A review of the bank-backed crypto and its challenges ahead
(Contributed by OKEx Research Analyst)
Cryptocurrency once again a buzzword in the financial markets on the back of some heavy selloffs in equities and FX globally. Investors have been seeking shelters from the escalating US-China trade war, a potential currency war, increasingly aggressive easing from central banks, and geopolitical tensions. In our previous article “Bitcoin and a Chaotic World”, we’ve seen how bitcoin reacted to crises in the past and it could act as a new kind of safe-haven asset.
However, with the hype over the crypto markets, Ripple’s XRP has been constantly lacking behind other major cryptocurrencies. In a broader sense, more big names are jumping onto the crypto bandwagon, however, that could jeopardize the outlook of XRP.
It’s not hard to see XRP’s performance was not pretty. The following chart compares the YTD performances of XRP with BTC, and XRP didn’t live up to the hype even with the broader bullish sentiment in June. As of August 6th, 2019, BTC surged over 200% this year while XRP gave up more than 12% of its value.
What is Ripple and XRP?
Before getting into the reason behind XRP’s weakness, it’s important to review what Ripple is and the usage of XRP. Ripple consists of two parts; a money transfer platform (RippleNet), and its currency (XRP). The system aims to provide a convenient international payment and money transfer platform for financial institutes and payment service providers. Plenty of major investment banks have been using Ripple’s services such as Standard Charter, Santander, and MUFG.
Meanwhile, XRP is a token for transferring value across RippleNet, it simplifies transactions across different crypto and fiat currencies and designed to reduce the processing time with minimal transaction fees.
XRP vs. Bitcoin
It’s the functions and purposes that highlight the difference between XRP and bitcoin. XRP was designed for money transactions between financial institutions, bitcoin was designed as a decentralized peer-to-peer payment solution. Another notable difference is bitcoin is minable, while XRP is an un-minable and rather centralized issue token. Data from CoinMarketCap.com shows that there is a total of 100 billion XRP existing in the world, approximately 25% of them or 4.28 billion XRP are now in circulation, and the rest is managed by Ripple itself. Technology-wise, Ripple doesn’t have a blockchain, it works on its algorithm called the Ripple Protocol Consensus Algorithm or RPCA.
Market is Getting Crowded
Institutional money transfer has built into Ripple’s core, it’s what makes Ripple stand out from the crowd. However, this could also be uncertainty for the company because money transaction is a lucrative business, a lot of big players wanted to tap into this market, potentially threatening Ripple’s business. The US Federal Reserve perhaps is the latest one. Just this week, the Fed announced that it plans to develop a faster payment system for banks to exchange money. The new system would allow bill payments, paychecks, and other common consumer or business transfers to be available instantly and round-the-clock. The Fed’s move certainly alarmed Ripple. Shortly after the announcement, Dilip Rao, Global Head of Infrastructure Innovation at Ripple, retweeted the news.
While his comment seems positive on the Fed’s new payment system, some afraid direct competition with big players could put Ripple, as the company, in a less-advantaged position. That came after Facebook’s Libra and JP Morgan’s JPM Coin, both are built and designed for faster money transfer. Losing market share could bring a negative impact to Ripple as the company overall, and that impact could spill over to XRP. On top of that, Ripple is not the only company that already in the field, rivals such as R3, SWIFT, and other startups are making the competition even more intense.
Low XRP Adoption
Although there were more than 100 financial institutions have been using Ripple’s RippleNet and RPCA to move money globally, however, the majority of them did not use XRP as a medium. That means institutional adoption of XRP remains relatively low, and that won’t produce any help XRP in terms of having positive price actions.
Short-term Technical Analysis
- XRP daily chart shows that it has been consolidating in the range between 0.30 to 0.32 in the past few weeks, and a symmetrical triangle pattern has formed.
- The Bollinger Bands squeeze, signals volatility may increase in the future, could be a possible trading opportunity.
The financial world has been trying to revitalize banking with the help of blockchain and other emerging technologies. Firms that are outside of the traditional financial system such as Ripple has been leading the game. However, the old world is catching up fast while other tech giants like Facebook are eager to get into the field. As a payment solution provider, Ripple is facing intense competition. Potentially, any negative impact on the company could easily transform into undesirable price actions in XRP. Lacking institutional interest is another question XRP must tackle. With its relatively centralized characteristics, it’s not hard to understand that XRP is not everyone’s cup of tea, but it will be interesting to see if Ripple can further utilize the use of XRP in its payment and transaction solution services in the future and stir institutional interest.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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