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A Little Altcoin Sanity: Ripple
We’ve done the basics: Litecoin, Dogecoin, Namecoin, Peercoin. It’s time to move on into some of the higher market capitalization coins that are demonstrably different from Bitcoin.
Ripple (and NXT… which will be our… next… topic) is profoundly different. So different, in fact, that calling it an altcoin might be very misleading. Why? Well, I think the coin specs will tell you, in short order:
– Developed by OpenCoin
– Centralized distribution and creation, with OpenCoin & co. retaining ~50% (!) of all XRP
– Decentralized ledger-keeping
– Website
– Primer
If you find XRP (ripples) interesting after reading this analysis, I highly suggest reading through their primer. Regardless of my views on XRP, the cryptocurrency that exists within the network, as an investment, the Ripple network itself has significant and interesting utility. XRP itself has value within the network in three ways:
1. As a necessary reserve for using the network. Users must own 50 XRP (~0.0005 BTC at current).
2. As a scarce and disappearing resource (the network permanently destroys Ripple at a very slow rate).
3. As a potentially lowest-friction method of exchange between nearly any two assets being exchanged within the network.
The question to ask as an investor, though, is simple: Are these sources of value worth the negative aspects of XRP? Well, let’s begin by evaluating those.
Distribution is the big one that comes to many people’s minds. Broken down:
1. 50% of all XRP is being, or has been, given away by OpenCoin to various people to promote adoption. Charities, interested businesses, market makers, community members. The list goes on. Your first inclination might be to write these owners off as not being different from the owners of any other cryptocurrency. I’d argue you’re VERY wrong on that note. Why? These “investors” aren’t INVESTED. They have no cost basis; no stake outside of that freely given them. I’d argue this is likely to make them more skittish than other investors.
2. 20% of all XRP was kept by the company’s founders — 9% to Jed McCaleb, 11% between Chris and Arthur (in some distribution). Jed announced in late May that he would be selling his large stake, crashing the price by a little more than 50% quite quickly. It has recovered somewhat since then. Why is this important? Because it’s important to keep in mind the risks of centralized ownership — Jed was (and is) mostly severing ties with Ripple Labs, and as a result, investors lost out significantly. He still has quite a great many XRP to sell off, as well — ~5.5BN more (~4,000 BTC at current prices!).
3. 30% of all XRP is kept by OpenCoin, which plans to hold onto it while it increases in value, although it plans on cashing out its holdings over time — to pay back investors, keep the company profitable, etc, etc.
Past distribution, there’s the issue of “that’s not like bitcoin.” A significant quantity of BTCTalk posters hate on XRP because of its centralized creation and distribution. Pretty much everyone who invests in altcoins is a Bitcoin-believer, and one of the great things about Bitcoin is the distribution process — mining. XRP did things very differently, and the difference is problematic to many potential investors.
Net conclusion of all this? In my view, XRP is not worth an investor’s resources. It suffers from:
1. Intense price uncertainty due to massively centralized holdings and skittish small owners.
2. Intense dislike by many of the most vocal and radical members of its parent community.
Those two combine for a high-risk, low-reward asset. High-risk is relative to other altcoins — I view it as MORE volatile than many others (subject to market capitalization considerations, and so on). Low-reward is also relative to other altcoins; due to the known impending sales (OpenCoin, Jed McCaleb), the profit cap is certain to be lower than for other coins.
Up next, another currency with centralized distribution — NXT — albeit a centralized distribution done much more elegantly than XRP’s attempt.
Thanks for reading!
DISCLAIMER: The content of this article is not intended to constitute professional investment advice, or a recommendation to buy, sell, or otherwise interact with any security or investment product. The author may have a material relationship with assets mentioned in this article, and while he attempts to remain objective, appropriate caution should be taken by readers when considering making any investment in assets mentioned or discussed above. Cryptocurrencies are an extremely volatile marketplace in which even experienced investors should take great caution.
Thank you, Ben, for your cliear insight and “a little bit of sanity”. You certainly have a handle on this matter and it seems you have insight into what makes one altcoin “stronger” than another within the cryptocurrency industry.
I certainly hope to read more from you.
Ripple Labs is the name of the organization shepherding the Ripple network…not Open Coin. Such a glaring error calls into question the legitimacy of other aspects of your piece. This includes the statement that RIPPLE LABS is retaining 50% of the XRP. Unless by 50% you mean 20%. You seemed to miss the part about it being a decentralized currency exchange that handles ALL units of value, be it crypto, fiat, commodity, et al. Smart contracts? MIT’s 2014 Smartest Company? 3 second transaction time (that not even NXT or Etherum come close to). Seeded by Google? Star-studded Advisory Board? Went from 5 to 65 employees in months? Prominently mentioned by VP of Federal Reserve (Andolfatto)? Not susceptible to 51%, malleability, DoS, etc attacks? Is used by not just a bank, but 5 Wall Street firms? The functional role of XRP as a bridge currency or to prevent ledger spam?
Sorry, Ben, but this is a pretty bad article. You have done a poor job researching the subject matter.
In general, a good brief summary of XRP, but other than your three points about how XRP has value in the network, your analysis is almost entirely about its potential to be a worthwhile place to invest/convert one’s fiat.
I’ve heard much intense dislike from bitcoiners, but if I ask them a few questions, this is often quickly responded to with a “well actually I don’t know much about Ripple, but it still sucks and I still hate it” … something along the line from Highlander “There can be only one!”
Bitcoin mirrors Fiat in a number of ways, and one big one is fulfilling the functions of being a store of value AND a medium of exchange. It doesn’t have to be that way, and in fact all the previous-generation alternative and community currencies sought to separate these two functions of money.
Ripple and XRP comes from this rich history, quite unlike Bitcoin which had almost no connection to what has been going on the past 30+ years in the field. XRP has value, but primarily exchange value. So while it may not be worth investing in, it certainly has worth in circulating, which is quite the opposite of Bitcoin where most people are buying and holding, rather than circulating. This is what makes Ripple worth investing in, for its ability to move. Bitcoin is much more of a cryptocommodity than a cryptocurrency, isn’t it?
I also think it’s funny when Bitcoiners talk about how Ripple is centralized, when in fact at least two mining pools possess more than 20% share of the mining. This is more centralized than Ripple, where each shared ledger holds an equal amount of transaction-processing power, while at the same time using way far less energy to accomplish the same task, moving a balance from one account to another.
I recommend crypto-currency enthusiasts read up on what’s been going on since 1980 with Mutual Credit, Time Banks, WIR, JAK, Bristol and Brixton Pounds, Commercial Barter and other interesting and successful currency systems, and since the 1930s with alternative currencies in general.
If you cannot even get the name of the company that is shepherding the Ripple network correct, then it is clear that you did very little research on the subject.
Furthermore, deleting comments that you do not like shows an entirely different kind of bias…one that will keep me from reading articles from this site again.