Ripple (XRP) Ends Year With 22,000% Gain As Bitcoin Falls

Ripple is ending the year with almost 22,000% gain. Ripple (XRP) started the year around $0.0065, went as high as $2.5 and is ending the year around $1.90. This gives a gain around 22,000%. Suppose you had invested $100 in Ripple in January around $0.01. This would have bought you around 10,000 XRP digital coins. This $100 investment in December would have been $15K. If you had invested $1K, your investment would have been $150K. Now in January no one could have predicted Ripple making 22,000% gain in the next 12 months just by looking at the charts. But fundamental analysis would have given you the clue that Ripple had a lot of potential in it. Watch the interview with the #2 ranked forex trader in the world Jarret Davis. If you have been trading currencies, you should also include cryptocurrencies also in your trading portfolio.

Ripple price chart has been on an upward trajectory throughout this year. In this post I will try to give an indepth review of what ripple is and how it compares to bitcoin (BTC). The recent price hike was caused by the news that Japanese financial services company  SBI Ripple Asia is launching a consortium with the Japanese credit card companies to use ripple blockchain technology. Right now XRP has a market cap of $54 Billion. This makes it third cryptocurrency in terms of market cap. The topmost is of course bitcoin. Second is Ethereum (ETH) and third is XRP now. This is an update. I just read on Bloomberg that Ripple surged 53% in the last 24 hours and has now become the second biggest cryptocurrency surpassing Ethereum. Did you read the post on how to do algorithmic trading on Dukascopy JForex? Take a look at Ripple weekly chart below!

Ripple Weekly Chart

Do you see XRP has been very bullish for the past 4 weeks. The most recent weekly candle is very long and very bullish. What can be the reason? If you look at the left, the first weekly candles, you can see XRP has been ranging for many weeks. Then it suddenly went bullish with price rising rapidly. The reason is simple. Ripple right now is cheap and it has a better blockchain technology that has the potential to solve the cross border payments problem. People are now turning towards to XRP and driving its price up. But I don’t think that XRP price would reach as high as that of Bitcoin right now. Did you read the post on how to use Support Vector Machines in trading? Take a look at XRP daily chart below!

Ripple Daily Chart

Ripple is basically a startup that wants to develop a global payment system for banks, digital exchanges and other financial institutions using blockchain technology. XRP is the digital coin that the users of Ripple network use for making transactions. Price rally started early this year when financial media reported that Standard Chartered and Axis Bank have announced using ripple blockchain network for making cross border payments between India and Singapore. Then American Express also started using ripple blockchain network for sending US corporate payments to UK based businesses. Recent price surge was caused by Koreans and Japanese investors when the financial media reported that Japanese and Korean banks have started testing ripple blockchain technology. These tests will run till January 31st, 2018 and if everything works well these banks plan to use XRP in sending money between them. A few months back, Ripple had announced that more than 100 financial institutions are now using its blockchain technology that includes American Express that would use its blockchain network for cross border payments between US and UK. So what is this Ripple and what makes it different from Bitcoin, let’s explore in detail now. You can also take a look at XRP H4 chart.

Ripple 4 Hourly Chart

In the above chart, you can see XRP price climbing up on hourly basis. This chart was taken yesterday and today Bloomberg has this headline that Ripple price surged 53% in the last 24 hours making it the second biggest cryptocurrency in the market. As of today Bitcoin market cap is around $250 billion while Ripple market cap is $86 billion whereas Ethereurm market cap is $73 billion. In the video the CEO of Ripple Brad Garlinghouse gives the reason why XRP is on the upward trajectory. The main reason is it has something to offer. It is solving a major problem that is being faced by the financial system. The problem of cross border payments. Clients have to make huge fees to move funds across the border. Ripple will make the process of cross border payment friction less with almost no fees. Let’s discuss what is Ripple and the technology behind it in detail now!

How Ripple Can Make Present Global Payment System Better?

Before the invention of bitcoin, sending money digitally required using the services of a third party which are obviously the banks and other financial institutions. These banks had their own network and they would charge fees from their clients for sending money digitally from one place to other. Soon after the invention of bitcoin, copycat cryptocurrencies also emerged. Most of these cryptocurrencies become known as alt-coins. Most of these alt-coins used bitcoin source code with some modification. Today there are more than 1000 alt-coins now circulating in the market.

Now this is something interesting for you. Ripplepay was introduced by Ryan Fugger in 2004 many years before Bitcoin came on the scene. Ripplepay is considered to be the predecessor of Ripple. Ripple system was supposed to be a decentralized financial network where users first establish trust relationship. Once a trust relationship gets established, users can allocate lines of credit to each other and send funds to each other using that lines of credit. The original Ripple Protocol would route the funds through a chain of trust. So if you don’t have trust relationship with another party but there is a user that has trust relationship with you and the other user. You can send the money through the in between user. Enter Ripple Labs that created a better version of original ripple protocol. Modern Ripple network can be used to route any asset other than digital assets and cryptocurrencies. Did you read the post on how to use R in algorithmic trading?

Ripple network maintains a ledger that has the balances and credit limits of all accounts. Ripple ledger is very lightweight as it does not contain the whole transaction history like that in the bitcoin ledger. Ripple ledger is structured as a ledger chain where each version of the ledger contains a hash to the parent ledger. New versions of the ledger are created through a process that is called Consensus Protocol. Ripple servers poll the neighboring servers for new transactions and include that in the new version of the ledger. Ripple Protocol uses Merkle Trees and Radix Trees that allows the servers to update the transactions in a much efficient manner as compared to bitcoin nodes. So in short, ripple is an innovative technology that developed entirely independently of bitcoin.

Ripple is a network of computers that are all running a common open source software Rippled that is developed and maintained by Ripple Labs. Ripple Labs does not own the network and does not charge any fees for using the software. The software uses Ripple Protocol just like a browser using HTTP or an email using SMTP.  You don’t need to know how Ripple Protocol works just like you don’t need to know SMTP for sending emails or HTTP for browsing websites on your browser. So just like email, Ripple is totally free. This is something important for you understand. There are many important features in Ripple Protocol that makes it a compelling alternative to the current interbank money transfer systems. There are many costs and risks involved in the current interbank funds transfer.

Today almost all the countries have evolved a domestic interbank fund transfer system. US has ACH while UK has its BACS. These domestic systems use the central bank as a clearing agent for providing trust between the parties. However it can take 2-5 days for money to transfer and settle. You can use the present domestic system is pretty slow by the modern standards. The situation becomes complicated when we want to transfer funds between countries as there is no trusted global clearing agent. So banks have developed relationships across the borders that they use to transfer funds across borders. Most of these banks are multinational banks with branches in different countries and they have written agreements with other banks for the purpose of funds transfer. For example if you a small business firm in US that wants to send funds to a German company in EU, your funds transfer will take a tedious route especially if your bank is a small domestic bank with no branches in EU. SWIFT is used but its not a wiring system it is just a messaging system while the fund settlement takes place through a complicated process that we don’t need to go into detail here.

In simple terms there is no direct linkage between US and EU banks apart from a few multinational correspondent banks. So funds go through a loop involving the domestic bank, the central bank and the correspondent bank. At each stage the client transferring the funds have to incur a cost. Bitcoin solved the double spend problem by developing an open source software that runs on a network of computer all over the world that confirm that transaction so eliminating the need for a clearing agent that is so necessary in the current interbank funds transfter system. But transferring the funds through the bitcoin network requires you to first convert your dollars into bitcoins. Transferring into bitcoins will incur a  cost that you will have to bear. Now when dollar get converted into bitcoins, you can send bitcoins to EU where they will again need to be converted back into EURO. So once again there will be a conversion cost. So in essence this is how a EUR/USD transaction will take place on a bitcoin network. It can take 10-30 minutes for the transaction to get confirmed by the bitcoin network. So there is an additional risk.

Now compare this with the Ripple Protocol. Ripple Protocol is currency neutral. You don’t even need to convert the currency or the asset into XRP (Ripple native currency). Plus Ripple uses the financial institutions as gateways in and out of the network and as market makers to provide liquidity for currency pairs. The protocol has been designed to give best prices to the users. Let’s reconsider the above example in which you are a small business in US and want to send funds to a German company in EU. You will directly plug into the Ripple network and start a USD to EURO transaction. Market makers will compete to quote their EUR/USD spreads and you get the cheapest spreads. This is done through the Pathfinding Algorithm that finds the cheapest path even it is a complex route through a number of intermediary currencies.

As you can see you did not need to convert USD into XRP. Ripple Protocol ensures that the transaction is routed to the cheapest spread. Banks have the intermediadary role and decide how much cost saving to pass on to their customers. The transaction is settled in a few seconds. This gives the banks chance to grant faster access to funds to their customers. So when you are using Ripple, you will interface with your bank to access Ripple. Now let’s discuss the heart of Ripple Network which is the Consensus Algorithm and compare that with Proof of Work Algorithm.

As said above, Ripple is a public network of servers. These servers use public/private key cryptography to verify each transaction. Each transaction has got a unique digital signature. Ripple servers mathematically verify the correct digital signature before including the transaction in the public ledger. Consensus must be reached among the majority computers before making any change to the ledger. Each transaction gets settled within 3-5 seconds. Unlike bitcoins, no mining is done in the Ripple network to achieve consensus. This ensures that very little energy is used by Ripple network unlike bitcoin network which is a huge energy sink. Each transaction on the bitcoin network uses massive energy.

International wire transfers charge around 2-4% fee to exchange even the most liquid of currency pairs like EURUSD, GBPUSD, USDJPY, AUDUSD, NZDUSD etc. Retail remittance service providers charge even more something like 5-10% spread over and above that charged in the interbank market. Ripple has the potential to bring down these costs to a very low level while at the same time settling the transaction within 3-5 seconds. So in essence Ripple has the potential to reduce the above mentioned frictions in the international cross border payment system.

Role of Ripple Labs

Ripple Labs is the creator of the Ripple Protocol. Ripple Labs is basically a software technology firm that provides the core technology for transaction settlement and the fine tuning and further improvement of the protocol. Ripple Labs also develops tools that developers can use to build user friendly applications for consumers. Ripple Labs also builds partnerships to expand the Ripple Network of banks, financial institutions, users and market makers and provides APIs. Ripple Labs has raised capital from a number of leading venture capital firms. Ripple Labs owns 25% of XRP. So you can well imagine it has got a big stake in making XRP a success story.  XRP is the currency of Ripple Network. It has been pre-mined unlike bitcoin which consumes a lot of energy in its mining process.

Now you should keep this in mind. Although Ripple Labs promotes and develops Ripple Protocol, it does not control the protocol in any way. New changes to the protocol can only be incorporated if the users agree to the proposed changes. Ripple network is heavily dependent on the validating nodes. Each transaction that takes places first get approved the validating nodes before it gets incorporated into the ledger. Ripple Labs as a developer can only propose new changes. These changes can only be incorporated into the protocol if the majority of the validating nodes approve it. Ripple protocol does not replace the existing global payment system. It is just improving upon it. In simple terms Ripple only provides the rails on which payments move. It does not affect the legal responsibilities and relationships between the financial systems.

This is important for you to understand. Ripple network can exist and operate successfully without Ripple Labs. It is a distributed P2P computer network that can work independently without any central authority. It has a robust network of validators that include financial companies, ISPs and MIT (Massachusetts Institute of Technology). XRP is the native currency for Ripple network. 100 billion XRP digital coins were created at the time of inception of Ripple Protocol. 20% of these 100 billion XRP (20 billion) were retained by the inventors and the remaining 80% was given to Ripple Labs. Ripple Labs is now Ripple.

Ripple Versus Bitcoin

As I mentioned above, Ripple developed entirely differently from Bitcoin and is not an altcoin. Ripple has some inherent advantages as compared to bitcoin. Bitcoin got introduced around 2010. It’s price has skyrocketed last year. But I believe bitcoin price is a bubble as it represents nothings and solves nothing. Bitcoin has no independence coexistence. It needs to be converted into a real currency before it can buy/sell something. I thing we have a strong case against bitcoin despite the fact that people are going crazy over it. Most of the people who have invested heavily in it at a later stage are going to regret it when the bubble will burst and bitcoin price will crash to the ground. This is inevitable. Bitcoin mining is a useless process that have heavy energy and environmental costs. This one fact will ensure that bitcoin will not survive long. Bitcoin mining needs to be simplified and made energy efficient if it has to survive in the future. Right now bitcoin mining is consuming more energy than the country Ireland. Ripple has no energy problem as it uses a different Consensus Algorithm for validation. There is no mining in Ripple. Ripple is solving a real world problem as I have explained above in detail. Ripple can reduce the friction in the global cross border payment system reducing the cost and making it more efficient. In future we can see more P2P networks like Ripple.

As a trader, it is always a good idea to know some details about the technology being used behind these cryptocurrencies. As said above Ripple is not an altcoin. It is totally different than bitcoin. It uses a totally different Consensus algorithm that uses validators to valid each transaction. Consensus algorithm uses very little energy as compared to the Proof of Work Algorithm in Bitcoin which is a huge energy sink. Ripple network does not depend on Ripple Labs. Any change to the Ripple Protocol can only be made with the majority vote of the network users.

Update: Just a day after I wrote this post, XRP price now is $3.09 reaching as high as $3.84. Chris Larsen, co-founder and executive chairman of Ripple is now one of the top five richest men in US. Chris Larsen owns 1.59 billion XRP digital coins plus a 17% stake in Ripple company as reported by CNBC. This makes his net worth $59.9 billion. Satoshi Nakamoto, the founder of bitcoins owns 980K bitcoins. With bitcoins prices at $15K, his net worth is just $14.7 billion. Chris Larsen now ranks 5th while Google co-founders Larry Page and Sergey Brin ranking 8th and 10th.

 

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