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Steve Miller

Co-Founder at MPower365
Is a CFA® Charterholder and co-founder of MPower365.com. A site devoted to helping people integrate cryptoassets into their investment portfolios. The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

Visit the site to subscribe to the newsletter and stay up to date on his latest research into cryptoasset investing.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
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Is Ripple Investable?

Ripple explicitly rejects the general rationale for the creation of cryptocurrencies. Facilitating decentralized trustless interactions between people. Instead, seeking to enhance existing financial infrastructure.

As opposed to most other projects viewing themselves as revolutionary technologies that will upend the financial systems as we know it. Think Bitcoin, Ethereum, etc…

This makes Ripple a potentially interesting investment as a hedge in a portfolio of cryptocurrency investments. Because if cryptos don’t catch on. It could still have value as a participant in the traditional financial system.

Whereas if they do. It could always pivot and loosen up the restrictions on who and how transactions are conducted across its network. Deemphasizing the role regulated financial institutions play today.

What to look for

Three metrics provide a useful framework for evaluating Ripple’s adoption in the markets it’s looking to serve

  • What is the moving average daily transaction volume in USD of XRP?
  • What is the average fee for a Ripple transaction over time?
  • How much lower is the average fee for a Ripple transaction versus traditional         remittance payment channels over time?

Why These Metrics Are Important

The combination of these three metrics helps potential investors evaluate the pace of adoption in Ripple’s current focus on International transactions because:

The moving average daily transaction volume should be trending up over time as an indicator of its spreading adoption.

The average fee for a transaction should be coming down over time. Indicating scale and efficiency as it matures.

The average fee for a Ripple transactions needs to be lower than the incumbents to displace them. The percent its lower than the incumbents is important.

Because even if Ripple is able to lower its fees. If the incumbents react by lowering theirs sufficiently. It will erode Ripples competitive advantage and make their success versus incumbents less likely.

Why the Focus on Remittances

Incumbents appear to have moved forward with many domestic payment initiatives without integrating Ripple. Through a higher willingness to cannibalize existing revenues than would be naturally expected from traditionally conservative institutions.

For example in the US. The real time payments initiative. A consortium of 23 banks representing 90% of domestic wire transfers is launching shortly. With three member banks offering it to their customers to start.

Making a payment using the networks blockchain technology will result in a cost reduction of 80% – 90% versus traditional wire transfers. And the recipient will have access to the funds immediately versus the delays associated with traditional transfers.

Now there are still some advantages to traditional wire transfers versus real time payments. And to start you will only be able to make payments under $25,000 using the network.

While this may seem like a large sum of money. On a relative basis, in the institutional payments space, it is small.

The initiative does not include Ripple though. And domestic focused efforts in other countries like Japan appear to exclude them as well.

So Ripple appears to wisely be focusing on the more byzantine world of international payments, specifically remittances.

Which is ripe for disruption given the high fees charged by incumbents today.

Ripple’s Value Proposition

Ripple’s standard transaction fee is .00001 XRP. At the current valuation of 0.2604, as of 10/13/2017, this means the transaction fee is approximately 2bp. Which is highly competitive with the fees normally assessed for transactions in financial marketplaces.

For example fees assessed for remittances generally run between 800 – 1200 bp currently.

And in some ways I think imposing a small fee actually strengthens Ripple’s use case. As it serves as a small tax on legitimate transactions to deter illegitimate ones.

So while paying 2bp does not deter legitimate users from leveraging the network. It deters denial of services attacks and spam by making these activities unprofitable.

Because even a small transaction fee inhibits activities that need to occur at scale, like these, to be profitable.

Ripple’s Constraint

Ripple’s ledger only stores XRP transactions. So XRP’s value would appear to be directly tied to expanding the volume of transactions flowing through the ledger.

Any exchanges of XRP for fiat currencies. Results in a credit to the ledger and the ledger only shows the XRP side of the transaction.

Since Ripple appears to be focused on integrating with existing financial infrastructure. While the volume of transactions involving XRP maybe rising. The value of the network underpinning its value is rising at a much slower rate.

So as an investor you may not realize much in the way of gains from investing in XRP. Even if Ripple is successful in becoming a key piece of the international payments system.

The Supply Challenge

XRP is an instrument to facilitate transactions in Ripple’s network. So it remains uncapped to ensure additional supply can be released if needed to keep things flowing smoothly.

This is a negative from an investment perspective as it is not clear what the eventual issuance of XRP will be. And the need to support the utility of the transaction network will always supersede the priorities of token holders looking to earn a return.

Because the value of the token is not directly tied to the utility of the network. Incentives are not aligned between the token holders and project leaders. Like they are for capped utility tokens such as Sia and Golem.

For example as Ripple has continued to make inroads into payment networks over the last few months. Token’s in circulation has increased from 38,333,090,674 on 7/31/2017 to 38,600,451,446 as of 10/13/2017.
So while the value of the Ripple network has increased necessitating an increased supply of tokens in circulation. Token holders have not fully captured the increase in value as a consequence of the additional token issuance.

Combined with the challenges associated with one sided transactions on the Ripple ledger. Makes it non-investable from my perspective at this point.

For a more bullish counterpoint please see The Internet of Value is already operational and it is ‘Powered by Ripple.

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Steve Miller

Co-Founder at MPower365
Is a CFA® Charterholder and co-founder of MPower365.com. A site devoted to helping people integrate cryptoassets into their investment portfolios. The CFA designation is globally recognized and attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis.

Visit the site to subscribe to the newsletter and stay up to date on his latest research into cryptoasset investing.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

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