This is a chart of the value of bitcoin yesterday, Wednesday. It’s hardly a secret that bitcoins are a highly volatile asset class, so relatively few eyebrows were raised when the price soared from an opening level of $230 all the way to a high of $266. An intraday swing of more than 15% is pretty much par for the bitcoin course, these days. But then came the crash: within a few hours, bitcoins the world over had lost well over half their value, and were trading as low as $107 apiece. That’s not normal — and it just goes to underline how bad bitcoin is at doing everything it’s meant to do.

Bitcoin is clearly not an effective store of wealth — just look at how quickly that wealth can be evaporated. Neither is it a useful payments mechanism, given how fast its value can fluctuate. Currently, it can take an hour for a bitcoin transaction to clear, which means that the value of the transaction when it clears can be radically different from its value at inception. Bitcoin only works for payments if you can be reasonably sure that its value will remain reasonably steady for at least the next hour or so.

At the end of my big piece on bitcoin, I conclude that we need “a universal payments system with no friction or interchange costs”, which can learn from bitcoin’s mistakes. And this morning, the company responsible for one possible such system — OpenCoin, which is responsible for developing Ripple — announced that it has closed its angel funding round, with support from the likes of Andreessen Horowitz, Lightspeed, and Founders Fund.

I’ve been playing around a bit with Ripple, and I think it’s extremely promising. It’s very early days yet, but Ripple already has clear advantages over bitcoin, and if various merchants and developers start to converge on the Ripple ecosystem — which, like bitcoin, is all open-source — then I think it could genuinely become the first real way for anybody in the world to pay anybody else in the world, immediately and about as frictionlessly as possible.

Ripple was founded by geeks, including Prosper founder Chris Larsen and Mt Gox’s Jed McCaleb. As a result, right now it has a bit too much functionality with too little ease of use. It supports an effectively infinite number of different currencies, for instance, including bitcoin; and although it’s easier to use than bitcoin, it’s still not particularly user-friendly. But that will come, with time — and in fact I would be happier if the people developing the easy-to-use front ends for Ripple were not OpenCoin. OpenCoin is a for-profit company, which will make good money if Ripple takes off; I’ll come to that bit in a minute. So it’s very important that a lot of the rest of the Ripple ecosystem not be built by OpenCoin: so long as OpenCoin is the only company to really buy into Ripple, the whole scheme will go nowhere.

Ripple has a lot of resources on its website which explain how it works in various levels of detail; I won’t attempt to duplicate that effort. But the end result feels a bit like bitcoin in many ways. Users are anonymous (or, technically, pseudonymous), for instance: if you want to send me money via Ripple, right now you have to pay racoLWuh2GtC72i1gV7ib14Jqgx3SLmwKc rather than just Felix, or my email address, or my Twitter handle. It’s all open-source, too: OpenCoin has no privileged access to the way in which people pay each other. The fees are de minimis, just enough to prevent DDoS attacks and the like. There’s even a built-in crypto-currency, the Ripple, with a fixed money supply. But the great thing about the Ripple system is that individuals don’t have to pay each other in Ripples. Instead, they can pay each other in pretty much any currency in the world: Ripples, yes, or dollars, or yen, or euros, or even bitcoins.

Here, for instance, is a screenshot of my Ripple wallet: it shows that I own, 3,052 Ripples, 13 dollars, and 0.0284 bitcoins. If I want to send a payment in any one of those three currencies, I can do so pretty much cost-free; if I want to send a payment in some other currency, then the system will select for me the best exchange rate, based on various companies which are offering currency-conversion services on the Ripple platform.

Any time you deal in currencies other than Ripples — which, in practice, is going to be all of the time — you have to go through “gateways” to the Ripple system. Eventually, those gateways could be PayPal, or Citibank, or Western Union, but that might take a while; for the time being, they’re smaller institutions, and you probably don’t want to be moving large amounts of money through them.

Everybody using a Ripple account will have some Ripples in their account, just to get them on the system, and there will always be people making a market, converting Ripples to real currency and back again. The good news, however, is that Ripples are not (fingers crossed) going to become speculative investment vehicles, in the way that bitcoins are. That’s because all the Ripples in existence — 100 billion of them — have already been created, and, to a first approximation, they’re all owned by OpenCoin, which is essentially the central bank of the Ripple economy. OpenCoin is going to be giving away billions of Ripples for free, to anybody opening an account, just to get the system seeded and get people transacting with each other. There’s little reason to hoard a few thousand Ripples if there are 100 billion of them just waiting to flood the market at any time.

It’s in OpenCoin’s interest, then, to carefully calibrate the rate at which it’s introducing Ripples into the active money supply, and to keep the value of a Ripple relatively stable. Right now, there are about 750 Ripples to the dollar, which means that theoretically OpenCoin’s 100 billion Ripples are worth something over $100 million. OpenCoin is going to want to see that number rise, slowly, as Ripple becomes more popular — but it doesn’t want to encourage hoarding: quite the opposite. It wants as many transactions to happen over its network as possible, so that it can really become, in Larsen’s words, “http for money”.

Given the Andreessen Horowitz connection, and a lot of shared interests between the two companies, the first place I’ll be looking for third-party ratification of the Ripple idea is the hot payments startup Stripe. I’ve had long conversations with Stripe CEO Patrick Collison about bitcoin and international payments and frictionlessness, and in theory there’s no reason why he shouldn’t build a pay-with-Ripple option into Stripe alongside its more conventional credit-card and debit-card payments.

As with all such things, there’s a first-mover problem here: there’s no point in building Ripple-based infrastructure if no one is using Ripple, and no one’s going to use Ripple if there isn’t any infrastructure. OpenCoin’s solution to the problem, which I like a lot, is to simply give away billions of Ripples for free, all of which are worth real money, thereby giving people an incentive to use it. I hope it works, and I hope that the number of gateways into the system will soon expand from the current list of relatively obscure sites like Bitstamp. Ripple hasn’t succeeded yet. But at least — unlike bitcoin — it has a genuine hope of doing so.