It is no secret to anyone that Ripple (XRP) became the darling of cryptocurrency investors over the last few years.
This asset, which is effectively centralized and relies on a permissioned blockchain, has been racking up partnerships with financial institutions worldwide. The promise of cheap, instant transactions across borders and the allure of blockchain technology, are hard to ignore. That is probably why Brazilian financial institutions are jumping in on the Ripple bandwagon, but does this mean that investors should be looking at picking up more XRP?
Powerful players partner up with Ripple
It is tempting to go into Ripple because the project is partnering up with powerful players in one of the biggest economies in the world. Ripple launched operations in Brazil in 2019, partnering with banking giants such as Santander and Bradesco. This is part of Ripple’s wider strategy of racking up partnerships all around the world. The strategy is great for Ripple and the banks; expanding those deals to include more financial institutions also bodes well for their business.
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Ripple competes with Swift
As a result of Ripple’s aggressive worldwide deal-making, the company has been able to secure $200 million USD in its series C funding round. Its business model and the technology behind it, make it a great alternative to Swift. The costs of cross-border transactions using Ripple are very low, coming in at about 10% of the costs incurred when using Swift.
XRP usage is bound to increase as a result. Banks, like any other business, look for efficiencies wherever they might find them. If they can reduce the costs of international transactions and still keep charging what they charge for them, then they are bound to add quite a bit to their bottom lines. It is a no-brainer, but it is also fundamentally opposed to the philosophy that crypto brought forth.
Decentralized solutions are still cheaper
But if banks and other financial institutions, like remittance service providers, keep their fees high while reducing their costs, people might start considering a truly decentralized solution instead. The user doesn’t care if the money goes through Swift or Ripple; they care about their own bottom line. A Bitcoin transaction for instance, will always be cheaper than a transaction that is 90% cheaper than a Swift transaction.
Banks can charge anywhere between $15 to $50 USD for a wire transfer using Swift. Even if that price comes down to anywhere between $1.5 and $5 USD, it will still be at least 10 times more expensive than a Bitcoin transaction. Therefore, the P2P philosophy that Bitcoin and other cryptocurrency projects brought forth, provides a more cost-effective solution for the individual.
XRP price manipulation?
Ripple is undoubtedly poised to profit greatly from its blockchain solution – although Bitcoin enthusiasts would call it glorified distributed database instead of a blockchain solution.
Nevertheless, buying XRP as an investment is not tantamount to buying Bitcoin or other cryptocurrencies as an investment. Ripple is using XRP and its blockchain solution to make life easier for banks, but the profits they expect to make from that endeavor will not trickle down to XRP holders.
XRP investors might be hoping that increased usage will buoy the price of the asset. This is an assumption that they should check. If banks are using XRP to move money across borders, they will like it to have a more predictable price. The cost of volatility in international banking might keep major banks out of the game. So, as long as Ripple keeps working on its partnerships with financial institutions, it will have more of an incentive to go against the interests of those buying XRP on cryptocurrency exchanges. Ripple’s centralized structure allows it to intervene quickly and stabilize the price, effectively erasing profit opportunities for XRP holders.
Since there is no regulation in cryptocurrency markets, it is difficult to prevent Ripple from intervening to stabilize the price once banks start using XRP more prominently. XRP investors have no recourse to prevent this; they cannot appeal to the SEC or any other regulator because holding XRP doesn’t grant them any rights vis-à-vis Ripple.
Are you investing in an alternative to Swift or in crypto?
This also raises the following question: what are XRP holders invested in? Investors who like Ripple should ask themselves if buying XRP means that they are investing in a cryptocurrency. From Ripple’s behaviour it is clear that those who participated in the series C funding round, were investing in an alternative to Swift. Those who buy XRP might think that they are investing in a solid altcoin, but they are really investing in a vehicle that will be used to lower the cost of international transactions.
Bitcoin and other cryptocurrencies also lower the cost of transactions, but they are not owned by a company that is also seeking funding to expand. XRP is therefore not like other top ranked cryptocurrencies. It shouldn’t be considered as a part of that asset class.
Nevertheless, since XRP is listed on cryptocurrency exchanges, many classify it as a cryptocurrency like Bitcoin or Ether. The fact that Ripple is racking up more partnership deals, especially in countries as important as Brazil, means that the mechanics are in place for its price to rise in the short term at least. The buzz around Ripple creates XRP FOMO. Investors can make a profit on XRP, but they must be aware of the fact that at any given point in time, if banks start using it more, Ripple is likely to intervene to lower its price in order to allow its business to prosper.