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:
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!