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Math to speculate on XRP price


PapaLou
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I'd like to start some dialogue to math out the possible prices for XRP. Looking into the 5 Trillion moved daily via Swift, I believe this is done using Nostro Vostro accounts which range somewhere between 15 trillion and 25 trillion very roughly speaking. Some people use this and divide total number of XRP in existence (or the non-escrowed amount) to arrive at a price. But that would assume one xrp per fiat (e.g. the USD) used. In fact, fiat moves so slowly and XRP moves so fast that one single XRP (3-5s settlement transaction time) can be used many, many times per minute, many more per hour, etc. If you use a 5s settlement that's one single XRP being used 12 times per minute x 60 minutes/hr x 24 hrs/day = 17,280 usages of XRP/day. If XRP is valued at $1, that means one XRP can move $17,280 dollars per day.

 

The only reason they may need such high nostro vostro account money is b/c of how slow the fiat moves. With fast movement they may only need a more exact amount that they move per day...so much less, closer to the 5 trillion they move daily. Well if at a price of $1, it's used simply to move 5 trillion that's 5T/17,280 = 289 million XRP needed do to that. That's all the banks need to own to replace the Nostro Vostro accounts. If that's all wrong and they need 15-25 trillion, then 25 trillion/17,280 = 1,446 million XRP, or 1.5 billion. That's what they'd need to hold. Even if you double THAT number, it's only 3 billion they'd have to buy from Ripple's treasury to do it. That doesn't really move price that much. This is all calculating off a $1 XRP. 

 

I know there's details such as the 20 xrp needed per wallet that's locked up, etc, etc. But these don't move the needle that much to get price to be needed to be THAT much higher than $1.00 for actual utility...like what the price "needs to be" to work as intended. Can someone explain what I'm missing because I'm really hoping I'm wrong. Also I know that adding NFTs will lock up more XRP etc etc but man these are small potatoes we're talking relative to the trillions in nostro/vostro. How does utility = a price over 5 or 10 dollars. I know hype can get it there, but what about actual utility? Thanks.

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This is so hard to predict and has been talked about and speculated on for many years, but here are a few things I think you are underestimating.

First, the power of speculation. Xrp hit 3.50 plus on speculation alone. Now imagine speculation on top of utility. If they gain a fair share of the cross border payments sector, then not only will utility be a factor, but there will actually be more reason to speculate on the price of Xrp. More players will come to play.

Second, market making will be a profitable business once things really kick off. The more market makers, the more Xrp will be held by entities to help keep the market liquid while making a profit. 

Third, DS has mentioned this next point several times. Because Xrp moves so fast, it can be compared to email as it relates to physical mail through the post office. In the early 90's, no one could have imagined the amount of information that would be flowing through email today. There is no way snail mail would have been able keep up with the demands of today. Email has allowed our information exchange to flourish. This is the same concept with Xrp and the exchange of value. The amount of value that can be exchanged daily has the potential to explode, and comparing it to today's numbers really doesn't take into consideration the vast amount of wealth and value that has the ability to be transferred in the future.

Of course, this is probably 10 years down the road, but this is really the exciting part about the potential of Xrp.

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Good question. I don't think that the nostra account values are particularly relevant since the whole reason that XRP has a value proposition is that the system is so inefficient. It seems to me that the big question is how much XRP will be held aside by institutions for market making purposes or otherwise. If I think in terms of payments transactions, every trillion USD needed to be represented by XRP in a sustained way would generate a market value of about $10 for XRP (i.e., price of XRP x 100 billion units). I acknowledge that it is a somewhat flawed way to look at it, but I think that it is still helpful to think in terms of orders of magnitude.

When I think about the payment flows that XRP could sustain then I can see the theoretical possibility that it moves in the trillions. However, I come to the same conclusion that the market is unlikely to need 100 billion units due to the velocity that you mention, so that means the value of each unit would be linked to the peak demand in the day. So if $5 trillion moves in a day and the most moving at one moment is 1/24th (for the sake of argument), then that represents maximum demand for tokens during the day. I've tried asking people who project XRP being worth hundreds of dollars about their thinking, but it is usually a broad answer about XRP being used for all types of financial transactions (which I think doesn't quite work) or just a general belief that it will take on a value similar to gold.

With the advent of CBDCs, I have a hard time seeing XRP playing a role in domestic payments in any substantial way and that will be a crowded space anyway. For example, China is already tied to Alipay and WeChat. Being a major rail in domestic payments would generate a lot of demand, but also a necessity for a stable value. Stable coins might offer a better solution for daily payments. 

There may be another scenario where XRPL becomes the focus of a wide range of activity that is not tied to the international banking system. This would be a totally different scenario and might drive valuation in completely different ways. For example, if XRP gains substantial new utility or passive income potential from moving it to Flare Networks, then it creates a reason for people to acquire and hold. Then there are other new projects independent of Ripple. To be honest, I see these as having greater potential to create conditions that could drive XRP to something over $10. I don't have a math behind that number other than to say that it counts on XRP having a significant speculative value in addition to its utility. I could see the non-interbank use cases creating greater speculative value than the interbank use case since there is more unknown potential. 

I note DS's comparison to email, but question the analogy. As most have experienced, once you have email available, you can start flooding everyone you work with and all you need as an additional resource is time. With value transfer, you are always limited by the amount of value that you have available to you and adding payment rails won't increase available value. Perhaps you can get more transactions by being able to tokenize your assets and sell them in fractions, but would that increase the total fiat value of the system? I don't think so. My house is still worth $100 whether I sell it as a single unit or in 100 tokenized units.

Would like to hear thoughts from others and the math that you imagine lies behind elevated value of XRP.

Edited by Treehouse
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All comments above have alluded to some of this, but we need to think beyond the current market IMO.

XRP price and liquidity

  • Higher the XRP price, higher the value of a single transaction supported by the order book
  • Deeper the order book, higher the number of transactions per second

Both of the above are unrelated to each other. However, sustained utility transactions will help set a floor price for XRP. Speculative value, if any, will be above that.

Addressable Market

This is where I differ from some of the initial estimates above. Today’s cross-border payments market is only table stakes. This is a disruptive technology and will enable markets that were previously not possible. 

  1. Personal Computers
  2. Internet
  3. Mobile
  4. Cloud Computing

Think about the size of addressable markets that got added with each of these epochs. In fact, blockchain isn’t feasible as a technology and wouldn’t have succeeded as a viable option without any of those. We needed guaranteed, sustained, high Internet speeds with the power of social media connecting people and with powerful computers running the technology.

The addressable market that will be enabled by the Internet of Value will be significant. 

Back to XRPL

Cross-border payments market is huge, but isn’t nearly as big as it needs to be, because of entry barriers for both small payment players and small retail users. The market is trailing demand here.

@Treehouse is right. Public blockchains will not be used for domestic payments. CBDCs *might*. But side-chains like the ones RippleX is working on will provide connectivity between the two.

NFTs will be huge. Not pixel art, but the ability to trade on personal assets (digital rights, physical goods, house, etc) across the world will infuse significant liquidity and enable new markets.

Metaverse is a big deal. Not games necessarily, though that may be the initial market. The idea of a virtual world that runs in parallel with the real world will encompass our daily lives - both personal and professional. FB made the most progress so far, but MSFT, AAPL, Snapchat etc are all making strong moves here. I expect blockchain to play a critical role to enable the Metaverse economy.

Edited by Ripley
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pretty awesome answers above. I want to take a lot of time to digest all of that. One similar point Metcalfe's law that everyone's been discussing with other coins. I used to send letters via snail mail maybe twice a year. Now I send a few emails a day. That's probably a 100x increase in my usage of the mail system. I used to interact with people via phone once a day. Now I make calls multiple times a day and send dozens of texts per day. With faster and cheaper utility/functionality of "value movement" I will personally most likely be sending multiple times over the number of payments I currently send out. I'm likely to receive them too of course, multiple times over. This increases all of the figures above by a factor of 25-100x. 

That puts the price by my earlier (basic and flawed) math at $25-100 in the future. Other uses outside payments (NFTs, Defi, etc) can pump it a factor or so beyond that. Speculation will anticipate the correct market price a year or so early. I guess I CAN see a future where something like XRP can be worth $200 or more, despite other options like XLM. And speculation should drive to that number years ahead of time. Nice! 

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3 hours ago, PapaLou said:

pretty awesome answers above. I want to take a lot of time to digest all of that. One similar point Metcalfe's law that everyone's been discussing with other coins. I used to send letters via snail mail maybe twice a year. Now I send a few emails a day. That's probably a 100x increase in my usage of the mail system. I used to interact with people via phone once a day. Now I make calls multiple times a day and send dozens of texts per day. With faster and cheaper utility/functionality of "value movement" I will personally most likely be sending multiple times over the number of payments I currently send out. I'm likely to receive them too of course, multiple times over. This increases all of the figures above by a factor of 25-100x. 

That puts the price by my earlier (basic and flawed) math at $25-100 in the future. Other uses outside payments (NFTs, Defi, etc) can pump it a factor or so beyond that. Speculation will anticipate the correct market price a year or so early. I guess I CAN see a future where something like XRP can be worth $200 or more, despite other options like XLM. And speculation should drive to that number years ahead of time. Nice! 

There is so much potential for this space. The hard part is waiting (and getting regulations straightened out). Get your s*** together US gov and SEC!

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7 hours ago, PapaLou said:

pretty awesome answers above. I want to take a lot of time to digest all of that. One similar point Metcalfe's law that everyone's been discussing with other coins. I used to send letters via snail mail maybe twice a year. Now I send a few emails a day. That's probably a 100x increase in my usage of the mail system. I used to interact with people via phone once a day. Now I make calls multiple times a day and send dozens of texts per day. With faster and cheaper utility/functionality of "value movement" I will personally most likely be sending multiple times over the number of payments I currently send out. I'm likely to receive them too of course, multiple times over. This increases all of the figures above by a factor of 25-100x. 
 

I understand the analogy above, but I struggle to see how it as reflective. Increasing the number of emails only requires a re-allocation of my time. Texting is the same plus perhaps a minute re-allocation of budget. Sending value depends on having value and simply having faster rails does not give me more value to exchange. I only have one house, one car, one computer, etc. and the presence/absence of trustless, no-friction payments block chain will not allow me to send more value. I could break my house into one hundred NFTs, but that doesn't increase its value. 

I could imagine an ever expansive sharing economy and better IoT might allow me to start renting space on my computer. Running a block chain node from home is a version of that. And perhaps I could securitize more of my possessions and unlock more passive income, but I don't know that the blockchain is a catalyst for that per se or that the potential platforms for such an economy would have to use blockchain or specifically XRP. 

Right now, the biggest limitation on my ability to send out more payments is the limited amount of money in my bank account :)

 

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9 hours ago, Ripley said:

Addressable Market

This is where I differ from some of the initial estimates above. Today’s cross-border payments market is only table stakes. This is a disruptive technology and will enable markets that were previously not possible. 

  1. Personal Computers
  2. Internet
  3. Mobile
  4. Cloud Computing

Think about the size of addressable markets that got added with each of these epochs. In fact, blockchain isn’t feasible as a technology and wouldn’t have succeeded as a viable option without any of those. We needed guaranteed, sustained, high Internet speeds with the power of social media connecting people and with powerful computers running the technology.

The addressable market that will be enabled by the Internet of Value will be significant. 

 

Thanks for your comments. I don't think that I quite understand this part. Would you mind sharing a little more about your idea? Is your thinking that block chain is the next progression in computer power / models and it will spur a whole new set of business models? If so, I would definitely agree with that. I have trouble developing any thesis about how that would necessarily translate into opportunities for XRP as opposed to one of the other top 50 coins. I'm guessing that there will be opportunities, which is why I think that new projects on XRPL like Flare are more likely to push XRP to doubt digit prices than interbank transfers, but I can't think of any way to translate that into assumptions that might be the basis for models and estimates of the likely total addressable market. 

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16 minutes ago, Treehouse said:

I understand the analogy above, but I struggle to see how it as reflective. Increasing the number of emails only requires a re-allocation of my time. Texting is the same plus perhaps a minute re-allocation of budget. Sending value depends on having value and simply having faster rails does not give me more value to exchange. I only have one house, one car, one computer, etc. and the presence/absence of trustless, no-friction payments block chain will not allow me to send more value. I could break my house into one hundred NFTs, but that doesn't increase its value. 

I could imagine an ever expansive sharing economy and better IoT might allow me to start renting space on my computer. Running a block chain node from home is a version of that. And perhaps I could securitize more of my possessions and unlock more passive income, but I don't know that the blockchain is a catalyst for that per se or that the potential platforms for such an economy would have to use blockchain or specifically XRP. 

Right now, the biggest limitation on my ability to send out more payments is the limited amount of money in my bank account :)

 


I think the point you might be missing is that if successful, XRP has capabilities that are entirely new to finance.  
 

In the same way that PC’s seemed limited and nearly useless to tech experts used to mainframes, simply looking at one aspect of payments is not seeing the possibilities that might open up.  No one in early pc days predicted TikTok or Spotify.

So streaming micropayments to mention just one XRPL skill set could open business opportunities that undreamt of right now.   Pathfinding is another.  DEX, layer 2 smart contracts…. the list goes on.
 

Frankly I think any price modelling is a waste of time.  Speculation and unpredicted new opportunities will likely swamp any old style valuation model.  And on the downside,  black swans could kill it mid launch.  
 

No one knows,  but time will tell.  My bet is on UP.

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20 minutes ago, Treehouse said:

Thanks for your comments. I don't think that I quite understand this part. Would you mind sharing a little more about your idea? Is your thinking that block chain is the next progression in computer power / models and it will spur a whole new set of business models? If so, I would definitely agree with that. I have trouble developing any thesis about how that would necessarily translate into opportunities for XRP as opposed to one of the other top 50 coins. I'm guessing that there will be opportunities, which is why I think that new projects on XRPL like Flare are more likely to push XRP to doubt digit prices than interbank transfers, but I can't think of any way to translate that into assumptions that might be the basis for models and estimates of the likely total addressable market. 

I meant what you expressed. It needn’t come to XRPL alone but remember that no one beats XRPL at payments. No one. Not yet. And it’s not a matter of TPS, but even that is getting solved in a few months with side channels. Building great platforms isn’t enough. Platforms need great products. Crypto has great platforms but very very few have actual utility (that is, money that flows outside crypto instead of just rotating hands inside for speculative purposes)

Also, Ripple sort of already built cross border payments. They haven’t had to do much engineering to extend their product portfolio in this direction. They were held back by regulatory uncertainty. 

We’re also seeing significantly higher development for the past few years. Liquidity of XRPL and its Fiat on ramps - these things are super time consuming to build out. 

I don’t want to speculate specific prices or claim that we’ll go to moon or something, but I’m eagerly waiting for the lawsuit to conclude in a positive way.

I have high expectations for both XRPL and Ripple. Just you wait.

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"So streaming micropayments to mention just one XRPL skill set could open business opportunities that undreamt of right now.   Pathfinding is another.  DEX, layer 2 smart contracts…. the list goes on."

 

If your point is that people will invent new business models/products/services that utilize the specific strengths of blockchains, then I would agree with that as well as the impossibility of predicting what those would be. To my mind, the only metric that one could look at to gauge progress is the degree to which new propositions are being launched and utilized (which to date is still pretty limited). In that sense, I am much more enthusiastic about these new projects on XRPL than I am about ISO 20022.

I do find that there are people who are predicting explosive growth - sometimes also making predictions - in the near-term, so I am always curious about whether their view is driving by a conviction in a narrative or by the results of an analysis. I see the narrative and generally agree that there is more potential than not, although I am not quite as convinced that major uptake will necessarily to the coins themselves rising to prices that place the market cap in the trillions for more than a handful. But I would love to see some analysis or ways of thinking about value capture that make a case otherwise.

 

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