How to understand ripple and how to evaluate ripple

Editor’s Comment: Given the actual and alleged crackdown on bitcoins by South Korea and China, as well as the vast world of cryptocurrency, several other “assets” like Ripple are popping the imagination. Ripple is often treated synonymously with the former and has a different structure that makes it easier to view as a “store of value”. A general lack of awareness of this crypto asset suggests the general frenzy of our time. Here’s how you rate Ripple.

Isaac Newton once said that he could calculate the motion of heavenly bodies, but not the madness of humans. It is believed that Newton lost almost all of his fortune during the South Seas Bubble in the spring of 1720. Nothing embodies this more than the frenzy we are currently experiencing in the cryptocurrency space. In the past few weeks, crypto enthusiasts have turned their attention away from Bitcoin to “cheaper” assets like Ripple, Stellar, and Tron.

First of all, Ripple is nothing more than Bitcoin. Anyone who thinks they are jumping into the next bitcoin when buying Ripple is very wrong. Ripple is not a cryptocurrency, but a technology service provider that should ideally be listed on NASDAQ. Another aspect that enthusiasts often forget is in many ways: Ripple isn’t really decentralized and has strong control over its internal mechanisms.

Ripple uses a novel consensus algorithm to validate transactions. Computers must identify themselves and obtain permission to participate in the currency’s network. This is in stark contrast to Bitcoin, where any computer is allowed to join without authentication.

In contrast to Bitcoin, which is based on a network of “miners” who execute codes, validate the transactions and keep the currency safe – Ripple’s setup doesn’t have miners. All 100 billion existing Ripple Issued Currency (XRP) coins were created when the network launched in 2012. The developers kept $ 20 billion and gave the rest to the company.

Since then, Ripple has “methodically” distributed tokens to customers and still holds 50 billion in an escrow account. To ensure long-term stability, Ripple announced the structured sale and use of its currency. This ensures that Investors have a sense of what to expect and can be sure that there is no supply shock that leads to price capitulation.

Traders and investors should focus on Ripple’s market cap. One question to ask yourself when buying Ripple is whether the prevailing market capitalization is rational and presupposes the most optimistic potential scenarios for the future.

Ripple has an end-use scenario that gives us a basic framework for evaluating it. It is said to be a “bridge currency” that many financial institutions use to process cross-border payments faster and cheaper compared to global payment networks. Bitcoin could be used with the same effect, but Ripple can process a thousand transactions per second with much lower transaction costs compared to Bitcoin’s seven.

This is Ripple’s ‘secret sauce’ and the reason management believes the currency’s true value is much higher. The company claims that more than 100 financial institutions are using its technology. However, it remains to be seen how seriously major banks and financial institutions take Ripple as a currency for themselves.

Now let’s try a quick rundown of the envelope rating for Ripple.

Suppose the global daily foreign exchange volume is $ 5 trillion.

For example, let’s say Ripple has a 10% market share, hovering around $ 500 billion a day, using the XRP network for large banks and financial institutions.

Considering that 0.1% of the above fictitious total can be counted as revenue, the revenue is $ 500 million per day. That’s $ 15 billion a month and $ 180 billion a year.

Assuming no cost and using a simple (and generous) forward revenue-based multiple of 2, Ripple can be valued at $ 360 billion.

At Ripple’s current price of $ 2, its market cap is $ 80 billion. Using the above framework (and the reader can play around with the numbers to get their own fair value) one can get a target price of over $ 8, which implies a 4x return.

Build your own models and frameworks before buying Ripple. Don’t buy it as it sells for $ 2 per unit. Remember, there is a difference between price and value.

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