Why Ripple Token (XRP) is Terribly Overvalued
XRP token and Ripple Payment Protocol are Different
Ripple is a global settlement network which allows banks to transfer money and settle international payments in different currencies. As more banks use Ripple protocol, it is becoming more valuable.
Contrary to popular belief, XRP currency is different than the Ripple protocol. XRP is a token or a native currency that works under Ripple Transaction Protocol. XRP protects the Ripple network from DDOS attacks, and prevents spam.
Do Banks really invest in XRP?
Banks do not invest, buy or hold XRP tokens.
There are banks working with Ripple company, and they may be making payments to the Ripple company per their use of the Ripple protocol.
Real Value of XRP
Certain amount of XRP is being destroyed to cover transaction fees. Currently, the default transaction fee is 10 drops (0.00001 XRP).
As an example, only 10 XRP tokens need to be destroyed if a bank needs to settle 1 million transactions in one year.
To have a better understanding of the real value of XRP, we need to know its destruction rate.
From the inception of XRP to 10/12/2019, only 0.00867% of the entire supply has been destroyed. On the other hand, there has been no significant change on the destruction rate over time.
With this rate, we will need around 70,000 (seventy thousand) years to consume all XRPs. Sadly, none of us will live that long. In reality, it is very likely that technologies like Ripple network will be outdated and useless 1000 years from now.
In other words, it does not make any sense to invest in an asset with the assumption that it has a chance to become scarce thousands of years from now.
Why Did XRP Skyrocketed?
Majority of people do not understand that Ripple payment protocol and XRP are different. When a private investor invests in Ripple company, people assume that the valuation of XRP should also increase. However, XRP token's valuation and Ripple company's financial situation are irrelevant.
Due to the fact that there are 100 billion XRPs created, the XRP price is low compared to other cryptocurrencies. As a result, new people who invest in cryptocurrencies ignore the market cap, and they think that XRP is very cheap and should go way higher.
As Ripple company holds the majority of XRPs, the amount of XRPs in circulation is significantly low.
Since XRP price increased to unexpected levels, those who shorted XRP got liquidated and had to buy back from higher prices. These short squeezes caused the price move even higher.
With the price increase, the volume also increased to astronomical levels. As such, more exchanges listed XRP.
Ripple company has been doing a great job on getting their token listed on almost all major local exchanges. Local exchanges are the place where new users begin their trading activities, and it is always easy to attract those newcomers by announcing partnerships with banks.
An important portion of the XRP circulating supply is restricted, which means most of the XRPs reported as circulating can not be moved. As a result, XRP market cap has been wildly overstated and does not reflect the truth. This overstated market cap has undoubtedly led many institutional investors to invest in XRP.
I hope this article will be helpful.
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