Speculation Surrounding XRP Over-Valuation Despite Over 25% Increase

XRP sky rocketed in value by around 30% yesterday before crashing back down to around the $0.22 mark – all within the space of a matter of hours.  Is the problem that XRP is already overvalued?

The sharp rise in value was seemingly driven by the widely reported news that Ripple has done deals with American Express and Santander to speed up cross-border payments between the U.S. and the U.K. through Ripple’s enterprise blockchain network, RippleNet.  Speculation based on the fact that Ripple announced that XRP, will “come into play” as a means of speeding up payments later on down the line seems to have supported the short lived rally.  On trading platform Etoro, no sooner had the price risen was there chatter on the forums about ‘shorting’ XRP.  Those who sold at the peak and then opened a sell contract yesterday would no doubt have been rubbing their hands.

XRP token and Ripple Payment Protocol are two different things it seems however that there is still a fair bit of confusion between XRP and Ripple.

Ripple itself is a global settlement network, enabling banks to transfer money and settle international payments in different currencies.  More banks appear to be partnering with Ripple and thus Ripple itself is becoming more valuable.

The XRP token / currency is different than Ripple protocol. XRP is a token or a native currency. It works under Ripple Transaction Protocol, and essentially acts to keep the Ripple network protected from DDOS attacks and prevents spam.  There’s a lot of debate as to whether it is a cryptocurrency at all, but more of a system.

Do banks really buy XRP as an investment?

As far as can be seen, banks do not buy, invest in or hold XRP.  They undoubtedly work with Ripple (the company) and make payments to them for use of the Ripple protocol, but the value of an XRP token and the Ripple company do not necessarily correlate.

So how much is XRP ‘worth’?

As with all cryptocurrencies (let’s call it a crypto just for ease), the value of XRP at any point in time is based heavily on speculation.  XRP however is being destroyed to cover transaction fees within the Ripple protocol. The default transaction fee is 10 drops (0.00001 XRP) although there are a few factors which can change this.

So to put another way, 100,000 transactions will = 1 XRP token being destroyed.  There are 100 billion XRP tokens ever ‘created’, and as you can see from the XRP ledger they’re being destroyed at a very slow rate, with less than 0.01% having been used so far.  Even with  banks on board and a much higher rate of 100,000 XRP destroyed per day, then in one year that’s 36,500,000 XRP destroyed.  Sounds like a lot, but over a year with 10 billion transactions per day that equates to just 0.0365%.  10 years… 0.365%.  100 years on and only 3.65% of the XRP tokens will have been destroyed… and that’s a long time in technology terms.  If these estimates prove to be accurate (or an overestimation) then it seems hard to see a situation where XRP tokens rise in value due to scarcity.

So why was there such a spike in value on November 16th 2017?  

News spread that ‘XRP, will “come into play” as a means of speeding up payments later on down the line’.  Although it seems that a lot of people do not understand that Ripple payment protocol and XRP are different, the mere fact that XRP will come in to play (how much so or when not being mentioned) seemed to buy even those who understand the differences.  When an entity such as Amex partners with the Ripple company, a lot of people people assume that the valuation of XRP should also increase.  However, XRP token’s valuation and Ripple company’s financial situation are in many ways irrelevant.

In general, some people seem willing to gamble on XRP increasing in value just because it appears ‘cheap’ compared to other cryptocurrencies.  Similar to thinking that rather have ten Indian Rupee than one English Pound, or ten Lloyds shares than one in Google – just because you own more ‘things’, it doesn’t appear good logic.

There are many other factors at play so it’s not particularly easy to say how much one XRP should be worth, but it’s also hard to see a clear reason for XRP vastly increasing in price at all based on the scarcity rationale.