Goodbye to Ripple

Additional Note: within a couple of hours of posting this article to the Reddit/Ripple forum, i was banned without warning or reason given. It's worth noting a few things:

1) over the course of the last several months, i have seen literally tens of thousands of referrals from the same subreddit to my blog - particularly my initial analysis. though i knew it might upset some people (and i swear, i take no joy in receiving angry messages), i felt an obligation to share my updated views on the forums where my previous work had gotten the most attention.

2) It has been about a week now, and despite thousands of reads (and public calls to those 'smartest people in the room' on ripple, there have been no meaningful refutations, rebuttals, or even serious questionings of the piece below. just ad hominem attacks, expressions of faith and hope that ripple will be successful (without addressing why a higher price for the XRP coin is necessary for that).

4) That Reddit banned me as they did makes it clear that the Ripple subreddit should not be relied upon as an unbiased source of information. if all they will generally allow are posts and opinions that support the bull case, then it is no different from a 'pump piece' or cheerleading section. Immediately before I was banned, my post was aggressively downvoted (which removes it from the feed for most readers). Investors and speculators alike should beware.

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Goodbye to Ripple
Summary
  • I feel the need to ‘set the record straight’ on my current Ripple views – especially as I see others use my original analysis in unsavory ‘Pump Pieces’ 
  • I no longer think my original analysis should be used to value Ripple. With what I know now, I see my initial ‘valuation’ of ~$0.83 per coin as far too high. I now replace this with a per-coin value of ~$0.05 
  • What have changed are my perceptions of the possibility of Ripple being used as ‘money’, required inventory hold rates, and penetration of the market in the face of a competitive response.
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When I was first becoming acquainted with blockchain and altcoins I thought that Ripple was the 'right horse to bet on'.  It was exciting to me to find a new area in the (potential investment) world where I could use the analytical tools in my kit, and bring some clarity to the situation.
With what I knew then, I did what was intended as a thoughtful analysis, focusing on its potential utility for international money transfers - while holding out hope that it might somehow carry the mantle of the 'greater crypto' world.
I realize now that I was wrong. 

I had an inkling of it a few months ago, which is why despite having mostly moved on (and largely lost interest in ripple) I still felt obliged to share some updated thoughts on it, which it was my hope, would point out some issues to a genuinely interested (and skeptical reader). 

But instead of people focusing on my update and asking more questions, I find that people are still linking to my original analysis, and even referencing it in pump-pieces that belittle and misrepresent my work (P.S. Taking credit for a type of analysis after you have read it from someone else makes you a plagiarist. Never mind that the particular ‘author’ I’m addressing – who has not responded to my polite request to change his posting - still managed to wreck the material.)    

So despite being relatively bored with XRP, and having since moved on to an in-depth and exhaustive Bitcoin piece of which I'm very proud (which will soon have a significant update, especially as it pertains to Monero) I find myself coming back to XRP to attempt to set the record straight on where I currently stand on it.

 I currently believe that XRP is a losing proposition for three broad reasons.

1)    XRP misses the 'bigger point' of cryptos at large

*NOTE* - this is not an issue I outlined in my earlier piece - nor is it an expressed purpose of RIpple. I mention it here because I believe there are still significant numbers of people who ascribe some value to ripple in the hopes that this may still yet 'come to pass'. I wish to disavow people of this notion. If this hurts your sensibilities, then by all means, skip to the next section.

While it has payment processing time benefits (for now) this comes at a significant cost. The supply and system is ultimately in the hands of the company, who despite their claims of libertarian principles, instead in action aspire to work with the very banks and bankers who have facilitated the unsound money world we live in today. As such, any hopes for XRP to eventually be considered ‘money’ in its own right – that is, have a value beyond functional utility – are unrealistic and out of accord with the most encompassing aspects of blockchain. (To be fair, I didn't really attribute any of RIpple's value to this in the prior analysis, but I felt it worthwhile to address here).

This then brings us to its value as a means to facilitate cross-border transactions.
  

2)    My ‘Functional Utility’ analysis – and the example I originally gave is far too optimistic – to the point at this stage of being flat out wrong.
But first – a quick note on non-cross border transactions. Some people claimed that my original analysis was too conservative because I only focused on cross-border transactions. They claim that if you include intra-country transactions, the upside is much greater.
This argument is without merit.

The reason cross-border transactions have been targeted by Ripple (and why I exclusively focused on them in my analysis) is because they, not intra-country transfers, are the ones that operate within a currently massively over-complicated, overpriced system. It is for this reason that Ripple ever has had a chance of establishing a foothold on an economic basis through technological disruption. 
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The first correction I make here related to my estimation of what % of all the ‘float’ traders would need to hold in order to accommodate all the transactions. I had originally estimated 35%. But I now see that as far too high.

Most B2B international transactions do not need instant transfer or confirmation. 6, 12 or even 24 hour confirmations for most businesses would be most of what’s required – so long as the costs came down as well. As such, most transactions could be done in batches, and therefore netted – meaning that on average, far less Ripple would need to be held to effect the transactions: only that which is necessary to accommodate the amounts that exceed the ‘nettings’. As such, I would reduce my 35% by 2/3 to ~12%. This of course brings my valuation down by 2/3… but there’s more.

The second correction I make here related to Adoption rates. I alluded in my Update to the fact that I thought Adoption rates were the big risks – but again, this hasn’t gotten the attention – so I focus on that here.

The main competitor to Ripple in foreign interbank transfers is the SWIFT organization and system. (In hindsight, I should have spent far more time on the competitive response than I did in the original report). Not only is SWIFT the incumbent for a notoriously reluctant-to-change customer base, but they are launching their ‘response’ to the business-threat of Ripple (and crypto in general) with their ‘GPI’. 


Their GPI claims to lower fees and transaction times, while increasing transparency. I don’t know much more about it than that. But frankly, I don’t think I need to know more about it, and here’s why: it’s probably enough.

Even if GPI falls short of Ripple in technology, speed, etc… it’s still a far easier choice for a bank to stay with SWIFT and give them time/space to upgrade their systems… so long as they are getting a discount to historical rates.

Can SWIFT build a system that can come close to Ripple? That’s an excellent question – so let’s think about it.

Ripple is open-source. This means that much if not all of the code is freely-available. What’s to stop SWIFT from cherry-picking the bits they like, and launching their own ‘version’ to effect similar outcomes? All this while giving their clients the peace-of-mind that the fallback old system still works in case of emergency.

Well, one thing to stop SWIFT from successfully launching a good competing product (that is just enough to keep their clients from switching) is money. How much money are they willing to spend on it? 

Well, considering that if they did nothing, their entire business is at risk, it seems like it should be a high priority. Do you think they could re-create a Ripple competitive system (leveraging the open-source nature of the tech) in 1-2 years if they spent $50 million? How about $1 billion? 

Considering that even a $1 billion investment could potentially protect for them what is a multi-billion annual profit engine, the economic motivation to try is a no-brainer (and the funding probably already available).

I do not see any reason to believe that Ripple has significantly accelerated its very early success in getting banks to use their system. If anything, there are many reasons to believe that their penetration prospects are far worse than even a few months ago – particularly as bigger banks develop their own systems (surely JP Morgan can do the same thing with ETH), and smaller banks sit-on-their-hands waiting to see where the technology goes before they stick their necks out. As such, the notion of Ripple getting 30% of the global market in 3 years should in my view be replaced with the prospect of a 5% market share.
So my ‘present value’ per coin number of $0.83 should first be divided by 3 (as per my comment above) and then again divided by 6 - making it worth today ~$0.05: or more than 75% lower than current price.

Alternatively, you might be saying to yourself... what is SWIFT simply bought Ripple? This way they could get all their technology in one fell swoop! Well, that’s all well and good, but the cost of doing so at current prices would be many billions of dollars paid to the Ripple consortium. Why do that, when you can just re-create your own system for much less? If the price of XRP crashes significantly, then maybe it would be worthwhile for SWIFT to buy Ripple – but of course that would be at drastically lower prices.

To Ripple supporters, I would just like to say, none of this is personal – and hey, maybe I’m flat out wrong about my current perspective. Time will tell, and as always I welcome constructive feedback. If presented with new information, I will of course reassess. But especially as I saw people using my earlier work (which is no longer representative of how I feel) in ‘pump’ pieces, I felt the obligation to set the record straight now.

 
Izzy

P.S. made it this far? thanks for reading! Why not go just a little further and check out my postscript to this article? There's a good example in there which I came up that has some numbers which i think adds some real value to understanding. Cheers



Comments

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  2. Very interesting points. I always disliked Ripple and learning about the Swift GPI just now is just icing on the cake.

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  3. lol. hahaha. you made me laugh so hard :D Swift GPI is 6 years away from being tested. enjoy waiting if you cant even wait for ripple to get implemented :D

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  4. The Ripple network & Ripple XRP coin are two completely different things from each other.

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  6. Quite funny reading this now when price just surged to 0.80 :)

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  7. haha yes, it hit $.89, whoops!

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  8. haha yes, it hit $.89, whoops!

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    This second post seems more emotional than the first one. It seems a little less analytical to me. Banks live in a sheltered world protected by regulations designed to protect consumers. They're about to witness something aimed directly at the weakness created by their control, and that is speed, transparency, and reliability.

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