Assumptions: Value analysis.
· The market is imperfect (manic-depressive), which creates buying opportunities or assets overvaluation.
· The goal is to analyze the intrinsic value of an asset, not its price. Find a good management team running it. The success comes from the facts and the analysis have been correct, not because others agree.
· The price does not necessarily reflect the intrinsic value of an asset.
· The return on an investment is multiplied thanks to the compound interest formula.
· Circle of competence: Always invest in leading companies in your sector, which enjoy a lasting competitive advantage, an edge called Moat.
· Buy at a discount against its intrinsic value. When you buy an asset with a large discount on its intrinsic value, great things will happen.
· Patience.
· Do not lose money Protect your equity.
XRP Analysis.
The story behind.
XRP is a decentralized open source platform based on the blockchain that has existed since 2012. XRP is a vehicle that transfers and liquidates the value of different currencies, whether cryptographic (digital) or traditional.
In turn, XRP belongs to Ripple, which is a company whose objective is to accelerate cross-border payments through the Blockchain technology, offering its cryptocurrency XRP as a bridge and universal currency, avoiding the expensive systems currently being used by traditional banks.
Mission: One frictionless experience to send money globally.
Vision: The World’s only enterprise blockchain solution for global payments.
Utility:
· Immediate
· No transaction costs
· No intermediaries
· Accessible to anyone with a smartphone
· Secure
While it is faster than the other major currencies (BTC, ETH, LTC …) with similar market capitalization and daily volume turnover, its main competitors are the current suppliers of cross-border payments. These providers use a transfer system that was created before the existence of the Internet, and have experienced few updates. It can be said that the current transfer system is:
· Slow (3–5 days)
· Unreliable, with a high error rate.
· Expensive.
· Unacceptable for the 21st century user, who requires an elegant and friendly experience.
For these reasons, the objective of Ripple (the company) is to replace systems such as the Swift international network, which although it may be considered obsolete, connects to no less than 11,000 banks. For this reason, its immediate strategy is to offer banks and payment service providers the XRP technology, which is called ILP (Inter Ledger Protocol), which allows any asset of value to be exchanged for people.
In order to perform a strategic analysis, a SWOT analysis can be made
SWOT
Internal analisis
Weaknesses
· Unlike other financial assets, XRP does not have reliable assets or cash flows that support its price and that facilitate its conversion into hard fiat currencies (USD, EUR, JPY …). But, since the 1944 Bretton Woods Monetary Conference in which the gold standard was abandoned, what currency has got it?
· Unlike other cryptocurrencies, XRP has been previously mined, and not by network members who process transactions. For libertarianpurists, this even leads them to affirm that it is not cryptocurrency. It is necessary to understand that blockchain and Bitcoin were born at a time when there was a majority feeling against governments, financial entities, regulation, etc. whereas Ripple was born when the crisis was practically overcome (2012)
· Low liquidity of XRP, given by 2 not negligible reasons: that 60% of the tokens are still held by Ripple and that certain exchange houses are still refusing to negotiate XRP, with Coinbase as the best example.
· Volatility: Its price grew by 38,000% in 2017, making one of its founding members among the 5 largest fortunes on the planet (for a few hours). Cryptocurrencies are still a very small market, but as financial institutions begin to enter, volatility will be reduced.
Strengths
· It is the fastest, a transaction closes in about 3 seconds.
· Scalable, allowing 50,000 operations / second. Benchmark: Bitcoin makes 13 operations / second, which could limit its growth.
· Thanks to Ripple, XRP has a management team with extensive experience in many industries. Its CEO, Brad Garlinghouse comes from AOL and Yahoo, Zoe Cruz from Morgan Stanley, and so forth.
· This is not usually mentioned, but it is one of the few crypto currencies with an appealing name, as it does not carry either Bit or Coin. The names of its competitors have been designed by engineers, rather than by communicators.
· Supported by 180 banks (Santander, BBVA, SBI, UBS, SEB …) and payment providers (Western Union, American Express, Money Gram …) that are testing their technology in order to offer better services to their customers and thus become more competitive (see transfer video in 8 seconds between ATB-Reise). Many of these banks are already developing services to be able to transfer funds globally, and in a very short period of time they have established themselves as the safe alternative to other cryptocurrencies.
· Down to Earth: Ripple is not against banks, governments and regulations, but it has a more realistic approach and knows that its existence is justified and that it will remain there. For this reason, its main strategy focuses on offering its services to financial institutions, since access to the general public can take much longer.
External analysis
Threats
· Banks do not need large sums of XRP, which currently has a market capitalization of about $ 60 billion. Although large financial institutions, such as UBS, American Express or Banco Santander are direct investors on this technology, most banks have not decided to try it.
· Regulation: The absence of legislation on the blockchain and cryptocurrency that allows or stops its use is limiting many investors’ decision to enter. It seems important to emphasize that the main innovations in the history of mankind had more time before being regulated. Looking back on the history of innovation, other technologies that have transformed our society had more time to develop before being seriously regulated. As notable examples, the telephone was invented in 1876 and was regulated in 1913 (37 years later), radio was created in 1907 and regulated in 1927 (20 years later), mobile phones were invented in 1965, but the first wireless spectrum auction dates from 1989 (24 years) or internet was invented in 1969, but only in recent years is an area with an intense regulatory focus, about 47 years after its creation. The open source software platform that is Bitcoin (BTC) (and subsequent crypto currencies) was launched in 2009. We are only 6 years from the development of the blockchain, and very far from the period in which other technologies were adopted by society in general in the past.
· That the “Internet Big 4” (Apple, Google, Amazon …) crush many of these crypto currencies as they have done with many other competitors throughout their brief but successful existence.
· The Blockchain explodes, even as a consequence of other cryptocurrencies without any utility, which are already present in the market. When not having liquidity, other tokens could drag XRP to its disappearance. They have already warned us 236 times of this fact;)
· A management fall-out that undermines the existing (little) trust in cryptocurrency that has already suffered numerous secessions.
Opportunities
· Although Ripple prefers to focus its efforts in a more efficient way, offering its services to the institutions of the developed world, there is still a market of 4 billion people from developing countries, who demand a cheaper, faster and safer transfer service.
· That the tests that are being carried out today are successful, and that the implementation of XRP in the financial markets begins.
· Vertical expansion from new services, including loans, given the “notarial” character of the Blockchain platform.
· That the public begins to use XRP as a micropayments’ solution
The numbers
From a quantitative analysis, an asset is valued based on its utility. To analyze if there is a demand for a service that improves efficiency, reduce costs and friction when moving value, the following figure should be taken into account: For an average transfer of $ 200, the costs are 7.09%. the amount sent, reaching 16.17% in South Africa in the last quarter of 2017.
More precisely:
· in Europe and Central Asia the average cost was 6.61%
· in Latin America 5.85%
· in South Asia 5.34%
· in sub-Saharan Africa, 9.27%
· and in the Middle East 7.41%
For institutions, the cost was:
· 10.44% through banks
· 6.24% by money transfer operators
· 6.64% post office
· 2.82% with mobile operators.
The valuation of XRP must be done considering its utility, and having chosen Ripple to access the market through financial institutions, we will estimate the market total. Therefore, voluntarily, no attempt will be made to assess transfers between individuals, which, given the company’s strategy, could be a positive collateral effect.
Main financial messaging services:
Fedwire: Sends $ 2.1 trillion daily, which means an approximate volume of $ 0.535 quadrillion
Swift: Sends $ 5 trillion daily, which means a total volume of $ 1,275 quadrillion, with an average transaction amount of $ 45,000.
Chips: Send $ 1.4 trillion daily, which means an approximate volume of $ 0.355 quadrillion.
Therefore, the total of bank transfers for the three main agents is $ 2,167 quadrillion.
Second, we add the turnover of the main money transfer services:
Western Union sends $ 100 billion annually, with an annual turnover of $ 5.5 billion in commissions.
Money Gram transfers $ 30 billion per year, with an annual volume of $ 1.630 billion in commissions.
Transfer Wise sends $ 120 billion annually, with an annual turnover of $ 1.10 billion in commissions.
World Remit transmits $ 40 billion annually, with an annual turnover of $ 0.63 billion in commissions.
RIA transfers $ 24 billion annually, with an annual turnover of $ 1.3 billion in commissions.
Finally, the new Paypal manages $ 350 billion with a net income of $ 3.2 billion annually.
This leads us to add about $ 506 billion annually with a commission income of $ 14.04 billion per year.
Therefore, the global transfer market is $ 2.7 quadrillion per year.
From the realistic perspective of Ripple, it would be fair that in 10 years it would reach a 10% share of the global transfers, that is, $ 0.270 quadrillion per year (the fourth part that Swift currently has). Therefore, the market to be reached by Ripple in the near future will be $ 270,000,000,000,000 per year.
To obtain the price of XRP we will have to resort to the formula of Irving Fischer of 1911 on the speed of money:
MV = PT
In which:
M = Amount of Money
V = Money speed or velocity (number of turns)
P = Price
T = Number of Transactions
If PT is the total amount of transactions per annum, we will replace it with the market share of Ripple, that is, $ 0,270 billiards per year.
Hence:
$ 0,270 quadrillion = MV
If the Monetary Mass is the number of XRP in the market, which is limited to 38,739,142,811 x Price = M
And the average velocity of XRP is V=46 (average last 3 months)
Applied to the formula:
$ 270,000,000,000,000 = 38,739,142,811 x Price x 46
and Clearing the Price, we get the intrinsic value (ceteris paribus) of XRP:
XRP = $ 151.51
Conclusion:
XRP is an innovation in the transfer of value (Internet of Value), so, unlike hundreds of other tokens, it has utility for society’s needs. Specifically, it provides:
· Connectivity between different payment networks
· Speed, thanks to an almost immediate exchange, which reduces the volatility effect.
· Reliability and real time visibility thanks to the Blockchain technology.
· Low operational and transactional costs.
· Scalability, growth potential that does not affect its efficiency.
As in the explosion of the .com at the beginning of the century, many of these blockchain investments will show that we have been investing in a bubble. But, just as the Internet did not disappear, nor there are fewer web pages, the Blockchain network is here to stay, and with it the cryptocurrencies that have a real use, among which XRP will probably be found.
The value analysis shows us an innovative service, backed by financial institutions and by household names such as the Gates Foundation, and a solid management team in a scarce market of communicators and managers.
XRP responds to a demand with a service that can be understood (value investing principle) and with a competitive advantage (Moat) over its competitors thanks to the fact that it is based on consensus instead of proof of work.
Exit-Points scenarios:
· Sale of 50% of the portfolio when its value is doubled.
· When reaching the estimated intrinsic value
· Keep until your retirement. The passage of time reduces volatility.
However, the cryptocurrency market is still very young, and nobody knows its future, neither do I. It is one of the riskiest markets at present, and it is recommended to invest a quantity of money that is not necessary, but to form a percentage lower than 5% of your portfolio, and never borrow money, please stay away from debt!
The present analysis is for personal use prior to the investment made in XRP. The author is not your financial advisor, so this is not an investment recommendation, but a step prior to the analysis you need to make before making a decision about investing in cryptocurrency or any other asset. For this reason, we cannot accept previous or future responsibilities regarding the success or failure of your investment. I am Not Your Financial Adviser. If your investments are successful, do not forget to help the most disadvantaged through your trusted NGO.
If you want to contribute to future analysis, I thank you for your tip, and if you are interested in the valuation of another asset, you can mention it and send it to my email address sodercan@yahoo.com mentioning the asset, its edge and the need that would be covered in the market.
Author: Óscar ZA — Bachelor in Business and Economic Sciences. MBA. Master in Banking and Financial Markets sodercan@yahoo.com @fantastiROco
Certified NYFA since 1996(Not Your Financial Adviser)
