Whether you realize it or not, investors are witnessing history with the rise of cryptocurrencies. Aside from the fact that there's never been an asset class like virtual currencies, in 2017 we witnessed what could be the single greatest year for an asset class in history. Between the beginning and end of the year, the aggregate value of all digital currencies exploded higher by more than 3,300% to $613 billion, and as recently as Jan. 5 touched $835 billion in aggregate market cap. It's truly been a sight to marvel considering that the broad-based S&P 500 has taken decades to deliver similar returns.
Bitcoin (CCC: BTC-USD), the largest cryptocurrency by market cap and the virtual coin most likely to be accepted by merchants, is heralded with having led the charge higher. After all, it was the first tradable cryptocurrency, and it brought blockchain technology into the mainstream. Blockchain is the digital, distributed, and decentralized ledger that records all transactions and underpins digital currencies.
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Ripple makes waves
However, the rally in cryptocurrencies in recent months has been about far more than just bitcoin. It's been about the evolution of blockchain technology and attempting to discover which burgeoning digital coins could become the next bitcoin. Among those that have risen to the challenge is Ripple (CCC: XRP-USD) and its coin, XRP.
Ripple made waves recently as it exploded past the $100 billion market cap barrier and briefly unseated Ethereum (CCC: ETH-USD) as the second-largest cryptocurrency due to the buzz surrounding its blockchain technology. According to an analysis by HowMuch.net, as well as Ripple's own website, its blockchain is capable of processing up to 1,500 transactions per second. While that's still miles behind Visa, it's well ahead of mobile payment platform PayPal, and its light-years ahead of both bitcoin and Ethereum, which purportedly can handle about seven and 20 transactions per second, respectively.
Then again, bitcoin and Ethereum have networks that are used considerably more than Ripple's and other burgeoning cryptocurrencies. While scale has potentially slowed their capacity to process transactions, they've nonetheless demonstrated their ability to handle an increasing load of transactions. Investors are essentially waiting to see if Ripple's blockchain has the capacity to scale and maintain its cryptocurrency-leading processing times. The good news is it appears to finally be getting the chance to show off its technology.
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Ripple bags its second industry elephant in as many months
In November, Ripple announced that it had landed a partnership with American Express (AXP 1.00%), an elephant in the banking space, as well as Banco Santander (SAN 0.98%), to test its blockchain technology in select cross-border payments. The partnership will process noncard payments sent by U.S.-based American Express users to U.K. Santander accounts on AmEx's FX International Payment network through Ripple's blockchain. It's believed that these transactions will settle instantly, removing what had been up to a three- to five-day hold period needed to verify funds before settling a cross-border payment.
Then, this past Thursday, Jan. 11, Ripple announced that it had snagged its second industry elephant in as many months. Money transfer service MoneyGram International (MGI +0.00%) is partnering with Ripple to utilize its coin, XRP, to expedite payment flows. Specifically, MoneyGram will use XRP through Ripple's solution for on-demand liquidity, known as xRapid, as well as explore MoneyGram's integration into Ripple's ecosystem through xVia.
As with its AmEx and Banco Santander partnership, its deal with MoneyGram is expected to result in considerably faster settlement times, which is critical to customer satisfaction in the money transfer business. Plus, XRP serves as the perfect intermediary when converting currencies, replacing the role a bank typically plays. For example, if a U.S. consumer sends funds to Mexico, XRP could serve as a means to convert U.S. dollars into XRP, then XRP into Mexican pesos. This exchange, and the ultimate settling of this transfer, can potentially be completed in a matter of seconds. Said Ripple CEO Brad Garlinghouse:
The inefficiencies of global payments don't just affect banks, they also affect institutions like MoneyGram. Money transfer companies are incredibly important because they help people get money to their friends and love ones. We are excited about this pilot and long-term strategic partnership with MoneyGram. By using a digital asset like XRP that settles in three seconds or less, they can now move money as quickly as information.
Image source: Getty Images.
There's much to prove
But, as noted, Ripple still has a lot to prove with a market cap that's currently higher than logistics champion FedEx.
To begin with, Ripple needs to show that it can scale its blockchain technology if these partners move beyond just small-scale tests. We've witnessed how, over the years, processing times for Ethereum and bitcoin slowed as they've gained in popularity, and it's always possible that Ripple's blockchain could share that fate.
There's also concern that competitors could unseat Ripple's blockchain. Though Ripple has been crystal clear in its intent to focus on financial institutions, the barrier to entry in developing and deploying blockchain is relatively low. Anyone with time, money, and a team that understands how to write computer code can develop their own blockchain and tethered virtual coin. In theory, a better cryptocurrency could come out of nowhere to dethrone the current leaders at any moment.
There's also no guarantee that even if these select projects work well, American Express, Banco Santander, and MoneyGram will significantly scale their deployment in quick fashion. We have to remember that blockchain has been around for about a decade, and only recently has there been any buzz about pilot and small-scale testing. It's probably going to take years to fully integrate blockchain into the financial services sector if that's the route these companies choose to go, which means cryptocurrency investors may have overestimated how quickly this technology will be adopted.
By all means, keep a close eye on Ripple's development. However, don't be surprised if volatility increases and Ripple struggles to maintain its current valuation.
