The Ripple Effect: Cryptocurrency Leadership

There is a new way to get rich. It is as simple as creating digital money.

Chris Larsen, the co-founder of Ripple — a real-time, digital payment network — is now the fifth-richest person in America. He earned most of that this week.

Welcome to the world of cryptocurrencies.

For perspective, at $59.9 billion, Larsen’s net worth would put him on Forbes’ list of billionaires ahead of Larry Page and Sergey Brin. And they “only” founded Google.

Larsen is just behind Mark Zuckerberg, the guy who started Facebook (FB) in a Harvard dormitory a decade ago and transformed the way most of the developed world communicates.

Equating wealth with importance is dangerous. But the people on Forbes’ list are arguably transformative figures. The technologies they created changed the world in meaningful ways.

I would argue vociferously that cryptocurrencies are transformative. Real franchises with lasting value are being created. What should give investors pause, however, is the current velocity at which this is all happening.

Right now, it feels like a bubble.

Ripple is unique among cryptocurrency investments. It is a real business, meticulously structured to solve real-world problems. In the spring and summer of 2013, it was seeded by top-tier venture capital firms like Andreessen Horowitz, Lightspeed Venture Partners, Pantera Capital, Google Ventures and IDG Capital Partners. The goal was to speed up, and add transparency to, payments using Blockchain (the ledger system underlying Bitcoin).

To do this, Ripple innovated. Its consensus ledger system operates by a supermajority. New transactions were only permitted if most of the network validators agree to include them in new ledgers. By contrast, miners process bitcoin transactions. They receive a fee for maintaining the ledger. This process can take anywhere from 10 minutes to 16 hours, in some extreme cases.

Ripple transactions are cryptographically secured and algorithmically verified. They are also completed in 3 to 5 seconds.

The appeal in the financial services community was immediate. Many were looking to move beyond SWIFT. The antiquated global money transfer system has been around since 1973.

And recently, cyber thieves have found ways to empty bank vaults with startling success. Ripple cuts out back-office costs and beefs up security while also speeding up processing.

Accenture (ACN), a global consulting firm, estimated blockchain technologies could save financial institutions $8 billion to $12 billion annually by 2025.

In September 2016, banking heavyweights like Bank of America (BAC)Royal Bank of Canada (RY) and several others signed on to the Global Payments Steering Group. Last December, American Express (AXP) and Banco Santander (SAN), a leading Spanish multinational, expanded the use of the technology to cross-border payments.

With no way to invest in privately held Ripple, investors have begun speculating in XRP, the native currency of the Ripple network.

Keep in mind; it only exists as a store of value within the system. By design, availability is limited to 100 billion XRP coins. And Ripple network users are not required to use XRP as a medium of exchange. They can use any recognized fiat currency, debt instrument or liability.

XRP surged 35,500% in 2017, ending the year at $2.30. This week it rocketed to $3.84, or 67%.

You can imagine the smile that put on Chris Larsen’s face. According to a CNBC
article, he received 5.19 billion XRP for his role developing the Ripple protocol.

Investors have witnessed these types of gains in the past. But the underlying securities were penny stocks. The types of businesses were small and speculative, listed over-the-counter, or on venture stock exchanges. Founders, directors, promoters and investors got rich based on tens of thousands of shares — that is, if their timing was fortuitous. Ripple, as a business, holds 61.3 billion XRP. Its coin holdings alone value the company at $235 billion.

For perspective, at its recent price of $173.70, the market capitalization of McDonald’s (MCD) is $140.70 billion.

I have been telling my members that cryptocurrency is real. It makes sense because it provides transparency. It also brings money into the digital era. Like music files and photos, this ultimately reduces friction and creates new business models that create wealth. These are all good things.

However, the near-term pricing mechanisms, especially for alternative digital coins, are out of whack. Creating money alone should not create wealth. Investors should exercise extreme caution.

They should also understand a significant decline will bring enormous opportunity.

Best wishes,
Jon Markman

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Comments 5

  1. richard January 5, 2018

    Aye there’s money to be made here for the nimble listening to good expertise during this window in time. But could it be possible that all the crypto currencies are working out the kinks while getting us used to the next step in money, a prolog to the solution offered when worldwide markets and currencies collapse?

    Reply

    • Mark Wilgus January 5, 2018

      I agree and better yet, currencies don’t have to collapse before entire countries move to crypto. Venezuela (although nearly collapsed), Russia, Israel and South Korea are most recent examples. Each of these countries for different reasons/objectives.

      Reply

  2. Dave January 5, 2018

    LOL… Deck chairs on the Titanic…Tulip bulbs at a Dutch market…Mortgages at 140% of appraised value… and now funny money created out of thin air (even more phony than fiat currency)…Governments and the regulators worldwide will kill this bubble sooner or later….PT Barnum was soooo right…

    Reply

  3. Reasonable Truth January 16, 2018

    Blockchain technology has value and can be suited for Digital Assets, notice I said Digital Assets. Decentralized cryptocurrency, differrent than a Digital Asset, visibly shows major issues to scale and perform multi-million of transactions across the blockchain. Failures to transact are highly visible and noticeable just look at Etherum as a prime example but most are not willing to openly notice it. In the end there must be a form of centralization with transparency to be efficient and show real long-term sustainability. It is now obvious as we have seen with Ether, Bitcoin and others the fundamental ability to scale globally, is just not there. The more you decentralize the more the systems take time to gain consensus and realize transactions with real time expectations. Peer to Peer buyer/seller instances are easily performed, but any matrix of multitudes of dependent element transactions are seeing choke points and grid-locking. Simply put, Crypto is going to have to fundamentally change the underlining technology to scale and deliver real business value that will sustain long-term growth and be able to easily process more than 300 Million transaction daily transactions in milliseconds. Just Reasonable Truth

    Reply

  4. Ed January 17, 2018

    I see this new Industry of crypto coins growing to be a MUNSTER and in a matter of weeks I will put some OLD SCHOOL MONEY to play and the USD has LOST around 95% of its value in few decades
    it is amazing how many people this New COINS are making RICH and Super RICH
    get in the boat now …. . will be a turbulent voyage mon ami

    Reply