Ripple’s bid to disrupt the payments sector


VCJ Venture Guest Column
Ripple virtual currency is seen in this illustration picture, Feb. 13, 2018, courtesy of REUTERS/Dado Ruvic/Illustration.

By Alejandro Ortiz, SharesPost

Founded by Chris Larsen and Jed McCaleb in 2012, Ripple is the one of the first companies to successfully provide a practical application of the blockchain technology.

Through RippleNet, its payments platform that runs on a blockchain, the company provides a seamless way to send money overseas regardless of location or particular bank. With over 200 financial institutions piloting RippleNet, the company’s products represent a long awaited disruption to the $1.75 trillion payments industry.

VCJ Venture Guest Column
Alejandro Ortiz, research analyst, SharesPost Research.

Ripple also owns XRP, the cryptocurrency that runs on RippleNet to provide a low-cost cross-border transaction and eliminate risks associated with payment processing. Ripple created a total of 100 billion XRP, of which nearly 40 percent currently circulates. XRP is the third largest cryptocurrency traded on global crypto exchanges, after Bitcoin and Ethereum.

The company, which employs more than 300 people, raised $93.5 million over two fundings from prominent investors, such as Blockchain Capital, Andreessen Horowitz and GV. While we cannot yet establish a valuation range for Ripple, investor sentiment has been positive on the company.

Previous mutual funds marks suggest Ripple peaked during early 2018, with investors valuing the company up to $1.8 billion, when the crypto market was at an all-time high. Since the onset of crypto winter in 2018, Ripple’s valuation came down to $800 million to $1.1 billion.

Should the Securities and Exchange Commission offer favorable regulatory guidance in the future, Ripple will likely enjoy a valuation boost since the company already makes scalable products that global financial institutions could adopt.

Ripple valuation based on mutual fund transactions. Source: SharesPost Research, public fillings on SEC.gov.

Ripple competes in the payments sector, which is an enormous market opportunity. The company enjoys an early lead thanks to its products and partnerships with major financial institutions across the globe. However, blockchain is still nascent technology; the impact of any regulatory changes to the cryptocurrency and blockchain industry needs to be closely monitored.

Investment Thesis

The Upside Scenario:

  • Market opportunity: Blockchain-based payments markets are young and Ripple is already a leader with the potential to disrupt the global payment industry.
  • Partnerships: Ripple has struck partnerships with more than 200 global banks, threatening incumbent financial institutions.
  • XRP: The cryptocurrency is expected to decrease costs and increase the speed, security, and reliability of cross border payments. The third most popular cryptocurrency reached an all-time high of $3.19 in early 2018 and is traded on all popular exchanges in the United States and across the world.

Downside Risks:

  • Unclear profitability potential: Ripple’s success is partly dependent on the industry’s adoption of blockchain technology. The regulatory situation regarding blockchain and crypto remans unclear. We don’t expect Ripple to be profitable any time soon.
  • Competition from incumbents: Deep-pocketed banks and payment companies offer a tough challenge to Ripple. The company needs to differentiate itself by to continuing to innovate.
  • Margin pressure: The growing list of payments companies can lead to increased competition and margin-pressures, eventually leading to industry consolidation.

Alejandro Ortiz is a research analyst, private investment research for SharesPost Research.