Forget the lottery and its 1-in-300-million chances of winning the jackpot when you have cryptocurrencies. Last year, digital currencies recorded what might be the greatest year ever for a single asset class. After beginning the year with a combined market cap of $17.7 billion, the aggregate market cap of all virtual coins added together had jumped to $613 billion by the end of the year -- an increase of more than 3,300%.
Bitcoin, which is the world's most popular cryptocurrency, and the one most likely to be accepted by merchants, is often credited with leading this charge. Until recently, it frequently comprised 60% to 80% of the aggregate virtual coin market cap.
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However, the monumental rally last year in cryptocurrencies was about far more than just bitcoin. Really, the story was about everything else not named bitcoin. If we exclude bitcoin's market cap from the equation, the aggregate value of every other virtual currency catapulted from $2.24 billion on Dec. 31, 2016, to $374 billion by Dec. 31, 2017. Finding the next bitcoin is where the real excitement lies.
Ripple blows by Ethereum to become the second-largest cryptocurrency
One such cryptocurrency that's taken the bull by the horns, so to speak, is Ripple. Ripple galloped higher by more than 35,500% in 2017, and over the past two weeks, its coin (XRP) has quadrupled in price. In fact, Ripple recently blew by Ethereum, which has held down the fort as the virtual currency with the second-highest market cap behind bitcoin for much of 2017, pushing to as high as a $127 billion market cap on Jan. 3, according to CoinMarketCap.com.
What on earth would cause a virtual currency to emerge from the shadows of bitcoin and suddenly skyrocket to a $127 billion market cap in under a year? It looks to be a combination of four factors.
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1. Rumors about expanded cryptocurrency exchange listing
The biggest factor of late is nothing more than a rumor that Ripple will soon be listed on cryptocurrency exchange Coinbase. Coinbase is the world's most popular cryptocurrency exchange, but it currently only offers trading in bitcoin, Ethereum, Litecoin, and bitcoin cash. As the second-largest virtual currency, it only seems logical that Coinbase would seek to add Ripple relatively soon.
What's more, transaction fees are significantly cheaper for Ripple than they are for bitcoin. How significant? Ripple's transaction fees typically run around a fraction of a cent, compared to bitcoin transactions that can have fees approaching $30. Low fees could be a means to entice investors into Ripple.
As recently pointed out on Inverse, Coinbase has expressed plans to expand its altcoin offerings in 2018. The addition of Ripple, though, would be incredibly ironic given Coinbase CEO Brian Armstrong's comments about it and burgeoning rival Stellar back in February 2015.
Ripple, Stellar, and Altcoins are all a distraction. Bitcoin is way too far ahead. We should be focused on bitcoin and sidechains
— Brian Armstrong (@brian_armstrong) February 23, 2015
Additional speculation suggests that Coinsquare, which is the largest cryptocurrency exchange in Canada, might beat Coinbase to the punch in adding Ripple to its trading platform. As CEO Cole Diamond recently noted in an interview with Business News Network, "We're going to be adding Ripple, we're going to be adding Monero, we're going to be adding other digital currencies that have their own blockchains and new did ICOs (initial coin offerings) – with the exception of Ethereum."
The expectation of better trading platform access certainly has investors excited.
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2. Major partnerships with big banks
Over the past two years, Ripple has also partnered with a handful of brand-name banks to test its blockchain technology in some capacity. Ripple's primary focus is expediting the settlement times of transactions over its network, especially with regard to cross-border transactions.
In June 2016, Ripple announced that seven global banking giants, including Canadian Imperial Bank of Commerce, UBS, Unicredit, and Banco Santander (SAN 0.56%), were testing out the company's distributed digital ledger in some pilot or small-scale capacity.
However, more visibility came in mid-November 2017 when it announced a partnership with American Express (AXP +0.71%) and Banco Santander for select cross-border payments. Under the terms of this real-world test, American Express users who make non-card payments to U.K. Santander accounts will have those payments processed through Ripple's blockchain network. It's expected that these transactions will settle instantly, which would be a massive improvement over the sometimes days-long verification process banks put cross-border payments through.
The more real-world financial partners Ripple can lure, the better its coin may perform.
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3. The lack of "fairness" in cryptocurrency markets
A third reason Ripple has done so well -- along with all cryptocurrencies for that matter -- is a lack of "fairness" on cryptocurrency exchanges.
What do I mean by fairness? With most publicly traded stocks, you have the opportunity to buy and sell, as well as short-sell and buy options, in order to make money. In effect, regardless of whether a stock goes up or down in value, there's money that can potentially be made. It's a fair market that allows optimists and skeptics to get involved. With cryptocurrencies, the only option at the moment, with one exception, is to buy or sell. Money can't be made to the downside with all but one cryptocurrency, which naturally incentivizes buying on any major dip.
The one exception here is bitcoin. Skeptics can place their bets against bitcoin via bitcoin futures trading with CBOE Global Markets or CME Group. Assuming bitcoin ETFs are also approved next year, there are bearish ETFs that'll play a similar role.
Long story short, until a fairer market exists, retail investors are liable to keep pushing cryptocurrencies like Ripple higher.
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4. The cohesiveness of Ripple's coin and blockchain
Finally, I'd point to the manner in which Ripple's blockchain and coin work hand in hand to enhance their value as a key reason why it's rallied so extensively.
One of the more prominent issues with valuing cryptocurrencies is that their coins aren't always very useful. Many cryptocurrencies require that their blockchain transaction fees be paid in their tethered token, but beyond this aspect, they lack a real function.
For instance, Litecoin and bitcoin have general use as means to purchase goods and services with a handful of merchants. Their coins serve a purpose beyond just being a way to pay for transaction fees. Most cryptocurrencies lack this clearly defined purpose -- but not Ripple.
Ripple's XRP coin is set up to act as the perfect intermediary in cross-border transactions. Imagine a customer in Japan wants to make a payment to a merchant in France across Ripple's blockchain. In theory, the Japanese yen of the buyer can be instantly converted into XRP coins, with those XRP coins then converted into euros. All of this can be done for a fraction of today's costs, and would also be completed much faster.
Of course, the bigger question is whether Ripple can keep up this astronomical run. My suspicion is that it can't, but until we see a fairer market where skeptics' investment dollars can be represented, I could be wrong.
