In the cryptocurrency world, news about skyrocketing prices and valuations mostly elicits shrugs. But Ripple’s rise has raised hackles and disbelief. 

The cryptocurrency’s price spiked recently after news of banking consortiums in Japan and South Korea testing its technology for cross-border transactions. On the face of it, those developments might indicate positive news. 

But the jury is still out on the details of those tests as well as actual benefits accrued to banks. To that end, commentators and observers are questioning and the logic behind Ripple’s increase. 

Two Charges Against Ripple 

The case against Ripple (XRP) rests on two charges. 

The first one pertains to the cryptocurrency’s dubious role in the payment network. Ripple was originally designed as a payment network protocol to bring down transaction costs associated with cross-border transactions. The cryptocurrency was added only later to prevent “network spam.” 

Its use in banking systems could be a potential game changer for its prospects. In addition to being a bridge between multiple world currencies, Ripple could also play a market maker role, similar to the one played by governments and institutional players in forex markets, by providing liquidity. 

But that future isn’t happening anytime soon. 

According to Nathaniel Popper, reporter with the New York Times, XRP isn’t used for “anything” and banks haven’t signaled a potential use for it yet. A CoinDesk article states that a majority of Ripple’s banking clients only use xCurrent, a tool that the article describes as a “glorified messaging system.” 

(Incidentally, the Financial Times has an interesting blog entry about the development of a similar currency, the eurodollar, which was outside regulatory purview during the 1970s and 1980s. It led to the euro’s development).

The second reason to doubt Ripple’s price is the stake of its founders in the token. According to reports, Ripple’s founders own more than 60% of all Ripple’s tokens. It is not uncommon for cryptocurrency founders to own a percentage of their creation. However, the high percentage of ownership gives Ripple’s founders sufficient reason to game the system. There have been similar charges against “bitcoin whales,” who own large swathes of the cryptocurrency and are said to manipulate its prices for personal profit. 

The Counter Case 

Brad Garlinghouse, CEO of Ripple, countered Popper’s tweet with one of his own.

According to Garlinghouse, the company’s xRapid liquidity product is “100% more efficient” as compared to existing products. He also said the combination of their product plus XRP is especially attractive to small and medium-sized banks because it enables them to make global transfers at less costs.

Asheesh Birla, vice president of Product at Ripple, told CoinDesk that the company’s cryptocurrency was “a pragmatic way of developing use cases that use digital assets. I think the patience, and the pragmatic nature that we’re working towards is paying off.” 

Still, the company has entered a market dominated by entrenched players. Kausik Rajgopal, director of McKinsey, told Popper from the Times that solutions such as Ripple will need to clear a “high bar to dislodge incumbent infrastructure, and will need to deliver not just a marginally better proposition, but a proposition that is a step function better.”              

The Bottom Line 

The jury is still out on the reason for a sudden spike in prices for Ripple. While critics claim that the cryptocurrency does not serve a useful purpose in the overall technology, the company says it helps bring down transaction costs and is a “pragmatic way” of developing use cases. In response to the tamping down of excitement, Ripple’s price has already shed some of the gains it has accrued in the last couple of days.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.001 bitcoin.