Missing quality discrimination between crypto assets

In most bubbles, people caught by the mania fail to discriminate between the different assets that they can invest in. During the .com bubble this manifested itself in anything related to the internet soaring and companies like etoys.com or letsbuyit.com commanding hefty valuations only to later succumb to their fates. There is currently a very strong move going on in the cryptosphere which mirrors this bubble characteristic.

Top 10 “Coin” Assets by TOTAL Supply market cap, Coinmarketcap.com

Let’s look at the current Top 10 Crypto “Coins” in market cap by total supply (ie not just circulating supply, which is a misrepresentation that is prevalent in the entire space, see my previous articles on the topic). I am not a coder at all, but even my simplest of technical minds is able to grasp the following example.

The big surprise is that the highest market cap coin in the world is actually not bitcoin, but Ripple at this point in time. In short, Ripple aims to take the blockchain technology to large financial institutions in a scalable way in order to compete with and possibly replace SWIFT. Lofty goals for sure and the number and names of banks said to be clients of Ripple certainly lend some sort of credibility to the firm. However, it is important to note a few points regarding Ripple’s valuation.

The public blockchain of Ripple is currently valued at over $200bn or more than Goldman Sachs, Pfizer or General Electric (let that sink in for a second). This public blockchain currently has zero use for anyone. It is a centralized ledger and thereby unattractive to anyone believing in the crypto value proposition of decentralized, trustless transactions. It is in effect simply another centralized system not that different from SWIFT in many ways. The company behind Ripple owns c. 62% of the total Ripple supply directly (escrow not withstanding) and there are no decentralized miners. Other people far more qualified than myself have written about the reasons for decentralization, but suffice it to say, this key difference makes it impossible for Ripple to be valuable the way bitcoin is.

Fair enough you might say, given Ripple has reportedly gained well-known financial institutions as clients, there is no need for Ripple to be decentralized in order for it to have enourmous value that might easily outshine bitcoin if the banking industry were to start using it as an alternative to SWIFT. Banks certainly won’t mind centralization. While that is true, note that this has nothing whatsoever to do with the Ripple coins that you can buy on crypto exchanges and that constitute the market cap that currently ranks number one in the world above bitcoin. None of the banks will use the public blockchain as their means to transfer money. When they become clients of the company behind Ripple, they are asking them to build (or rather to explore building) a PRIVATE, in-house blockchain based on Ripple technology. To avoid any doubt, that blockchain, just like SWIFT will be internal to the banks and there will not be any transactions taking place from banks using the public Ripple blockchain. Yes, that might (this is a very small chance in my view) at some point still happen for some smaller banks, but it is not the likely use case and certainly not what is happening currently. Therefore at this point, “dumb money” mostly at home on Coinbase and some of the other “entry-level” exchanges is currently attributing a valuation of $200bn+ to something that is quite literally hot air. None of this is to say that the team behind Ripple might not one day build a replacement for SWIFT, but let it sink in again that this has no relation whatsoever to the coin people are trading now. It is not equity in the Ripple company, it is a share in a useless network. (Edit: don’t believe me? here s the FT: read)

A final thought on Ripple for everyone who claims the protocol still has a value for people not minding the centralization who want fast and cheap transactions. To those people I say: use raiblocks — it is decentralized, lightning fast and most importantly free. There are no transaction fees. This value proposition is unlikely ever to be bettered by a for-profit organization’s centralized public blockchain. Should that public blockchain (again — not the company’s equity) really be worth more than Pfizer?! Let me throw in that Uber’s latest investment round was valueing the company at just under $50bn. A fourth of the value of Ripple’s useless coins.

Some good commentary on this whole Ripple issue can be found in this discussion of Tone Vays and Jimmy Song from c. minute 6 onwards for 10 minutes or so: link. Also, a full cryptoscam episode here.

Other coins with similar issues where the companies behind these coins might easily have an attractive product to offer to corporate clients, but suffering of very much the same issues as Ripple or where the entire coin very much looks like a scam that we can currently find in the Top 10 (!) of Crypto market cap are IOTA, Bitcoin Cash, ATMcoin and potentially Solarcoin. I have not done enough digging on the latter two, so they might be wrongly added to the list, but you can do your own research. Even just looking at the “normal” Circulating supply market cap (basically the start page of coinmarketcap.com), you have several of these centralized, useless public chains as well as scams listed with $0.5bn+ valuations. To name a few, we can find Ripple, IOTA, Bitcoin Cash, Bitcoin Gold, Bitconnect, Tether, Veritasaeum and Digibyte all in the Top 50.

The fact that the market currently does not seem to distinguish between strong projects with coins that will actually have a use case and potentially a value to investors like Syscoin, Raiblocks, Monero, bitcoin, Sumokoin or Lisk and the aforementioned scams or useless “hot air” token in terms of valuation shows only one thing: a lot of “dumb money” that buys anything blockchain related and hyped by potentially malignant actors with a hidden agenda (nota bene: this refers to pump and dump schemes, never to the people behind the projects) has recently entered the crypto markets. That is very often the final stage of a bubble and I do not believe that “this time is different”.