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.