/ Ecosystem

Are You Ready For Something Strange?

Hodor

Hodor

I blog about Ripple & XRP. FULL DISCLOSURE: All views are my own. I do not work for Ripple; I am not a professional financial analyst, and the majority of my crypto holdings are XRP.

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Have you seen the popular Netflix series "Stranger Things" with Winona Ryder? 1

I discovered Stranger Things during the quiet summer of 2016, back before the Great Crypto Explosion of 2017.  It was almost random - I don't usually click on the content that Netflix promotes, but something about this one caught my eye.  Not that I remember exactly, but perhaps I'd just completed some other series and was looking to try out something new.

I'm a "binge watcher" of Netflix shows.  Once I discover one that I like, I stranger_things_winonausually watch all of the episodes within a week or so, sometimes watching up to three at a time (depending on the weather outside).

This particular series made me nostalgic for the 80's and 90's, when phones were usually connected to a wall outlet.

Things That Don't Make Sense

Stranger Things is obviously fictional, but it demonstrates a story line where the characters are thrust into situations that have no precedent; a girl with telekinetic powers that escapes from a military research facility?  The characters grappled with accepting her abilities, but it turned out that the younger characters accepted her much more readily than the older ones; they were more open-minded to possibilities outside of their experience.

From early childhood, we're all trained to spot patterns, and also to spot exceptions to the patterns.  In a paper written by university researchers from Rutgers and the University of Texas, it was noted that: 2

"Items that violate a category rule are remembered better than items that follow the rule."
It makes sense, since humans have historically been much better at pattern recognition than even the most sophisticated computers (not counting the contemporary innovations in artificial intelligence).  So how is this applied to businesses and economics?

Financial Comparisons of Companies

It's customary for business publications online to list company metadata.  They do this to help stock traders and other business-people make comparisons and analyze the health of a company.  Depending on whether a company is public or private, some of these factoids can include information from periodic (quarterly) financial statements, as well as mathematical ratios and measurements.

Sometimes these data points vary by industry.

For example, if you're looking at oil and gas companies, each company is broken down oil_and_gas_companiesinto three separate categories before a comparison is even made. 3 "Upstream, Midstream, and Downstream" oil and gas companies all refer to companies that focus on production, transportation, and refining, respectively.  The reason that this categorization is done is because for stock traders and financial analysts to really understand an oil and gas company, they have to compare the company to other companies that are like it.

This makes sense.  In fact, it should be common sense; why would we compare a telecom company to a car manufacturer?  This concept also extends to the difference between fundamental and technical analysis.

Fundamental Analysis vs. Technical Analysis

Fundamental analysis looks at the ability of a company to make money.  It has to do with the profitability of a company, along with its business plans and long-term health.  when somebody talks about fundamental analysis, they're talking about analysis of a company's financial statements using methodical mathematical techniques.

Technical analysis is the polar opposite.  Technical analysis only looks at the market factors in an industry, and makes comparisons of the company to these factors. 4   These are the tools of the day trader, and include things like archetypal chart patterns such as "head and shoulders" and "double bottoms."

These indicators are used to make up-to-the minute buy and sell decisions.   Technical analysis is great at gauging market sentiment and emotion, but it has one fatal assumption that sometimes emerges in dramatic fashion:  the assumption that prices already reflect all the underlying fundamental factors. 5

Ripple will be an Unprecedented Exception

Why is this assumption underlying technical analysis so important?

Because it bridges the gap between the two theories.  And in the case of the crypto markets, it explains many of the sudden market adjustments for XRP.  While swing traders and long term investors have long been the minority in crypto markets, that trend is changing.

Instead of the historical mix of mostly short-term crypto traders, the crypto market is just starting to see the influx of mainstream retail investors.  This group is comprised of a more balanced group, many of which are looking for good fundamentals in their crypto investment.

In late December of last year, we saw a dramatic shift of capital flow into XRP.

It happened after three straight months of incredible news for Ripple, the company that created this crypto-currency.  The main use case for XRP is the market for international payments, which is measured in the quadrillions of dollars currently.  In addition, it's readily apparent that Ripple is purposefully and methodically raising the profile of XRP in preparation for a series of steps in its business strategy.

Ripple decided it was time to host the SWELL conference, and positioned itself as the future alternative to SWIFT, which currently handles the majority of the correspondence banking market. This was just the first step, and it followed on the heels of the announcement that Cuallix would be the first customer to use XRP to transfer value. 17

Ripple then hosted the Central Bank Summit at Carnegie Hall in New York City, where it held several sessions along with representatives from the International Monetary Fund (IMF), and discussed how blockchain technology could be used to streamline banking. 18

The momentum then continued unabated, with announcements seemingly each week about new high-profile customers that were signing up to use Ripple technology.  This list included names like American Express. 19

The XRP Value Adjustment

Technical Analysis did not predict the massive 1,000 % increase in XRP price that took place in a few days following this momentum of fundamental factors. 20

Oh, I'm sure some technical analysts will argue with this statement and point out that on a minute-to-minute basis that technical analysis pointed the way, but when it comes to predicting price movements more than a couple days in advance within the crypto markets, technical analysis did not see it coming.  But I did. 

I'm not saying this to brag, or point out that I'm some sort of oracle of price predictions, because I'm not.  But I excel at fundamental analysis.

I understand how the world works, and especially the business and consulting world.  I understand how to gauge the performance of a company, and I am very skilled at discerning hype from real performance.  My confidence level in Ripple has always been high, even as far back as 2013.  This was a company that understood that technology was just that - technology.  It was not a political tool that belonged solely to crypto anarchists.

Technology is free from politics - it exists on its own.

And Ripple - and anybody else for that matter - has every right to leverage that technology for positive goals, whether they be for business, or for building an application to help the unbanked poor in developing nations by building software applications with the Bill & Melinda Gates Foundation. 21 22

Ripple's XRP Holdings

In the early 1900's, the most valuable companies were usually corporations that manufactured tangible goods or products.  They included behemoths such as US Steel, Standard Oil, and International Harvester.  As time went on, these names began to include technology companies.  By the mid-sixties, the composition changed to include IBM and AT&T, as well as Kodak.

Recently, the world has seen the rise of Silicon Valley and West Coast software companies.  These new entrants have now taken the top spots.

I'm old enough to know that the valuations of some of these companies have been - and still are - controversial.  The current top three companies of the world by stock market capitalization? 6

Here it is, as of the third quarter, 2017: 7

  1. Apple - $792 billion
  2. Alphabet (Google) - $665 billion
  3. Microsoft - $569 billion
Yes, these valuations are massive, and they continue to be controversial for some people.  You might wonder if any company has recently been valued at over a trillion dollars.  The answer is yes.  In November of 2007, PetroChina was valued at approximately $1.1 trillion for a period of time after it's IPO.

I'm bringing up these valuations because it's become a hotly-debated topic in crypto-currency at the moment, since Ripple holds approximately 60 billion XRP, the native no-counter-party currency of the XRP Ledger.

Anybody can own XRP, but the fact is, most of them are owned by the company that created it - roughly 60 percent, in fact. 8  So when XRP rose to over $3 dollars per unit in early January of this year,9 many people - not just crypto investors - did the math and arrived at a very large number:  somewhere in the neighborhood of $200 billion.  This immediately raised some eyebrows.

It wasn't the $200 billion valuation that bothered some, but rather it was the potential.

They'd seen how fast the price of XRP rose, and this based mostly on speculation to this point; even though XRP's use case is massive, and some predict that its valuation should be measured at significant numbers eventually, they pointed out that speculation alone had the potential to power Ripple's valuation higher than even the largest Silicon Valley company, based purely on the value of its digital asset holdings.

Get Ready To Be Uncomfortable

Before we continue with our conversation about Ripple, its important to understand history a bit.  The world has actually seen companies that are many times the size of Google or Apple.  Don't believe me?

Depending on how much you paid attention in history class, you may or may not be familiar with the following names: 10

historical_valuations

I'm not sure if you can see the small print, but here are the valuations of those historical companies:

  • Dutch East India Company - $7.9 trillion
  • Mississippi Company - $6.5 trillion
  • South Sea Company - $4.3 trillion
  • Saudi Aramco - $4.1 trillion
The numbers are adjusted for inflation - it's the value that these companies would have been measured at, using current value equivalents.16 These companies were granted monopolistic dispensations for certain periods of history, for better or for worse.  Eventually, monopolies are typically broken into smaller companies or divisions as history progresses.

Circle Back to Ripple

Ripple will be the most valuable company on planet earth if XRP adoption continues.  I predict that it will happen this year, 2018.  The reason why is because xRapid adoption has now started in earnest,11 and this is the one software solution of Ripple's that utilizes XRP.  I've already described the reasons why XRP will be adopted by banks, financial institutions, and other companies in previous blogs, but suffice it to say that XRP is gaining traction - very quickly.

Even though 55 billion XRP is locked away in a rolling escrow, Ripple still technically has custody of that XRP, and it will still be used to measure the company's valuation.

The Big Number

I know what you're wondering, because I wondered the same thing; at what XRP price point will Ripple be worth a trillion dollars?

XRP Price = $17 USD

How Will the World View Ripple?

Just so you're mentally and emotionally prepared for it... the price won't stop at $17.  It will keep going past this artificial construct that makes people uncomfortable. While most crypto analysts have given maximum price points of XRP at somewhere between $5 and $50, there are some very insightful analysts who place their upper estimates at well over $100. 23   24

Those XRP prices, while perhaps seeming steep to some onlookers, would put Ripple at about the same size as the some of the historical trading company monopolies.

The World Doesn't Like Monopoliesproof-of-work

While the world doesn't like monopolies, keep in mind that Ripple is not a pure monopoly.  While they may own 60% of the world's XRP, the other 40% is owned by you, me, and anybody else that can open an account on Bitstamp or Coinbase.  Even if Ripple were to disappear tomorrow, we'd still have enough XRP to fuel international commerce for many years to come - each one can be split into one million units, lest you forget. 12

Regardless of whether or not it has a monopoly, many people might be uncomfortable with a company whose valuation is measured in trillions.

Don't worry - Ripple is quite cognizant of possible market capitalization numbers, along with the public relations challenges that will go with it, if you ask me.  They are a company built by - mostly - engineers and Silicon Valley pioneers.  These people know how to do math, and they've seen how disruptive, massive companies can transform the world in unexpected ways (think Facebook & Twitter)

Their plan is not to just "sit" on their XRP and watch as their valuation skyrockets past the valuation of the East India Company.

Escrow

The purpose of XRP is to fuel economic commerce across borders.  The escrow vault_imagearrangement ensures that one billion XRP are freed each month for Ripple to sell to others, including banks and financial institutions, as well as other large international corporations. 13 14

My prediction is that while Ripple may not anticipate selling or otherwise using all one billion XRP that is freed up each month, that will change quickly in 2018 as demand from xRapid use starts to accelerate.  Remember, XRP's core purpose is to replace Nostro account holdings in various corridors throughout the world. 15  This means that companies will be knocking on Ripple's door as the year progresses.

Be Prepared For Stranger Things

The world was first introduced to cryptocurrency in 2008 with the creation of Bitcoin; since then, it's been slowly getting accustomed to the idea of an international currency that treats the borders of countries as an insubstantial piece of metadata that has nothing to do with its own existence.

And now we have XRP. ripple-symbol3

Sources

    1. http://www.imdb.com/title/tt4574334/?ref_=ttep_ep_tt
    2. https://books.google.com/books?id=p-4xHOXyFREC&dq=Easier+to+remember+exceptions+to+the+rule
    3. https://www.investopedia.com/university/important-ratios-for-analyzing-oil-and-gas-stocks/
    4. https://www.thestreet.com/story/10362279/1/getting-started-fundamental-analysis.html
    5. https://en.wikipedia.org/wiki/Technical_analysis
    6. http://www.visualcapitalist.com/most-valuable-companies-100-years/
    7. https://en.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization
    8. https://ripple.com/xrp/market-performance/
    9. https://coinmarketcap.com/historical/20180107/
    10. http://www.visualcapitalist.com/most-valuable-companies-all-time/
    11. https://xrphodor.wordpress.com/2018/01/19/xrapid-cost-savings-confirmed-by-cuallix/
    12. https://ripple.com/build/transaction-cost/
    13. https://ripple.com/insights/ripple-escrows-55-billion-xrp-for-supply-predictability/
    14. https://ripple.com/dev-blog/explanation-ripples-xrp-escrow/
    15. https://ripple.com/files/xrp_cost_model_paper.pdf
    16. https://en.wikipedia.org/wiki/Dutch_East_India_Company
    17. https://www.financemagnates.com/cryptocurrency/news/cuallix-uses-ripple-cross-border-payments-u-s-mexico/
    18. https://ripple.com/insights/ripple-hosts-worlds-central-banks-to-explore-next-generation-of-payments/
    19. http://fortune.com/2017/11/16/amex-payments-ripple-blockchain/
    20. https://finance.yahoo.com/news/ripple-apos-xrp-token-sets-174530282.html
    21. https://ripple.com/insights/news/ripple-the-gates-foundation-team-up-to-level-the-economic-playing-field-for-the-poor/
    22. https://www.gatesfoundation.org/Media-Center/Press-Releases/2017/10/Bill-Melinda-Gates-Foundation-Releases-Open-Source-Software-to-Expand-Access-to-Financial-Services
    23. https://medium.com/@riadelimpias/xrp-from-a-value-investing-perspective-9bf8c08527af
    24. https://www.reddit.com/r/Ripple/comments/6irqhs/mathematically_speaking_what_is_the_highest_price/

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Hodor

Hodor

I blog about Ripple & XRP. FULL DISCLOSURE: All views are my own. I do not work for Ripple; I am not a professional financial analyst, and the majority of my crypto holdings are XRP.

Read More