For the better part of a year now, the cryptocurrency market has been a practically unstoppable force. When 2017 began, the aggregate value of every investable virtual currency combined was only $17.7 billion. However, as recently as the first week of January, this combined valuation had peaked at almost $836 billion. This 4,500%-plus increase in cryptocurrency market value over a span of 53 weeks is unlike anything investors have ever witnessed before.
The exponential move higher in cryptocurrencies, explained
Wondering what's behind this rapid ascent in cryptocurrency valuations? For starters, thank the emergence of blockchain technology. Blockchain is the underlying digital, distributed, and decentralized ledger that's responsible for keeping a record of all transactions.
The excitement surrounding blockchain has to do with its potential to correct a number of perceived flaws with the current payment system, such as long waiting periods for funds to clear, as well as high transaction fees as a result of banks acting as middlemen. In particular, blockchain technology offers the potential for lower transaction fees since there is no bank involvement, quick processing times since transactions are being verified 24 hours a day, seven days a week, and increased security due to decentralization. Rather than storing this transaction data at a single hub, blocks of data that makes up the chain are scattered on servers and hard drives all over the world. This ensures that no single entity can gain control over a cryptocurrency, and that cybercriminals can't hold a digital currency hostage should they gain access to transaction data.
We can probably also thank the market dynamics of cryptocurrency exchanges for the continuation of this rally. You see, the cryptocurrency market isn't exactly "fair." By this I mean that investors have an opportunity to buy or sell, but there's essentially no way for them to make money if these digital currencies drop in value via short-selling, options, or futures contracts. With the exception of bitcoin (CCY: BTC-USD), which is now on both the futures platforms of CME Group (NASDAQ:CME) and CBOE Global Markets (NYSEMKT:CBOE), it's not possible for skeptics to put their money where their mouth is. That naturally tends to incentivize buying since downward moves aren't making anyone money.
And, of course, news-driven events have helped. Bitcoin (CCY: BTC-USD), the world's largest cryptocurrency by market cap, and the virtual currency most likely to be accepted by merchants, has benefited from its acceptance as legal tender in Japan, as well as its aforementioned futures listing with the CME Group and CBOE. Bitcoin (CCY: BTC-USD) is fully expected to be listed for futures trading with the Nasdaq in the first half of this year, and may soon have a number of exchange-traded funds for investors to choose from. In short, we're seeing bitcoin grow as a validated asset class in some countries and settings.
Ripple is making waves
However, bitcoin's reign as the leading cryptocurrency may not last over the long run. Objects in bitcoin's rearview mirror have already been creeping closer, and one in particular absolutely mops the floor with bitcoin where it counts most. Let's have a look at why bitcoin should be terrified of Ripple (CCY: XRP-USD).
Over the aforementioned 53-week period between Jan. 1, 2017 and the first week of January 2018, Ripple (CCY: XRP-USD) rose by very close to 50,000%. The bulk of this increase is a result of blockchain partnerships that Ripple has struck with a number of large financial institutions.
Though Ripple (CCY: XRP-USD) announced in June 2016 that seven global banks were testing its blockchain in pilot and small-scape projects, its XRP coin didn't take off until it announced a partnership with American Express (NYSE:AXP) and Banco Santander (NYSE:SAN) in mid-November. This real-world test will allow American Express users to send noncard payments via AmEx's FX International Payment network to U.K. Santander accounts and process those transactions through Ripple's blockchain. Rather than having these payments potentially wait days for verification, Ripple suggests they'll settle instantly.
Bitcoin should be quaking in its boots over this Ripple comparison
But it's not a single partnership that should have bitcoin necessarily worried. It's a simple comparison of bitcoin's blockchain to Ripple's that should be cause for concern.
A block of transactions tends to be verified on the bitcoin blockchain about once every 10 minutes, allowing what works out to a maximum of seven transactions per second. On average, bitcoin transactions take a little over an hour to settle.
Scalability has always been an issue with the bitcoin community, namely because, as an open network, not everyone can agree on what path bitcoin's blockchain should take moving forward. The Segregated Witness (SegWit) upgrade could have helped improve capacity, lower transaction fees, and speed up transaction times, but it was never put into action due to insufficient support for such a move. Instead, bitcoin forked into a handful of new currencies.
By comparison, Ripple, by its own admission, has scaled to handle 1,500 transactions per second, which is over 200 times more than bitcoin's blockchain. Furthermore, these transactions settle in an average of four seconds, and they're considerably cheaper. The average Ripple transaction fee is a fraction of a cent, whereas bitcoin transaction fees can range to nearly $30. This is what bitcoin should be worried about.
However, there is something worth keeping in mind here. Bitcoin has proven its ability to scale over the years, while Ripple's claims are mostly unproven without a vast merchant network and just a handful of testing partners for its blockchain. In other words, it's unclear if Ripple can indeed expand its network and maintain these low transaction costs and quick settlement times once scaled.
Nevertheless, it's pretty clear why Ripple has quickly climbed the ranks, and it would be completely plausible, based on this comparison, for Ripple to surpass bitcoin to become the most valuable cryptocurrency in the world at some point in the future. Of course, a lot will depend on whether the Ripple team can make good on its scalability promise once more financial institutions latch onto its blockchain technology.