Ripple's XRP token has repeatedly ranked as one of the world's largest digital currencies by market capitalisation, holding the number-three spot at the time of report on 31 January 2018.
Similar to fiat currencies, digital currencies have their own unique price determinants. While variables like trade balances and economic growth affect the price of fiat currencies, analysts have pointed to other factors when explaining the price behaviour of digital assets.
The technology that underlies cryptocurrencies is complicated, and investors who wish to make well-informed decisions regarding these digital assets can benefit significantly from conducting their due diligence.
The Basics Of Ripple
Ripple provides a real-time global payment system that facilitates transactions across 27 different countries.
The traditional global payments infrastructure used by global financial institutions, including banks and payment processors, is fractured and contains many different payment systems across the world that are separate. This network's fractured nature results in various problems.
These include high expenses, long transaction times and substantial failure rates. Leveraging outdated payment systems present users with an estimated US$1.6 trillion in costs and result in transactions that require between three to five days to settle, according to data supplied by the Federal Reserve's Institute of International Finance and the World Bank.
These problems could potentially deter customers, as the high expenses of making cross-border transactions can be passed down to the end-user and the separated nature of existing networks could undermine effective data transfer. By creating a unified, global payment network known as RippleNet, the company's founders and managers are aiming to create a single solution that industry participants can use to make cross-border (and intra-country) transactions.
The company's corporate materials describes RippleNet as "a single, global network of banks that send and receive payments via Ripple's distributed financial technology -- providing real-time messaging, clearing and settlement of transactions." By leveraging RippleNet to make payments, users can execute transactions that settle in a matter of seconds, instead of the several days that cross-border transactions made through banks can require.
The Role Of XRP
XRP, the native token of the Ripple network, can be used to facilitate cross-border payments by providing liquidity. More specifically, it can function as a so-called "bridge currency" that allows financial institutions to transfer wealth.
By providing this liquidity, Ripple's XRP token can help reduce the costs of cross-border payments. Further, the presence of this token can help reduce the time associated with transfers and minimise settlement risk, which occurs when one participant in a transfer won't hold up its end of the deal.
Ripple Investment Basics
Investors interested in buying XRP can do so through several exchanges, including Kraken, Bitstamp and CoinOne. On these exchanges, investors can trade XRP against many different currencies, including:
At the time of report (31 January 2018), XRP currency pairs cannot be traded on Coinbase or GDAX, its exchange for professional investors.
Ripple's XRP tokens have generated some very impressive returns at times, surging more than 30,000% in 2017 alone and providing the largest gain of any digital currency that year.
As a result of this robust appreciation, XRP not only outperformed all other digital currencies in 2017, but also many other asset classes. For example, stocks had a strong year, with the benchmark The Standard & Poor's 500 Index rising more than 19% and the Dow Jones Industrial Average climbing 25%.
Investors should keep in mind that while XRP has generated some sharp price increases, it has suffered intense volatility, experiencing crashes that resulted in significant declines in value.
By roughly mid-month, the digital currency fell to less than US$0.90, marking a more than 75% decline from XRP's all-time high. Even then, XRP mounted a quick recovery, surging more than 90% in the space of 24 hours.
For anyone thinking about investing in XRP, having a strong sense of the digital currency's key price determinants can be very helpful. For example, when explaining why the digital currency approached US$4 in early 2018, analysts pointed to variables including rumors that Coinbase would soon list the XRP token and announcements of bank partnerships.
Rising Use Of XRP
One major trend that coincided with the sharp price gains that XRP enjoyed in 2017 is growing use. More specifically, the digital currency's value appreciated quite a bit during a year when the number of exchanges offering XRP trading increased from six to 50. During 2017, U.K. exchange CEX.IO, Singapore exchange Huobi.pro and Japanese exchange GM
OCoin all started listing the digital currency.
The fact that these organisations have added XRP trading helps illustrate the demand for the digital token, and this form of endorsement might help fuel demand for XRP. However, investors should keep in mind that just because these exchanges have listed the digital token, that does not necessarily mean that the cryptocurrency will draw significant trading volume.
Another signal of XRP's rising use is the financial institutions that announce partnerships with the company. The digital token climbed in January 2018 after Ripple announced a partnership with MoneyGram. At the time, MoneyGram, a money transfer company, revealed that it planned to use XRP in its payment flows.
Digital currencies are different from stocks and bonds in that they do not produce earnings or provide interest payments to their investors. As a result, they are far more difficult to value, and several analysts have pointed to the key role that speculation plays in determining price movements.
An example of this is rumours and the influence they can have on the global asset markets. There is an age-old saying that investors should buy the rumour and sell the news. An instance of how speculation can drive the price movements of the security (or in this case a digital asset like XRP) is the sharp price movements that were attributed to the rumours that Coinbase would allow investors to trade XRP.
The digital currency experienced notable price increases while market participants speculated that the exchange would add the token, but once Coinbase squashed these rumours, the cryptocurrency's price fell by as much as 20%.
It is worth noting that as cryptocurrencies experienced aggressive gains over the last few years, some voiced concerns that their price levels were the result of speculation. One market analyst cited this particular development when explaining the impressive upside that bitcoin was experiencing during the spring of 2017.
"Based on the data we've collected, we think speculation in the primary driver," Garrick Hileman, an academic who researches digital currency and the blockchain, said during an interview in May 2017.
Investors should keep in mind that while analysts have cited this strong sentiment as fueling compelling gains, market sentiment could just as easily change and start moving in the opposite direction, fueling notable losses.
Investor Interest in Cryptocurrencies
Another development that has coincided with the rise and fall of XRP is interest in the broader cryptocurrency market. While XRP surged in 2017, it was not alone, as the value of the digital currency market climbed more than 3,300%. During this time, the total market cap of all digital currencies rose from US$17.7 billion to more than US$613 billion. This market cap peaked at more than US$830 billion in early January 2018, at which point it had risen more than 4,500% compared to the price it had at the start of 2017.
Investors should keep in mind that while these digital currencies have at times drawn robust inflows, the capital markets can be very fickle. If cryptocurrency values start falling rapidly, it can trigger panic selling that causes more severe declines in value.
While many other asset classes—stocks, bonds and commodities—have been around for some time and had the opportunity to establish themselves, digital currencies have had a far shorter tenure.
The first units of bitcoin, the first digital currency to scale, were mined in January 2009, which allows for very little market history to work with.
As a result, investors can benefit from keeping in mind that digital currencies are relatively new, and market observers don't have as much history they can look at.
A Potential Asset Bubble
Several market observers have voiced concerns that the entire digital currency market may be in a bubble. Former hedge fund manager Mike Novogratz has taken a particularly aggressive stance, stating in late 2017: "This is a bubble and there is a lot of froth. This is going to be the biggest bubble of our lifetimes."
Some have compared the sharp appreciation in digital currency prices to the technology boom that stocks experienced in the 1990s, when investors were willing to put their money in to companies that were not yet generating revenue.
However, it has been noted that the tech boom of the 1990s was different because investors who bought stocks then were purchasing equity in companies, whereas buying digital tokens through sales called initial coin offerings (ICOs) certainly does not guarantee equity in a company.
If there is indeed a bubble in digital currencies, and this bubble bursts, it could fuel very sharp declines in the value of these assets. Investors can benefit significantly from keeping in mind that cryptocurrencies are relatively new and have not established the same amount of market history as other asset classes like stocks or bonds.
Ripple's XRP is a digital token that is used for transactions on RippleNet. The digital token has enjoyed some very strong appreciation at times, such as in 2017.
XRP, like other digital assets, has risen in value as the broader cryptocurrency market has experienced highly robust gains. However, no one knows how long this upward trend will last. Many analysts believe that digital currencies are in a bubble, and should this bubble burst, it could cause severe losses.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…