is, it’s not really a cryptocurrency at all.
Ripple is not for the people
Most of the older cryptocurrencies were created through mining. The supply is finite and once all the units are mined, that is all the units there will ever be.
This was done with the idea of stopping any one entity controlling too much of the supply and being able to manipulate the entire market.
Remember, bitcoin was built as a response to the bailouts of the crooked banks after the 2008 financial crisis.
Some of the more modern cryptos are not created by mining. They are created in one go and then distributed by either an initial coin offering (ICO) or airdropped to holders of other currencies. This ensures no one entity controls too much.
Ripple was created in one go, but it was not distributed very far. The founders decided to keep 61% of the total supply for themselves.
What you see on the exchanges is only a small portion of the total supply. If the founders wanted to dump their share and tank the price, they could. I don’t know why they would, but it’s a possibility.
This is why at Ripple’s peak on 4 January, the co-founder Chris Larsen had a reported net worth of $59.9bn. Which, according to Forbes’ rich list, would make him the 5th richest person on the planet, just above Facebook’s Mark Zuckerberg.
In response to growing concerns about the amount of Ripple that Ripple itself controlled, it announced it has locked up 55bn XRP in escrow, to be released at a steady rate every year.
Whether it could just decide to change the terms of that escrow agreement is up for debate.
Another reason people don’t consider Ripple to be a real crypto is that it’s a relatively closed chain. What this means is that in order to send it to other people, they have to “trust you” first. This is great for banks, but not so great for ordinary users.
It’s easy to see why, in a community founded on decentralisation and bringing down crooked corporations, Ripple isn’t very well liked.
What caused the huge run-up?
So, if it’s not very well liked, how come there’s so much money flowing into it?
“It’s the n00bs!” Or, in normal English, it’s the people new to investing in crypto.
Over New Year almost every “cheap” looking coin rocketed. The narrative that came out is:
- Throughout Christmas people heard about how much their friends had made in bitcoin.
- They wanted to make those huge gains too, but bitcoin looked very expensive.
- Psychologically it’s easier to imagine a $0.30 asset tripling in price than a $20,000 one.
- So, if cryptos really were the future and everything was going up, surely the cheaper ones would go up by more.
- So they bought up all the cheap ones in the top 100 on CoinMarketCap.
Of course, the imaginary investors in this scenario completely misunderstand how market cap affects price. But hey, these newbies are one-dimensional caricatures.
The cheap coins really did start going up and this led into the FOMO (fear of missing out) cycle, and led even more people to invest.
Then the more people that jumped in, the more people saw the mega gains and FOMOed in.
That’s the story that emerged of why Ripple and other cheap coins had such a run recently.
It also accounts for why they currently suffer the most at any market dip. The people holding them have “weak hands” because they don’t know enough about the technology to invest well and get spooked easily.
But hey, if you bought Ripple over Christmas and made 16 times your money, I guess you’re still laughing, even after the recent 50% drop.
It was the Koreans
The n00bs buying in is an engaging narrative. But it can’t really explain everything. I’m sure that it’s partially true. But most of the money actually came in from Korea.
The Koreans are captivated by cryptocurrency right now. Their crypto markets are huge and they run at a big premium to Western ones.
Just as an aside, that’s why CoinMarketCap decided to exclude Korean market data from its price calculations on Monday (and cause that dip, which turned out not to be a dip at all). They were skewing the prices too much.
Over the Christmas run South Korea accounted for over 50% of Ripple’s trading volume. As Crypto Crimson reported:
Considering that multiple partnerships were announced between SBI Ripple Asia (Softbank Investment Group) and Banks in South Korea, it is expected that the Ripple Network will be used by the banks to transfer and exchange payments starting late Q1 2018. News spreads fast in a country as small as South Korea – and the FOMO was too high, as per analysts.
Reports point out that South Korean Exchanges were accounting for over 50% of XRP transactions being made when it comes to daily trading volume.
As all the Korean trading raised Ripple’s price, it drew more and more people into buying it. The FOMO became too strong and it all snowballed.
So to sum up:
- Ripple isn’t a true cryptocurrency, as most people imagine them.
- But it is great for the banks, even though they aren’t actually using the XRP currency.
- Most people investing in it probably don’t know that much about it so they may have “weak hands”.
- This can lead to huge price crashes.
- But also huge bull runs.
Personally, I don’t want to invest in Ripple. There are similar, but less centralised cryptos out there (such as Stellar Lumens) which have the same advantages, but none of the disadvantages.
However, as it has the names of a lot of big banks attached to it, it will continue to make lines and continue to get a lot of money flowing into it as a result.
If you are investing in Ripple, I’d advise you to be wary.
If you are looking to make the kind of gains Ripple saw over New Year, but on a better cryptocurrency, you can find them by following my friend Sam Volkering’s advice.
The best place to start is with his book: Crypto Revolution. It contains everything you need to get started, and it will make you a much more informed crypto investor. You can get your copy here.
Until next time,
Editor, Exponential Investor
PS One of the wilder conspiracy theories being bandied around about the rise of Ripple deserves a mention. It is clearly fabricated, but it’s quite a fun theory. It goes like this:
The banks don’t like bitcoin. But they can’t shut it down. So they are buying into Ripple and making the price rocket with the hope this will lead other people to FOMO buy in.
When they have increased the market of Ripple way above bitcoin, they will sell it all and crash the price of all crypto beyond recovery. Then they will then buy up all the “good” cryptos on the cheap and control the market forevermore.
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