There. It’s been said. Over the last few days we have seen a significant fall in the price of bitcoin and it will be days to years, or perhaps never, before it recovers.
What is causing the sell-off? Difficult to say. But several facts stand out. Bitcoin in April saw a rise to heights that it was nowhere near ready for based on the fundamentals. It fell quickly back, but what we are seeing now may be just a further settling back to historic trend-levels.
It is also true that bitcoin is still a very small economy being moderated by a few exchanges. Since the market value of an exchange is mostly in the expectation of what people think. If expectations drop, value drops, and the value disappears as if (as in fact) it was never there in the first place.
So, the buy/sell choices of a few people on the exchanges can cause a movement of price throughout the bitcoin economy. In theory, a single bid can set the price of the entire economy.
And that is why I am not worried about this being the end of bitcoin. It was not ready to be valued so highly, its infrastructure is still being built out, and the critical trigger that will propel bitcoin fully onto the world stage has not yet occurred.
That trigger is going to be another event like Cyprus. It could (but won’t) be Portugal which is going through its own crisis right now. It won’t be because bitcoin has not seeped deeply enough into the world culture. It could be Kenya, Myanmar, or a myriad other places. Basically, though, enough pressure will come on one nation that will prompt the people to widely adopt it or the government to declare it.
With that foothold, bitcoin will slowly start being adopted across economies until it is a world currency backing fiat money.
But there are others who say that bitcoin’s 2.0 money will be supplanted by a 3.0 money.
Today, I look at one of the frequently talked about contenders. Ripple.
I was intrigued by Ripple both because it is frequently talked up and slammed.
First, I ask the question, what problem does Ripple solve that the other crypto currencies do not? There are several identifiable problems with bitcoin that can/could/should be addressed. The problems include moving money in and out of BTC, the fact that miners are controlling too much of the hashrate and that the regular guy can’t hope to mine anymore, the transaction/confirmation lag, etc.
It is a little difficult to figure out from Ripple’s website what BTC problem they are going to solve. Their video was slick and shallow. It sounded good, but after watching it, I felt I had more questions than before. What are the IOUs and how do they work? What are the gateways and how do I move money on and off of Ripple? No idea.
I was able to find much more detailed information, but strangely, mostly off of their website. Here are a few key points:
- Ripple is essentially a social lending network. They are trying to be a way to connect anyone in the world who needs money to anyone who has it to allow an exchange.
- The way money is transferred is a little like six-degrees of separation. Let’s assume a network where everyone has two friends. I have two friends that I trust, so through them, I know four more, through them, eight, and so on. In only a few steps, I am connected to everyone in the world on that network.
- When I find that I want to buy bitcoin from John, I send the request and receive the bitcoin. I do not have a trusted relationship with John, so a chain of people is created, all of whom trust each other, and the money passes hand-to-hand until it gets to me.
- All of this passing hand-to-hand is done in Ripple’s own currency (XRP) which you have to buy into in order to participate. There are 100 billion XRP extant and no more will be created. That means, like bitcoin, if Ripple takes off, the price will inflate. Note that 15 or so developers hold in reserve some 20% of all XRP for their own use. They are giving away some other percentage.
- Currently, getting XRP is no easier than it is to get bitcoin. They have recently announced that Snap Swap is going to be their gateway in the US, but it is not up-and-running yet and it was difficult for me to get any real information about it. You can also get XRP from Bitstamp, but for an American, buying from Bitstamp is not a simple process.
- Ripple is also still in development. When I went to their website to get a wallet, I was allowed only to register my website.
- Even if I had gotten a wallet, unlike the BTC wallet I downloaded and then funded by watching a video on one of the BTC dust sites, you need to buy 300 XRP to activate a wallet. Further, you need to maintain a minimal balance in order to keep that wallet active. This fact alone raises questions. What if I am expecting a payment, but don’t have the funds right now to keep my wallet active? What happens?
- Ripple is also a company, and not a decentralized network that anyone can join. This system is going to be controlled, and controllable from a single point. Want to shut off payments to a particular group or individual? The FBI can order it.
So, again, what is the bitcoin problem that Ripple solves better? I still can’t really answer that. I am still having difficulty getting my head around the fact that it is a network of trust where the money has to pass between x number of hands before it gets to me. That feels shaky and complicated.
I cannot say that Ripple is a scam. There is a kind of idealist theory that underlies the idea of a network of currency built on individual trust. But unless Ripple can solve one of the big problems of bitcoin, like its liquidity problem, then there is really no reason to consider it a serious contender, despite the hype.
If I have gotten any details in this article wrong, please leave a comment or email me. I will be happy to print a correction.