In the shadow of Bitcoin: the Ripple effect

If any virtual currency has kept headline writers busy, it's been Bitcoin. Far less in the public eye, another digital unit, XRP (Ripple), has been on similar rollercoaster rides. Are the two comparable at all?

Forbes has just revealed that the richest person in the cryptocurrency business is Chris Larsen, co-founder of Ripple and the man behind the firm's XRP digital token. Although he's no longer with the company, he still holds a 17-percent stake in it.

When the value of the digital currency peaked around the turn of the year, Larsen had a net worth of $20 billion (€16.3 billion). With the recent plunge in value, he still owns little under $8 billion and has no intention to part with his stake despite the latest rollercoaster ride.

While Bitcoin's value soared by roughly 2,000 percent last year, Ripple's (XRP's) rally was less known, but even more impressive — the value of the firm's tokens soared by a staggering 60,000 percent towards the end of 2017, while they were not even worth a cent apiece at the beginning of the same year.

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Getting a grasp of blockchain

Both Bitcoin and Ripple have been smoked in recent weeks with stock markets plunging around the globe, and more significantly, due to fears over tighter regulation of virtual currencies making the rounds.

Fundamental differences

While both digital currencies are based on the blockchain technology, there are crucial differences in the way they appeared in the first place and how they function.

The Ripple network was launched back in 2012, but unlike Bitcoin, XPR tokens were never mined and were simply issued by the company (100 billion tokens). Some 40 billion of them are now in circulation, with the rest owned by Ripple. This has frequently made the company the target of critics who argue that Ripple has too much control over the virtual currency, whereas control over Bitcoin is fully with its users.

Kryptokurren - Screenshot - Ripple

Ripple's website points to the shortcomings of the current SWIFT payment system, saying it has something better to offer

To soothe investor fears, Ripple has placed over 50 billion XRP tokens in escrow to allow a predictable supply.

It's fair to say that right from the start, Ripple was not intended to play the same role as Bitcoin in the financial world. Its designers have seen it as a service provider for the existing financial system. Its XRP token is just an accounting unit, with the company hoping to one day replace today's SWIFT payment system as it believes it will provide lower costs and above all, a higher transaction speed. It's basically used as a bridge currency for fiat money, helping to carry the latter from A to B, says Ripple's current CEO, Brad Garlinghouse.

"You can use digital assets to fund liquidity, and Ripple is uniquely positioned to capitalize on that," he says.

Conventional money transfers often encounter a liquidity problem, meaning that banks cannot really give customers transmitted funds unless the receiving lender has enough money in the right currency. And this is exactly where Ripple comes in. Interested banks hold a pool of XPR to fall back on for instant liquidity while managing transactions.

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Speed of transfers hard to beat

It's the Ripple protocol and its underlying algorithms that make cross-border money transfers happen almost in real time (under 4 seconds), beating Bitcoin by a wide margin. Not to mention that it currently takes days for a cross-border transfer to be completed under the conventional SWIFT system.

That hasn't kept critics from doubting the clout of the virtual currency. "I don't think Ripple has proven itself as a contender to be the next big thing yet," the CEO and co-founder of financial consultancy finder.com, Fred Schebesta, told DW. "Ripple is very far from achieving the level of awareness, support and adoption of Bitcoin."

While this may be so, the number of banks and financial services that have launched trials with the Ripple technology has grown beyond 100, with UBS, Santander and American Express counting among its customers.

It's true that the Ripple network can be seen as "the odd currency out" as it doesn't have its own public blockchain and mining system (understood as the digital processing of transfers where information about current transactions known as a block are added to the records of past transactions known as the blockchain).

Apfel und Apfelsine

Measuring Ripple and Bitcoin by the same yardstick would be comparing apples and oranges, analysts argue

But that's only logical given that right from the outset Ripple has focused on being of value as a business-to-business (B2B) service, and not a peer-to-peer (P2P) solution.

Looking ahead

Ripple is certainly facing major challenges ahead. It needs to get a lot more banks interested to convince investors. B2B solutions are also being offered by many other up-and-coming virtual currencies, and it's certainly early days to say whether Ripple may eventually be picked to replace the SWIFT payment system which would indeed ensure its long-term existence.

It's also possible that the Ripple technology (protocol) will prosper, while its XRP tokens may not.

"I think Ripple is a great company and is run really well, but as yet it's unclear what its future will be," Fred Schebesta said.

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Yet another cryptocurrency

Bitcoin researcher and cryptocurrency advocate Greg Matthews, who runs the microguy.com website, doesn't tire of highlighting the differences between Bitcoin and Ripple, touting Bitcoin as being "trustless, permissionless, decentralized and sovereign."

He told DW that by contrast, "Ripple is a centralized system and its currency was created out of thin air: Ripple is a currency exchange network."

For banks and regulators, Ripple's centralized way of operation means at least one more good thing, though — money transfers happen within a controlled system, leaving little room for the kind of money-laundering activities that Bitcoin potentially allows.

What becomes quite obvious is that trying to pit Bitcoin and Ripple as direct rivals makes little sense as it would amount to comparing apples and oranges. But most cryptocurrency market analysts will agree that each of them has a justification in its own right in the ever-changing modern realm of finance.

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Good time to start a currency

Introduced in 2009, Bitcoin was the world's first decentralized digital currency. It quickly gained traction amid lingering uncertainty in the wake of financial crisis. Designed to be as rare as gold, Bitcoin was created to have a maximum of 21 million "coins." Initially worth just a fraction of a cent, by February 2011 the currency had gained parity with the US dollar, then it really took off.

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An anonymous founder

The name Satoshi Nakamoto is synonymous with Bitcoin. It is said to be the alias for an unknown IT whizz who invented the cryptocurrency. But despite claiming to be a 30-something Japanese national, it is generally thought that several computer science experts created the technology behind the digital coin. One rumor even suggested that Tesla chief Elon Musk is the real Satoshi, which he denied.

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So no coins then?

Instead of being printed like dollars and euros, each Bitcoin is created on a global network of computers and verified by the system rather than a bank. There are no transaction fees. The smallest amount you can buy is a "Satoshi" or one-hundred-millionth of a Bitcoin. Purchases can be made anonymously and even at digital currency ATMs. When you buy Bitcoin, it is often stored in a digital wallet.

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Complex puzzles

To ensure that not too much Bitcoin comes into circulation, a process called mining was created where blocks of transactions could only be processed once a difficult math problem was solved by geeks. The puzzles are becoming so complex that bigger and bigger computers are being utilized to decipher them. That's led to concerns about the amount of electricity used to handle Bitcoin transactions.

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Are Bitcoin fortunes legit?

Due to its anonymous nature, Bitcoin's success is likely being fueled by organized crime, including money laundering and the purchase of illegal goods. The currency is also being targeted by cybercriminals. A recent hack blamed on North Korea forced a South Korean digital currency exchange into bankruptcy. Reports suggest the "Islamic State" armed group used Bitcoin to receive funds to buy arms.

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Bitcoin leads, others follow

Bitcoin is the largest of all the cryptocurrencies and its incredible rise has spawned many imitators. Other large digital cash creators include Ethereum, Zcash, Bitcoin Cash, Ripple and Litecoin. As of November 2017, their number had swelled to 1,324. Hundreds of others have attempted and failed to launch their own digital coins. The market is now coming under increasing scrutiny by regulators.

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Watch it skyrocket

2017 was a stratospheric year for Bitcoin. Worth close to $1,000 in January, some twelve months later it had scaled to an all-time high of $19,784. Despite much skepticism, the currency started to see serious interest from institutional investors. Two exchanges began Bitcoin futures trading, allowing speculators to punt on the incredible volatility in the value of the cryptocurrency.

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Warnings abound

From central banks to respected investors, almost the entire financial establishment warned of a massive Bitcoin bubble, which they said can only end in disaster for holders of the digital currency. Among them was Nobel prize-winning economist Joseph Stiglitz who said Bitcoin "ought to be outlawed." Jamie Dimon, the CEO of JPMorgan Chase labeled those who buy the currency "stupid."

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The shape of things to come?

Just before Christmas 2017, Bitcoin saw a dramatic rally, topping out at nearly $20,000 before losing a third of its value in just five days. More intense volatility followed early in the New Year, only to be reversed when it plummeted by almost half. Are we in for an even bigger rollercoaster ride if Wall Street adopts Bitcoin?

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