For traditional equity investors, cryptocurrencies like Ripple (CCC:XRP) can easily go in the “too hard” pile.
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There are two core stumbling blocks: valuation and utility. For equities, valuation methods are inexact, but at least relatively well-defined and replicable. The usefulness (or lack thereof) of the companies being traded in the stock market can be understood (and debated).
As a result, it’s easy for equity investors (myself included) to write off crypto as the “Wild West,” a market largely dominated by momentum-driven short-term traders instead of savvy, long-term investors. That characterization is too broad, but over the years has held some truth. (Witness, for instance, the $2 billion valuation applied to Dogecoin in 2018, an altcoin originally conceived of as a joke.)
Ripple, however, is a bit of a different animal. Pinning down precisely fair value remains difficult, but the logic underpinning XRP is solid. The crypto could, if all works out, become a key part of the worldwide economy.
Obviously, “if all works out” is a giant “if.” Like pretty much every crypto, XRP has significant short- and long-term risk. But for equity investors looking to dabble in crypto, it’s an interesting place to start.
The Valuation Problem
Stock valuation is far from an exact science, but there at least is firm data with which to work. For instance, we know the market capitalization of Apple (NASDAQ:AAPL). We know its earnings for the most recent quarter, and the most recent fiscal year. From those data points (and others), investors can draw very different conclusions, but the building blocks on which valuation methods sit are relatively firm.
That’s simply not the case for cryptos. XRP, for instance, looks intriguing — but what is it “worth?” The same is true of bitcoin, Ether, or the thousands of other cryptocurrencies. We can calculate the market capitalization of bitcoin, or of XRP, but we have no real basis for understanding if that market cap is too low — or too high.
Similar problems admittedly exist in fiat currency trading but known inputs like interest rates and economic growth at least allow for reasonable fundamental models to be built. And there are at least guardrails in that trading. For example, few traders would argue that the Canadian dollar is worth $3 or $5 against its current 79 cents.
But, on this site earlier this month, Thomas Yeung argued that XRP could quadruple. For bitcoin, multiple traders have argued the price could clear $1 million against a current $20,000-plus.
This problem holds for XRP. At a current price of 56 cents, and with Ripple having issued 100 billion coins, the currency is “worth” about $56 billion at the moment. Is that fair? It seems close to impossible to argue that it is — or isn’t.
The Utility Problem
The other broad issue with cryptocurrencies — and there are thousands — is that their utility is difficult to see, and in some cases simply nonexistent.
Indeed, I’ve long been skeptical toward bitcoin (and admittedly, far too skeptical) for that reason. Bitcoin originally was supposed to disintermediate large banks, but over time its use case supposedly has pivoted to being a “store of value.” Since bitcoin is an ineffective currency (long processing times, repeated hacks, a failure to actually provide its promised anonymity), the bullish argument has moved rather substantially. Maybe bitcoin will be a store of value simply because enough people believe it to be so. Maybe not.
For many altcoins, meanwhile, the use case is far less clear. Many have proven to be outright scams. An investor who owns Apple stock knows what Apple produces, and what its value is to the economy and even the world at large. The same cannot be said for many, or even most, cryptocurrencies.
Why XRP Is Intriguing
Again, XRP has both of these problems. Valuation is inexact. Utility remains unproven.
But there is at least a case to be made here. The $56 billion market cap (based on maximum coin supply) clearly could be too cheap if the crypto does gain adoption. In terms of utility, there’s a reason to see that adoption occurring.
Because Ripple’s currency could significantly improve payment processing around the world. Obviously, the rallies in stocks like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ), to name two of many, show how optimistic equity investors are toward the payments industry more broadly. Tens of trillions of dollars move worldwide every year. That alone suggests that XRP should be worth more than $50 billion — and potentially much more — if it becomes an integral part of that system.
And it could. XRP gets around Bitcoin’s processing problem by removing mining from the equation. The currency is overseen by Ripple, a private company, and the network is managed by assigned validators. (To be fair, those aspects also remove some of the benefits of bitcoin, most notably its decentralized nature.)
In other words, XRP is part of a future where the guardians of finance — the same guardians Bitcoin’s pseudonymous founder aimed to displace — largely maintain their roles. That’s a future more in tune with how most equity investors see the world. XRP can win when there is an evolution toward crypto rather than a revolution by crypto.
Dipping a Toe
It bears repeating: the risks are substantial. In the short term, XRP has been all over the map since an “airdrop” of the Spark token, and may continue to be so. While bitcoin is chasing new highs, XRP before the airdrop was threatening all-time lows.
In the long term, XRP simply may never gain real adoption. Bitcoin’s promise may be fulfilled. If it isn’t, alternative improvements in the payments world may make XRP obsolete, or unnecessary. This is not a crypto to be owned with funds an investor can’t afford to lose. (In fact, I’d argue there’s no such crypto.)
But XRP at least makes sense. There’s logic to its centralized nature. There’s logic to its potential utility. And, even measured in a rough manner, the price looks at least acceptable. If equity investors wanted to dip a toe into the crypto market, XRP would be an intriguing choice.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.