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Cheap doesn’t measure price against price; it measures price against value

Cheap doesn’t measure price against price; it measures price against value


Close Quarter

“Only when the tide goes out do you discover who’s been swimming naked.”

— Warren Buffett

Tuesday 18th September 2018: Ripple opened at around 27 cents. Four days later, on Friday afternoon, it hit a high of 76 cents, a move of 182% that briefly made Ripple the second largest coin by market cap behind Bitcoin. The volume behind the move was massive with exchanges reporting between seven hundred and one thousand percent increases in turnover.

And it wasn’t just Ripple. Stellar is up 16% in the last seven days, along with Ethereum, EOS, Tron, and Verge. Some middle order coins punched above their weight too, with TokenPay, Electroneum, Global Currency, and MonaCoin all having a good week.

Ripple had a slew of positive news releases relating to the adoption of XRP, the Ripple protocol currency, and the announcement that xRapid, the cross-border payment system, is going live next month.

Huge volume accompanied by good news. Does this mean the bear market in Ripple and cryptocurrencies is over?

Read on….


Undercrowding

Ripple made an all-time high of $3.32 on the 4th January 2018. During August 2018, it was trading as low as $0.245. That’s a loss of 92.6%. Anyone who bought at the highs is going to need a 1,251% return to get back to breakeven.

On the surface, the Ripple price action looks good, but is the move just a short-term bounce before it makes new lows or is Ripple about to start a new uptrend?

Ripple has three parts to it.

  1. Ripple Labs Inc.

  2. The Ripple protocol.

  3. XRP, the currency of the protocol.

Ripple, unlike Bitcoin, does not use a proof of work system. Instead, all of the 100 billion XRP tokens were pre-mined before launch.

The founders kept 20% of the float, and the rest was given to Ripple Labs Inc. Ripple Labs distributes the tokens on a monthly basis and maintains the balance of coins in an escrow. There are approximately 39.2% of the tokens in circulation.

At the all-time high XRP had a valuation of over $110 billion. If the protocol is of interest to the banks and financial institutions; then, where does this leave XRP, given that the Ripple protocol can be used without it? XRP has a current market capitalisation of $23.1 billion; and this means, if XRP were a US company, it would be in the top half of the SP500 by market capitalisation.

XRP needs to prove it’s worth the $23 billion valuation.

The Ripple protocol is designed to be a bridge-currency for cross-border payments. It's what is of interest to the big banks; however, it’s possible to use the Ripple protocol, without using XRP, to transfer dollars, euros, and yen.

 Xcurrent

Xcurrent

Enter the Ripple gateway drug: xCurrent. How do you persuade big banks to use a new technology? You show and don’t tell. The benefits to the banks include lower transaction costs, an exponential increase in processing times, from three to five days to around four seconds, and enhanced counterparty risk.

But xCurrent does not use XRP. Remember xCurrent is the gateway drug, designed to get XRP Labs into partnerships with as many institutions as possible. The strategy being to build partnerships with global institutions and ween them off the archaic interbank system and onto an XRP powered version of xCurrent.

And so where does that leave XRP?

Enter the drug of choice for the mass adoption of XRP; xRapid. xRapid is a cross-border payment system that uses the Ripple protocol like xCurrent, but unlike xCurrent, xRapid does use XRP to provide on-demand liquidity.

Using XRP to mop up liquidity provides many benefits for financial institutions and corporations who need to send funds via a cross-border payment.

Currently, there are two conventional methods used to solve cross-border payment liquidity. Let’s say a US corporation needs to send Euros to Germany. The corporation will have to either pre-fund a German bank account with Euros or they’ll have to use the services of one or more of a few large clearing banks to provide a line of credit on the funds.

If they are pre-funding the German account, that takes up cash flow and introduces foreign exchange risk, and if they are using one of the big clearing banks; then, they would expect to pay hefty fees because of the monopoly the big clearing banks enjoy.

Using xRapid solves both of these problems and works like this:

A corporation or financial institution will initiate payment via xRapid. xRapid then searches for the most competitive price from the exchanges and third-party market makers. The market maker with the best price is selected and trades the sending fiat currency into XRP; then, the XRP is routed to the destination, where the XRP is exchanged into the destination currency and settled into the destination account. The entire process takes a few seconds.

For the sending corporation, it removes the need to tie up working capital in foreign banks and circumvents expensive foreign exchange fees from big clearing banks.

And this potential is the reason for the speculation in XRP and why its value exploded to a high of $3.32 in early January 2018.

But if you want to buy the next Apple, Microsoft, Amazon, Facebook, or Netflix for pennies on the dollar, then you’re going to have to take risks.

Why?

Because Ripple Labs Inc is a privately funded company, so this means you can’t buy shares in it. It’s a closed shop. And this is the reason behind the speculative foray into XRP. Speculation that in early 2018 drove the price of XRP to a market capitalisation of greater than $110 billion. This valuation is so high that if XRP were a corporation, it would be in the top 50 most valuable companies in the United States.

Ripple Labs is backed, not by money from a public offering, but by an elite group of angel investors and venture capitalists.

There is a continuing trend in the investment world to delay companies going public. The initial backers, the venture capitalists, delay the initial public offering, where the public has an opportunity to buy shares in the company.

Is this why speculators have been piling into XRP, the Ripple protocol currency, and is XRP seen as a proxy for shares in Ripple Labs?

 Economics

Economics

Undercrowding engineers Ripple Labs Inc as a scarce commodity. Even though it’s little more than a great idea, the illusion has become real.

381% vs. 5113%

Sorry. The stock market is not designed to make you rich.

It’s designed to make the owners of the company rich.

The trend for companies to come to market late in their growth cycle is making it even harder for you to spot an opportunity and win.

A recent example is Facebook. Facebook’s initial public offering on May 18, 2012, was the first day ordinary investors got their chance to invest in the biggest social media story of the century. Facebook opened around $38 and briefly spiked to about $45 before huge selling came in.

 Who earns what is Facebook IPO?

Who earns what is Facebook IPO?

Did you have the opportunity to purchase Facebook for a few cents a share? Insiders and a few celebrities made hundreds of millions because they had the chance to get in years before Facebook’s IPO. You had to take your chances with a stock that, at IPO, was priced with a price to sales ratio of 100!

Have you ever watched Shark Tank or Dragon’s Den? It’s where new business owners are paraded in front of angel investors in the hope that one of the angels will invest in their business for a percentage of the company.

 Price: Sales Ration

Price: Sales Ration

Imagine your a billionaire. Now, imagine if you could buy all of Facebook on the day Facebook IPO’d. Buying Facebook with a price to sales ratio of 100 means that if things stay as they are and sales continue at the present rate, it will take you 100 years to get your investment seed money back.

Even if you love Facebook, even if you believed in the growth story, and even if you thought Facebook could not fail and the stock market would not crash, you would have to take all the risk.

Fast forward to now. As it turns out, you were right. The stock market didn’t crash, (yet) and Facebook’s sales exploded, bringing the company's valuation back into a normal range.

Yes, if you bought Facebook in 2012 you’ve done well, you’d be up around 381%.

Let’s say you loved the stock, understood its potential and purchased 500 shares for $19,000. Today that’s worth a little over $72,000, and you just enjoyed a 30% compounded growth rate over the last five years. Not bad.

But to achieve this, you had to take a considerable risk. And that’s the point.

But what if you had been able to purchase Facebook shares a few years earlier for $3.51 or less. Some rock stars, celebrities, and investors did, but you would have needed a net worth of millions to acquire a seat at the table.

If you had bought Facebook for $3.51, your $19,000 investment would now be worth just shy of $1 million, and you’d be up 5113%.

Think about this: Imagine you’re a billionaire and you did purchase all of Facebook for $38 in May 2012. Using the figures from Facebook’s financial statements, it would take you 100 years to get your money back. And that’s bad.

And here is the problem. Billionaire’s don’t take that kind of deal. That’s why they are billionaires, so you have to ask yourself who is the counter-party selling to you when you’re buying?

That’s right; it’s the billionaires. They had the invitation to buy Facebook shares for pennies and now thanks to brilliant marketing and management of the IPO by Wall Street investment bankers, they are selling out, passing on all the risk, and making thousands of percent profit.

An invitation to the billionaire's venture capital club is not coming to your mailbox anytime soon. Investors and speculators see the coins as a proxy for shares in the actual company behind the technology.

As investment directly into Ripple Labs Inc is impossible because it’s a private company. XRP is viewed as a way to obtain a seat at the table and to level the playing field. It’s a way for you to take your place at the table with the billionaires. The potential of the future profits is what’s driving the frenzied speculation into XRP and all cryptocurrencies.

Round Table

 Ripple investors

Ripple investors

Ripple Labs Inc has had nine rounds of funding. The lead investors being: SBI Investment, a Japanese venture capital company. Santander Innoventures, the corporate venture capital arm of Santander Bank. IDG Capital, whose senior advisor, Jim Breyer, was an early backer of Facebook in 2005. And Core Innovation Capital, founded by Arjan Shutte, a senior advisor for the Centre of Financial Services Innovation, and an expert on the underbanked population.

And these are just the lead investors. There are twenty-five others including Seagate Technology the data storage company, Accenture, a global management consulting company, AME Cloud Ventures, a venture capital fund led by Yahoo co-founder Jerry Yang, CME Group, the world’s largest futures exchange, and Standard Chartered Bank.

If you are going to purchase XRP as a ticket for your seat at this table, then it makes sense to know the big picture game plan. What is the end game of the big players behind Ripple? And of course, as an outsider, you don’t know. Yes, you can read the glossy brochures, and yes, you can understand the hype and opinions of the Gurusphere. But how can you form your own opinion?

This week Ripple had a massive move up, in percentage terms, but where does it go from here?

The 5% club, the consistently successful speculators, start by focusing on their risk. Not their future profits. Maybe you already have a position in Ripple. If so, ask yourself when did you buy and why? Was it because you were influenced by a guru or comments on Twitter, or was it because you formed your own opinion?

IMAGE 1.jpg

Unless you did buy because of your analysis; then, most likely, you bought it in 2017 during the parabolic jump in December, when XRP traded from $0.25 to $3.32. And if you did, you’re most likely holding a losing position.

Figuring out the view from 50,000 feet is important for two reasons. First, it will help you with the risk management of the position, and second, it will stop you reacting to every piece of news that doesn’t support your long-term view. Understanding the big picture will help keep you in the game, and when the 95%, the majority of traders and investors, are losing their nerve, you won’t be.

The power of investing in cryptocurrencies is they allow you to invest in blockchain technology without having to have a net worth of millions. Some see cryptocurrency investment as a way to democratise financial investment, a way for you to be able to buy in, just like the international rock stars invited to own Facebook when it was trading for pennies.

And the question is, even though buying XRP is a proxy for sitting around the table with the global elite backers of Ripple, will Ripple make it? Will Ripple Labs become the market leader in cross-border payments, and will XRP be redundant?

Ripple’s current value compares to around the 250th largest company in the United States. At the all-time high, Ripple’s market capitalisation made it one of the top 50 companies in America with a value of $110 billion. Today, after losing over 92%, and bouncing from recent lows, it’s worth around $23 billion.

The 95% think the value of an investment is reflected in the price. And that’s another huge mistake the majority of investors make. Price has got nothing to do with how attractive an investment is. The 95% compare the high valuation of $110 billion to the low valuation of $23 billion and see Ripple as cheap.

If you’re going to sit around the table with the global elites, it pays to know what they know. And they know this, it’s not about price, it’s about value.

Price vs. Value

 Warren Buffett Quote

Warren Buffett Quote

Warren Buffett is famous for answering direct questions about his investment decisions with witty aphorisms.

When asked about the price he paid for a stock Buffett replied, “Only when the tide goes out do you discover who’s been swimming naked.”

A lot of people find Buffett irritating because he never answers a straight question about his investments. But hidden in his witty homespun replies are the real answers.

When you invest in something, like XRP, the only thing you have control over is the price you will pay. Every time you look at XRP’s market price, you can choose to buy or not buy.

As an investor, it’s your job to find out if the investment you’re considering is overvalued, undervalued, or fair value.

 Fundamental analysis \ Technical analysis.

Fundamental analysis \ Technical analysis.

There are two general schools of thought on how to make an investing decision:

  1. Fundamental analysis.

  2. Technical analysis.

Fundamentalists believe that value can be found by reading the financial statements and factoring in dividend payments, cash flow, and cash held by the company.

Hardcore fundamentalists believe chart reading is as much use as reading a horoscope because they also believe that financial markets follow a random walk. Random walk theory states it’s a waste of time looking at a chart because each day’s movement up or down is random because there’s a 50:50 chance of tomorrow being up or down; they think you may as well read tea leaves.

Technicians take the complete opposite view. They believe that all the information about the investment you are considering is known and already priced into the chart. Hardcore technical analysts ignore all fundamental information and take positions exclusively from the charts.

Learning how to read a chart is easy compared to the knowledge required to understand the complexities of the inner workings of the financial markets. You can learn all you need to know in a weekend. Easily. Unlike the knowledge required to integrate and fully comprehend company financial statements, debt markets, interest rates, and geopolitical events. It takes years to combine these skills effectively.

And that’s the reason why so many new traders are drawn to technical analysis. It’s because it’s easy to learn, compared to the fundamentals.

Technical analysis “training” is where you’ll find the snake oil sellers, and where the uninitiated learn the magic of moving averages, and other technical indicators like MACD, and RSI. But what does TA teach you about how to uncover value? Absolutely nothing. According to the fundamentalists.

Who’s right?

 Altcoin Sidekick

Altcoin Sidekick

In the early days of technical analysis, the consensus was that it’s a dangerous waste of time. Recently though, attitudes are changing.

Financial models assume a random walk, but recent academic studies suggest financial markets are complex systems that change state between being random and non-random.

The simple conclusion is this: Sometimes, markets have a memory and are influenced by what has happened in the recent past, and sometimes they don’t.

And this is why attempting to make profits trading in and out of a market over the short term is so difficult. It looks easy, but it’s not.

Recent rule changes in Europe has forced trading companies to state how many of their clients lose money. If you take a look, it’s between 69% and 80%. But over what period? Over time these figures move closer to 95%. And that’s why the majority lose. No plan, no risk management, and no edge.

If you take positions based on a tip from the internet, then you’re part of the 95%. You might do ok this time, but over time you are highly likely to give it all back.

 The greater fool theory

The greater fool theory

The greater fool theory describes how the 95% majority use charts. When the 95% take a position, they are relying on a bigger fool than them buying at a higher price.

As Warren Buffett said, you can buy anytime, but if you don’t understand the value of what you’ve purchased, then you are putting yourself at risk.

And this is what Buffet’s swimming naked aphorism means. You can jump in anytime, and when you get to the beach and see others already swimming and enjoying the water, you think it’s safe to take the plunge.

But when the tide goes out, the ones who had no understanding of the competitive edge of the investment; the ones who invested and backed their decision with nothing will be the ones left high and dry. Exposed with nowhere to go.

Pure fundamental analysis has its problems too. The data generated appears to lag the price action because of how financial systems price in future events. Typically markets price in between three and eighteen months into the future.

A company can report fantastic fundamental data, but the price can go down, sometimes drastically. It happens because the data has been priced in already.

It doesn’t matter what the financial figures are. It only matters if the numbers are better than or worse than expected.

Companies can release great numbers, and the stock can go down on the news because the figures are worse than expected.

 Testing Zone

Testing Zone

Ripple, XRP, had a big move this week. Did you buy it and if you did why?

And if you bought XRP how long do you intend to hold it? A few days; maybe, even a few hours? Or do you have a long-term plan, other than sell it when your $2,000 investment makes you rich — a strategy almost certain to fail — unless you have picked, by accident, the next big thing?

So, how do you go about reading between the lines? How can you find hidden value in your investment idea before it’s priced in?


TechnoFundamentalist

In the Heatseeker series, we discussed how simple heuristics could be as powerful as complex studies. We talked about the writer who spent 2,000 hours with Warren Buffett researching his life and methods before writing his biography — “The Snowball.”

Buffett’s number one question — always — is, “What are the odds of this investment being exposed to a catastrophic risk?” If this test is not passed, Buffett walks away.

If Buffett’s idea passes his risk test; then, instead of using complex Wall Street investment bank methods to uncover value, he asks a few simple questions.

 John Dewey Quote

John Dewey Quote

Let’s do the same.

  1. Who is behind Ripple Labs?
    Ripple Labs Inc is a private company, backed by 29 main investors including elite global venture capitalist companies, banks, and corporations including Seagate Technology.

  2. Who controls XRP?
    Ripple is made up of three major components. The company, the protocol, and the currency of the protocol.

    XRP, the currency of the Ripple protocol is different from most cryptocurrencies because Ripple Labs Inc centrally controls it. There is a maximum of 100 billion XRP, all generated before launch. The majority of which, around 61%, is either owned by Ripple Labs or held in an escrow.

    Ripple Labs placed 55 billion XRP into 55 rolling escrow contracts to allay concerns it could dump massive amounts of XRP onto the market. The escrow is a sign of trust that Ripple Labs are committed to the success of XRP and that they don’t control it.

    It works like this: There are 55 one billion XRP contracts numbered zero-54. Ripple Labs releases one billion XRP into the market per month from the escrow to use at its discretion. In the first month, one billion XRP is released from contract zero. At the end of the month, any unspent XRP is rolled into a new contract, in this case, contract number 55, so if only 100 million are spent, the balance of 900 million will be rolled into contract number 55. And so on.

  3. What problem does XRP solve?
    XRP is a replacement for Swift. Swift is the 45-year-old interbank settlement system used to control the flow of money across borders. It’s expensive, and it’s slow.

    Ripple, using the Ripple protocol, plans to provide a much faster and cheaper infrastructure for interbank payments.

    It will allow financial institutions and corporations a fast and efficient mechanism to move money around the globe. The benefits to using the Ripple protocol is speed and reduced risk.

    Ripple has three products. xCurrent, xRapid, and xVia. But only one of them, xRapid, uses XRP.

    Ripple has promoted the fact that it’s in partnership with over 120 banks, but only a handful are committed to using xRapid. Remember, only xRapid uses XRP.

    xCurrent can be seen as a half-way house product and allows institutions to use the Ripple protocol but still use liquidity banks within the system.

    Ripple Labs objective is to use XRP within the protocol to provide on-demand liquidity. Think of it as xCurrent without the liquidity providers. The system is fast and reduces counter-party risk because transactions take seconds compared to the 3-5 days of the Swift system currently in place.

  4. How big is the potential market for XRP?
    A survey completed by McKinsey in 2016 estimated that by 2020 the global payments industry will generate an estimated $2.2 trillion in revenue. It’s a giant market with enormous profit potential for a first mover with a disruptive technology.

  5. Is XRP on sale?

Cryptocurrencies are the Wild West of financial markets. During 2018, the top coins and tokens have lost billions in market capitalisation, but even after the losses, are they cheap and is all the bad news priced in?

Remember, the price is what you pay, and value is what you get. The 95% don’t think about value. They compare the price. They assume XRP must be cheap because it dropped 92.6%. It's a huge mistake. Cheap doesn’t measure price against price; it measures price against value.

So is XRP cheap? It’s cheap compared to its past price, but is the price you pay today cheap compared to its unrealised value?



Are there any known risks?

  1. Ripple has had a long dispute with R3 over an option that gave Ripple the obligation to pay R3 five billion XRP for $0.0085. It's a significant negative, especially with falling prices and no new demand because 5 billion XRP is around 13% of the total float on the open market. On the 10th of September 2018, Ripple and R3 came to an agreement over the dispute. Clearing this risk is positive for Ripple Labs going forward.

  2. The big institutions in partnership with Ripple Labs are using xCurrent but not XRP.

  3. Ripple does not have the market all to itself. Swift is fighting back with an updated system, and it has competitors like Stellar and R3.

  4. Remember Facebook and its price to sales ratio of 100? If speculation in XRP is a proxy to holding shares in Ripple Labs Inc, the price to sales ratio is off the charts. XRP is currently valued at around $23 billion, or said another way, 23,000 million. Looking around the internet, Ripple Lab’s sales revenues are quoted at 5 million. And that’s a price to sales ratio of 4,600. This means as an investor, if you bought all of Ripple Labs Inc; then, based on current sales, you can expect to get your money back in 4,600 years. Bonkers. If you increase the sales revenues by 1,000% to 55 million, the price to sales ratio is still 418. These are roughtimates. But they are something to think about considering Ripple has partnerships with over 120 banks, only a few of which have made commitments to using XRP. xRapid, if it’s successful will change this, but for now XRP has very little intrinsic value.

But what if you’re wrong on your fundamental assessment? If you use fundamental analysis exclusively you’ll miss out on noticing timely changes in the market you’re interested in. The 5% club combine fundamental analysis with the behaviour patterns found in technical charts to help them time their decisions and control their risk.

The 5% club are TechnoFundamentalists.

Groundbait

This week Ripple had a large percentage move of 182%. The 95%, see the move, read the Gurusphere, and jump in. The 5% don’t.

They combine, the behaviour patterns of the masses, the signatures left behind in time, to enter a market and control their risk, but how do they know what part of the ocean to fish in? That’s what the 5% use fundamental analysis for. They use it to find the best and highest yielding fishing grounds.

The 5% club find potential unrealised value and wait patiently for the fish to bite.

And this week XRP took the bait.

Was there any catalyst for the move? There was two. First on September 10th, 2018, the lengthy court case with R3 regarding the option payment was settled, and second, Ripple announced the live launch of xRapid.

Rumours quickly spread that the move and volume spike in XRP was caused by xRapid testing.

How do you know if this move is for real, that XRP has made a major low and is on it’s way to all-time highs and higher?

You don’t. The 95% waste time and energy trying to answer the unanswerable. The 5% form an opinion on long-term value, and use the behaviour patterns of the 95% as a trigger to enter into a market and control their risk where the odds of long-term success are good.

 Ripple

Ripple

The arrows, 1 and 2, on the chart show the days when:

  1. Ripple announced an agreement with R3.

  2. Ripple announce xRapid is going live next month.

The 5% club, assuming they had uncovered hidden value in XRP, had several days before the move to take a position with controlled and known risk. The 95% chase the move, and listen to someone else’s opinion.

Notice the red box highlighting the “air pocket.” An area showing no new supply entering the market.

The chart of XRP shows a fast move up with a large selling tail. It took a lot of effort to move the price up that fast. On Friday 21st of September, XRP has a wide range up day with a massive 750% volume spike. But XRP closed at around 50% of the range forming a selling tail.

The selling tail forms a testing zone. This is a price range where future rallies will test new overhead supply.

Engaging at close quarter with XRP, or any other cryptocurrency is about finding the moments in time where you can control your risk. The rest is about finding the best part of the ocean to fish in.


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