Cryptocurrency Investors Have Clearly Lost Their Minds
By Crystal Stranger, Founder of PeaCounts
When the market cap of Ripple’s XRP surpassed Ethereum’s ETH last week many cheered that finally there was a new queen of the cryptos. But I looked at it and thought that it showed this industry reaching a new low in lack of investor understanding. This shouldn’t be surprising, I suppose. One irrational bull market followed by an equally irrational bear, and anything can happen in this space. Many say it is all speculative and there is no fundamental value, but I don’t believe that is true. Yes, I may be crazy, but I think the entire market has it all wrong right now.
There is a stock investing maxim that the price movement of stocks reflects news before it is public knowledge, and the correlation seems to show this. But I see little correlation about this in the cryptocurrency space. Good news, bad news, it seems to have little effect on price. But then when a big movement happens one way or another everyone scrambles to find news to relate this to. These false correlations become mythical in nature and are repeated as stories told to children in ancient times. But typically the price movements are up when a big investor moves in on an exchange, or down when the Mt Gox trustee dumps shares or a silk road whale comes out of hiding to finally move illicit profits.
Irregardless, there is no rational reason why Ripple’s price should have doubled last week. At first I thought it was a massive pump and dump scheme by some Telegram hucksters, but the price hasn’t dropped quickly enough to validate this. So I will say this movement is far beyond reason, especially as XRP has next to no inherent value.
Why do I say this? Sure, Ripple Labs is an excellent company that has an excellent solution for cross-border payments and is making high-profile partnerships left and right. But XRP has essentially no value. Ripple Labs’ main solution is a fiat to fiat transfer system called x-current.
This all loops back around to XRP, which has absolutely no use in the x-current system, it is completely cryptocurrency free. Their open-source cryptocurrency-based solution is called x-rapid, but this system also does not require the use of XRP. There is a requirement to access x-rapid that you must hold 20 tokens of XRP in a wallet. At the time of this article that is roughly $10 in XRP tokens.
X-rapid may have good applications that are attracting partnerships, but these XRP tokens aren’t actually used in the x-rapid system, they are just a nominal access key of sorts. And sorry to break it to you, but 20 tokens to access the payment system won’t be a fundamental driver of value anytime soon. With 100 billion tokens outstanding it would take two-thirds of the world’s population individually staking wallets in order to use up the token supply. Sure you don’t need that many to drive value, but it seems the focus of Ripple Labs is to provide money transfer services through high-profile partnerships, not to get billions of people individually transferring funds.
The Bitcoin bridge developed by Ripple Labs is still certainly groundbreaking technology, but when Western Union started using x-rapid they found there was no significant price savings compared to traditional means. Granted it sounds like this was a small sample and they may have not been using the system in the way fully intended, but certainly does not show a large use case for XRP anytime soon.
There is the argument that XRP is a decentralized money system on it’s own, similar to Bitcoin or Litecoin. However, this also does not hold water in my opinion because I have yet to see any merchants accept XRP as a form of payment. And the argument for XRP being decentralized is on shaky technological ground as the consensus model used is a variation of byzantine fault tolerance, which works better in permissioned blockchains, meaning the private business-specific blockchains such as Hyperledger.
Let me explain. There is a computer science dilemma called the “Byzantine Generals Problem” where an analogy is drawn to a group of Byzantine generals camped out around a city under siege (no wonder computer nerds love Game of Thrones, right?). The generals have to message each other to make a plan to attack, but there may be traitors among the generals who want to send misleading information to confuse the attackers, so how can the generals determine which messages are accurate and which might be false information? Enter the basic algorithm of Byzantine Fault Tolerance that relies on 2/3 of the incoming information to be confirming before validating the information as correct.
Byzantine fault tolerance has issues though. The first issue is security because the system does not typically wait for a full 2/3 of nodes to report, it instead relies on the information of the nodes connected to it. Thus it is at risk if there are enough bad actors who have set up nodes, potentially through pseudonymous identities using a Sybil attack. The second issue is that any selectivity tool added to this consensus model essentially guarantees centralization over time. Why? Because if you have to select nodes there becomes a pressure to select the same nodes as everyone else, otherwise the other nodes won’t trust you, and it becomes a self-reinforcing system with a cartel of nodes.
Ripple and XRP aren’t bad, it just is relative to other tokens in the market XRP is highly overvalued. This is easy to see when viewed in comparison with Ethereum’s token Ether. Ethereum also has both a public blockchain based on Ether, and a business-oriented permissioned blockchain under the moniker Enterprise Ethereum. However, that is where the comparison stops. Ether is one of the most widely accepted and used cryptocurrencies internationally. Typically at a conference if someone pays me back for dinner they transfer Ether. When I see shops in other countries accepting cryptocurrencies, usually one of the choices is Ether.
Then there is the ICO world where ERC-20 tokens are still the gold standard for fundraising. If you want to issue a token with easy wallet access and to easily get exchange listed, then you want an ERC-20 token. Sure there are plenty of other platforms you can build on, but typically even with the venture funding if you later want to do a token sale you will end up switching your platform to Ethereum. In order to issue ERC-20 tokens there is a cost of two ETH. This may not sound impressive, isn’t 20 XRP more of a driver? It is all about the number of circulating tokens. There are just over 100 million Ether out there, meaning Ripple has 1000 times more tokens in circulation!
Then there is the technology side. Ethereum is based on the secure Proof of Work consensus model that is similar to Bitcoin, so your tokens are inherently more secure. Additionally, Ethereum has a much larger community of developers and contributors to the code base than Ripple has. Finally, Ethereum is headed by a genius of epic proportions, Vitalik Buterin. Whereas Ripple is more of a business leadership model (refraining here from a Bill Gates- Steve Jobs comparison rant).
The market may be disappointed by Ethereum’s decision to abandon Casper, their Proof of Stake solution, and sharding development efforts. This was accidentally spilled by Virgil Griffith at Consensus Singapore while I was there. And I was surprised less people were talking about it than I have heard. Personally though I was relieved. Proof of Stake is not a secure system, it has a number of vulnerabilities. The focus on network security with abandoning these projects for the time being and focusing on Web Assembly to replace the buggy Solidity code base relieved a lot of the concerns I held for Ethereum going forward.
Either way you look at it though, token investing is not the same as equity investments. Just because a company succeeds doesn’t mean the token should gain value, and vice versa. But clearly the investment world has not mastered this basic concept, as there is no way in a rational world that XRP would be valued higher than ETH.