One Does Not Equal the Others
Ripple: An effective hedge for cryptoasset investors portfolios
Ripple explicitly rejects the general rationale for the creation of cryptocurrencies. Facilitating decentralized trustless interactions between people. Instead, seeking to enhance existing financial infrastructure with its permissioned transaction network.
As opposed to most other projects which view themselves as revolutionary permissionless technologies that will upend the financial systems as we know it. Think Bitcoin, Ethereum, etc…
This makes the token, XRP, created to make Ripple’s payment system work more smoothly a potentially interesting investment as a hedge in a portfolio of cryptocurrency investments. If crypto adoption falters it could still have value as a participant in the traditional financial system.
Whereas if the cryptosphere continues its current trajectory. It could always pivot and loosen up the restrictions on who and how transactions are conducted across its network. De-emphasizing the role regulated financial institutions play today.
What to look for
Three metrics provide a useful framework for evaluating XRP’s adoption in the markets Ripple is looking to serve
- What is the moving average daily transaction volume in USD of XRP?
- What is the average fee for a Ripple transaction over time?
- How much lower is the average fee for a Ripple transaction versus traditional remittance payment channels over time?
Why These Metrics Are Important
The combination of these three metrics helps investors evaluate the pace of adoption in Ripple’s current focus on International transactions because:
- The moving average daily transaction volume should be trending up over time as an indicator of its spreading adoption.
- The average fee for a transaction should be coming down over time. Indicating scale and efficiency as it matures.
- The average fee for a Ripple transactions needs to be lower than the incumbents to displace them. The percent its lower than the incumbents is important.
- Presuming Ripple is able to lower its fees. If the incumbents react by lowering theirs. It erodes Ripples competitive advantage and lowers their chances for success.
Why the Focus on Remittances?
Incumbents have moved forward with domestic payment initiatives without integrating Ripple. Demonstrating an unexpected willingness to cannibalize existing revenues.
For example, in the US, the real time payments initiative. A consortium of 23 banks representing 90% of domestic wire transfers incorporating similar concepts as Ripple to lower transaction costs for payments.
Making a payment using the networks blockchain technology will result in a cost reduction of 80% – 90% versus traditional wire transfers. Plus, recipients will have access to the funds immediately versus the delays associated with traditional transfers.
Now there are still some advantages to traditional wire transfers versus real time payments. To start you are only able to make payments under $25,000 using the network.
While this may seem like a large sum of money. On a relative basis, in the institutional payments space, it is small.
The initiative does not include Ripple though. Domestic focused efforts in other countries like Japan appear to exclude them as well.
Ripple appears to wisely be focusing on the more byzantine world of international payments, specifically remittances.
Which is ripe for disruption given the high fees charged by incumbents today.
Ripple’s Value Proposition
Ripple’s standard transaction fee is .00001 XRP. At the current valuation of 1.09, as of 4/23/2021, this means the transaction fee is approximately 8bp. Which is highly competitive with the fees normally assessed for international transfer payments.
For example fees assessed for remittances generally run between 800 – 1200 bp currently.
Imposing a small fee strengthens Ripple’s use case, serving as a small tax on legitimate transactions. A small fee does not deter authorized users from leveraging the network.
It does deter denial of services attacks and spam by making these activities unprofitable. Incorporating a fee inhibits activities that need to occur at scale, like these, to be profitable.
Steve Miller
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