Ripple Deep Dive: A 2 Basis Point Improvement Isn’t Worth a $45B XRP Valuation

Ripple Deep Dive: A 2 Basis Point Improvement Isn’t Worth a $45B XRP Valuation

Executive Summary

 

Ripple (the organization) and the cryptocurrency, XRP, are two of the most contentious crypto entities with those who believe in their merit while others do not. While Ripple is attempting to solve real problems for banks through a step function improvement in the infrastructure for global payments through RippleNet, the utility of XRP within this system is both vague or not required.

 

Ripple is championing XRP to bolster its products, although the addition of the cryptocurrency to its RippleNet system offers a negligible 2 basis point cost improvement. XRP’s use case is currently only active within Ripple’s products and this slim improvement should not result in the $45B fully diluted (2.5x reported) value of XRP, in our opinion.

 

While we believe Ripple offers real, tangible benefits in overhauling the $27T market for cross-border payments through the use of one common system that’s faster and cheaper over legacy systems. However, we don’t believe that the value extends to XRP. Overall, while there are positive aspects for Ripple the company, we would avoid XRP the cryptocurrency. Also, We include a detailed XRP valuation model at the conclusion of this report.

 

The Problems with Ripple and XRP

 

Ripple and XRP have both faced immense scrutiny, worsened by the lack of clear and factual information from Ripple. While Ripple may be separate from XRP, as the main champion of its use and the largest holder of XRP itself, Ripple has a duty to offer clear and transparent information which the company has not done historically. We share our detailed concerns table on page 5.

 

Ripple’s problems center on some unprofessional business tactics such as bribing exchanges to list XRP (Coinbase, Gemini), extreme customer acquisition costs (Ripple offering 300% integration rebates), and promotional pilots announcement with little follow through. Additionally, Ripple’s main source of revenue has been through the sale of XRP, not from their products.  Currently,  there are very limited use cases for XRP.

 

The major concern for the value of XRP stems from the main use case of the cryptocurrency; Ripple’s own products. While there are cost savings of 6.8 bps for banks using RippleNet for international payments, Ripple’s own marketing materials only show an incremental 1.9 bps improvement for customers using XRP with RippleNet.

 

The second largest concern is that Ripple does not make the majority of its profit off of its products, it makes money through the sale of XRP the currency. To date, Ripple has reported it sold a total of $428M in XRP to fund its operations. Ripple sells XRP out of its own supply as it is the largest holder of XRP, owning ~60% of the total 100B supply.

 

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Recognition:

Thank you to Itamar Rogel and Samuel Corso for reviewing this report and offering their feedback.

 

Disclosures:

Tom Shaughnessy owns tokens in Ethereum (ETH) and does not own tokens in XRP and has no investment in Ripple the company. This research is strictly informational and is not investment advice. Do not buy or sell any securities based upon this research. This research strictly reflects our views, which can be wrong.

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