Can Ripple Crash? Full Analysis

/Can Ripple Crash? Full Analysis

What are the risks threatening Ripple that can go as far as causing to Ripple crash?

Can Ripple Crash? Full Analysis 2018-03-26T17:04:49+00:00
Can Ripple Crash? Full Analysis

Ripple Crash: All Possible Scenarios

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  1. Ripple past crashes
  2. Ripple’s crash due to technical issues
  3. Trading issues that may lead crash
  4. Government regulations
  5. Taxation issues

Ripple (XRP) is a cryptocurrency that aims to connect central banks, payment services, digital asset exchanges and corporates using RippleNet to deliver a frictionless experience sending money globally. It is built on an advanced blockchain technology that is scalable, secure and operates between different networks. In 2017, the company saw an increase in the numbers of its customers to over 100 institutions and it also saw an increase in its price.

In the 1st week of 2018, Ripple achieved a record high of $3.84, only to fall by more than 50% the following week. This led to several speculations as to why the cryptocurrency was crashing and even more if the crash was likely to happen anytime soon. So here comes a question, “What may crash Ripple?”

Scenarios that may lead to Ripple’s crash due to technical issues.

  • Centralization, the absence of mining, POW, and security.

The major reasons that may cause Ripple crash are the following facts:

  1. Ripple operates on centralization unlike other cryptocurrencies where the aim is to be decentralized, Ripple is highly centralized and this means that the company controls how much supply of XRP is in the market. Centralization is a major reason why people hate Ripple.
  2. Another speculation is the fact that Ripple cannot be mined, it is a 100% premined currency and investment requires purchasing tokens from partner exchange platforms. The fact that Ripple is centralized and controlled enhances its appeal to financial institutions. Hence, it would be difficult for them to have a centralized system and also have incentivized mining that requires mining and proof of work (POW).

This also means that there is no security for those that would want to invest in Ripple as individuals because they cannot control the market as in other cryptocurrencies.

  • Rumors that Ripple network is rigged by private companies for their benefit.

There is a belief that the Ripple network is being rigged by private companies for their benefits.

  1. It is believed that the more XRPs bought, the higher the cost of XRPs and thus the company profits from it.
  2. They operate on a closed source code and use a private blockchain.
  3. Last year, it was revealed that despite Ripple reps failing to keep their promises of giving out free XRP to users they had secretly made a deal with a company allowing them to buy XRP at a rate that is way lower than the market exchange rate.
  4. This revelation left a lot of users feeling betrayed and wary about Ripple and its benefit as an investment mechanism.
  • Quantum computers.

Quantum Computers have been a theory since 1982 and are a possibility that is going to happen in the near future.

  1. There are theories that quantum computers will put an end to bitcoin trading as it will be able to crack the private keys of bitcoin wallets.
  2. Some people don’t believe that this will affect Ripple so much because Ripple does not really rely on wallets and money is not really stored in Ripple format. Rather, Ripple is used for transferring currency, assets etc.
  3. It is believed that quantum computers will pose a threat to the security of this method of, money transfer without the need of a third party and there is a chance that Ripple will survive the challenge due to the fact that they rely on integrated protocol and have closed blockchains.
  • A ripple is destroyed with every transaction.

Another point to be considered is the fact that every time a transaction occurs using Ripple an XRP is destroyed forever. However, it should be noted that 100billion XRP were made in total, this happened at the creation of Ripple network and there will never be more. Hence, the company changed the rule to ensure that 1000 transactions had to be made before 1 XRP could be destroyed. This is called the burn rate. It is believed that in the future if more and more transaction is made and XRPs reduce in number, the burn rate can be increased by approximately 10,000,000 transactions = 1 XRP, the system is flexible.

  • Is blockchain necessary for a centralized ledger like Ripple?

Ripple uses blockchain technology but it does not allow its users to mine, which leads to the question why not use a different technology that does not involve decentralization.

  1. They could have used technologies such as MySQL, but they chose blockchain because they wanted a technology that was scalable and could ensure a safe environment.
  2. Using blockchain which is a ledger ensures that all transactions are always recorded and makes a very core accounting tool.
  3. It also allows creates a publicly auditable and accountable ledger rather than one hidden in the vaults of banks. If they had used some other cheaper technology (e.g. MySQL) they might have run into security issues like a loss of transaction information that may lead to public distrust.
  • Bots that may cause blockchain failure.

There are doubts as to whether the Ripple blockchain can be hacked by bots and how this would cause the Ripple to crash. Ever since the popularization of cryptocurrencies, several sites have crashed due to hacking such as Mt Gox and Bitfinex. Ripple itself might be safe and impenetrable to hacking but what is not safe is the wallets that people store their cryptocurrencies on or the site that they buy them from. In 2016, over $28 million was recorded as loss from crimes involving virtual currency was reported to the FBI’s Internet Crime Complaint Center, more than triple the 2015 total.

  • Stellar (and others) vs. Ripple.

It can be argued that there are several other applications that are better than Ripple such as Stellar.

  1. One of the biggest difference between Ripple and Stellar is the fact that Stellar aims to target individuals while Ripple aims to target financial institutions, central banks.
  2. They are also focused on improving the living condition of others as a non-profit organization and their technology as an open source code.
  3. Stellar was originally a fork of Ripple but as of April 2015, they don’t share any code. And since their target groups and functions are different it is hard to say who is more superior. Stellar Lumens is the currency used by Stellar.
  • Could financial institutions use Ripple’s system?

Although there are numerous banks that have jumped on the Ripple train there is the issue of whether they will use the XRP or just modify the ledger to satisfy themselves. However, it must be noted that for any transaction involving Ripple, XRP must be used. Even if the transaction was from USD to EUR, it would be converted from USD to XRP and then from XRP to EUR. However, institutions do have the option of creating a corporate coin that can be used but even this will still require XRPs. This is based on the interledger protocol that was created in 2004 and the brainchild of the Ripple Technology.

  • Will Lightening Network make Ripple obsolete?

Due to an increase in transaction fees by bitcoin, consumers have turned to other altcoins like Ripple that are cheaper transaction wise and faster. Bitcoin has turned to other options such as the Lighting Network which will allow bitcoin to have faster and cheaper transactions directly between two parties. It will also allow for stopping the transaction if something does go wrong. However, some don’t believe that such will make Ripple obsolete as Ripple has something the banks prefer that is centralization, public ledgers and the fact that they have integrated with the Lighting Network as well.

  • Can Ripple Wallets freeze because of bugs and hacks?

Although word on the street is that you cannot freeze Ripple Wallets, this is not as true as they can be frozen.

There is a freeze feature enabled in the Ripple network and this has publicly been tested as seen when one of the co-founders left the company back in 2015.

There is a chance that hackers could make use of the freeze feature on unsuspecting users and cause a disruption in the service as the power to freeze accounts does not only reside with Ripple but with several Ripple gateways such as Bitstamp etc.

  • Is it possible to create more Ripple on purpose?

There have been several questions as to whether more Ripple can be created by the company or by hacks and so far, the answer has been no according to the protocol from inception. The aim in creating XRPs was for it to be a scarce asset, hereby increasing its worth and causing the price to increase. This leaves a question in my head what happens when they run out of XRPs? What next? Will that be the end? There must be an answer to this question otherwise why are so many Central banks, financial institutions and payment providers willing to use their services.

Up till now, we have discussed how technical difficulties could be the reason why Ripple prices are going down and possibly crashing. Now we will take a look at some trade-related issues that could be why Ripple prices are falling.

Trading issues that may lead to Ripple crash

  1. Trading Bot.

One major issue is the use of trading bots. Like with all other forms of stock and currency exchange Ripple trading bots exist and they are used to buy coins at opportunistic times. They also manipulate pumps and dumps which in turn cause to raise in coin’s price. As a result, the traders will have to pay more for the asset, which leads to further inflation.  This can cause a flash crash as evidenced on 22nd of June, 2017 when Ethereum briefly fell from $319 to ¢10.

  1. Big players dump big amounts of Ripple.

This also leads to another possible way that the Ripple can crash. Hypothetically if one person dumps a large amount of XRP onto the market at once they could potentially crash the currency value. This possibility led Ripple to ask Jed McCaleb one of the founders to sign an agreement that allowed him to sell a maximum of 10,000XRPs a week when he left the company in 2014. This is believed to have caused the Ethereum crash as someone supposedly dumped a million Ethereum coin on the market.

  1. Unintentional trading bots.

Another thing to consider is if the legal trading bots could develop a problem that crashes or overload the system causing the general trading pattern systematic to slow or decline or through a mistake cause a flash crash.

  1. Cooperation of traders and miners.

Other possible ways that can cause a crash will be a traders-miners cooperation. That is the big miners co-operate with traders to cause a disruption such as an increase in transaction cost and this can probably serve to increase the number of dumps for the Ripple cryptocurrency. But this is probably an unlikely scenario as the Ripple network does not have miners due to the fact that Ripple is a 100% premined cryptocurrency.

  1. Speculative bubble burst.

The biggest probable cause of the crash in the Ripple would be a speculative bubble burst. But first, you need to understand what a speculative bubble (SP) is, SP is a sharp increase in asset worth within a specific industry. It is usually caused by inflated outlooks of future price and asset appreciation that will result in asset value increase. The burst is usually when the market returns to normal and there is a sharp decrease in the prices, short-term investors tend to dump their assets leading to a bubble burst. This is very likely to happen with the Ripple as many people are getting into the cryptocurrency craze.

  1. Short-term squeeze.

Other factors that can lead to a market crash include a short squeeze which is a phenomenon that occurs when short sellers get squeezed due to the prices of stocks that they have shorted getting increased. It could be a direct effect of positive speculation. In the aftermath of a short squeeze is usually a price lower than was seen before the squeeze began. If the stock continues to rally support then it should return to normal trading price however, it might take a while.

  1. Long-term squeeze.

Contrary, we have the long-term squeeze, this usually occurs when there is a sudden decrease in the stock price that initiates selling and this puts pressure on long-term holders of a stock to sell their stock so as not to protect themselves from a major loss. Another, thing we should discuss is flash crash. What is a flash crash? Flash crash is a quick drop and recovery in stock prices. This term was coined after the events of May 26, 2010. The Ripple has yet to experience a flash crash in the typical sense but the crash of January 2018 was not a long-lasting crash as the XRP recovered to more than a dollar by the next day.

  1. Flash Crash.

As mentioned earlier, the flash crash on Ethereum is one that has not been seen on any other cryptocurrency platform. This resulted in a dramatic price fall of Ripple. To be more precise it fell from $319 to 10 cents within a very short period of time. Because of this, a number of investors lost huge amounts of money, however, in a matter of minutes the cryptocurrency rebounded. It was originally thought to be due to an illegal price manipulation scheme but GDAX said it was due to a selling market worth several millions of dollars ordering after investigations.

Crashes of Ripple in the past

Recently, a move by coin market cap to exclude data from South Korean markets led to a crash of Ripple and several other cryptocurrencies as it led to a panic selling. This was because the South Korean market is one of the biggest cryptocurrency markets and it adds on a 30% premium on all cryptocurrencies. Hence without this data, it looked as if cryptocurrencies had dropped by 30% and those who didn’t know what was going on triggered a panic selling.

A further drop was instigated when rumors came out that the South Korean government was planning to pass a bill banning cryptocurrency trading in the country. This is a major blow to Ripple as most of their trading takes place in South Korea and Japan.

  1. Another incident that caused the Ripple to fall was on the 5th of January, 2018, when coinbase announced that it had no intention of trading the XRP currency and that anything otherwise was just rumors and speculations. The currency dropped by 26% after that announcement was made.
  2. Also, there was a correlation between Google search results regarding Ripple and an increase in its price.  A review of google trends found that during the period of October 2016 – October 2017 there was a significant correlation between the price of XRP and the number of search volume. This means that in months when the search volume was high there was also an increase in the price of XRP.
  3. Recently Jamie Dimon, CEO of JP Morgan called cryptocurrencies, “a fraud that will blow” this caused a minor drop in cryptocurrency trading. However, he made an apology shortly after it was discovered that Goldman Sachs planned to set up a Cryptocurrency desk.

Scenarios when Ripple value decreases because of government regulations

We will now discuss possible causes that could result in a crash in the future.

  • China banning Ripple.

One of the biggest and most possible reason is China. China could decide to ban Ripple this would cause a big crash in the Ripple price, however, some people do not think that it is likely to happen. The population of China accounts for 20% of the world population, and if 20% of the world cannot use Ripple this will obviously be bad news for any cryptocurrency much less Ripple that seeks to work with institutions to reach a wide range of clients. This will mean that a lot of their customers will most likely drop out of their current deal and also put off possible future customers.

  • The US banning Ripple.

Another, imaginable situation but also unlikely, is in the event that the USA bans Ripple or heavily sanctions it. While I said this is unlikely it is not impossible in the current climate. Many changes are being sprung suddenly and the government might feel the need to also make money off of cryptocurrencies especially in the area of taxes and regulation of cryptocurrency in relation to crime. That said Ripple does not follow the normal code for cryptocurrencies and is not a good choice for criminal activities so this might never happen. On the off chance that it happens, the Ripple would suffer a blow and how it would handle it is not something I can predict.

  • Tax regulations.

If the regulations are based on tax and require users to pay taxes on using Ripple, it would cause a disruption of service and not many foreign banks would be inclined to being under United States (US) scrutiny and contracted may be reneged and dissolved. This will lead to a sharp decrease in the market price of Ripple.

  • Money monopoly.

In the event of an enforced money monopoly that is not in favor of Ripple, the shares will suffer and likely drop to an all-time low that cannot be easily rectified and could lead to a total halt of its business operations. It could also result in a situation that leaves the Ripple worthless and it might not be able to function as a payment transfer tool. However, if it is in favor of the company it would be a two-edged sword as it will increase the nominal value but at the same time make them distrustful in the market and to other traders. I do wonder if it will increase or decrease the value of the Ripple? What do you think?

  • Regulations.

There are other factors such as taxes that can affect the prices and whether people invest in cryptocurrency. In the United States of America, cryptocurrencies are treated as property and make for difficult taxing if they are used on a regular basis. Firstly, we have a capital gain tax which is a tax on the realized profit from the sale of a non-inventory asset that is greater than the amount realized on the purchase, or its value at the time it was acquired, or its market value. This is different from country to country, for example in Canada, residents pay 50% of their marginal tax rate on capital gains, while in the USA individuals and corporations are subject to capital gains taxes each year on their annual net capital gains.

Scenarios of Ripple value decreasing because of taxation issues

  • Capital tax gain.

Capital gains taxes apply to anyone who sells an asset for profit – unless that person sells and buys assets for a living, like a day trader. This would apply to those that trade cryptocurrency for a living. These rules are already in place and do not seem to have an effect on current market prices. On the other hand, it should be noted that countries like New Zealand, Hong Kong, Pakistan, Belgium, Netherlands, Turkey, South Korea, Switzerland, and Singapore have no capital tax gain.

  • Property tax.

Another possibility would be if Ripple becomes considered a digital property and a taxation is put on it. This will further complicate things but I do not believe that it will have much effect on the Ripple price, other than an initial panic that eventually dissipates. In general, taxing will not really affect the price of ripple as Ripple is not really being used for personal usage. But as an investment and can apply for deductible investment loss.

  • VAT and other taxes.

Most countries have different categorization for cryptocurrencies, for example, the US considers them property, the UK, Brazil & Israel consider them to be assets, Japan and Canada consider them to be commodities, while countries like Mexico, South Korea, and Turkey are still in discussion. At one-point Germany and the UK applied VAT on cryptocurrencies but this has been repealed and they now face huge company taxes. This affected large-scale miners and caused them to either shut down or move to more crypto friendly countries.

  • Banks.

People often wonder if banks can purposely crash the Ripple to make crypto look bad but I believe that this has an impossibility tag around it as the banks will be equally affected if this crash were to happen and they currently benefit a lot from using Ripple. But if a third party were to do it, I would believe it, there is a lot of hate surrounding Ripple at the present and this makes it seem likely.

The Ripple is aiming to stay and to improve the way banks and payment providers operate and it is a great investment option that is possibly going to continue to rise if only based on the way the protocol has been written and how the tokens are used. It might never overtake bitcoin in individual share price but it has the ability to become the most used cryptocurrency in the world.  With more financial institutions accepting Ripple and it getting regulated without any major upsets, the Ripple’s XRP price can skyrocket to $5.00 – $10.00 by the end of 2020.

To sum up…

All in all, we have discussed different ways that a Ripple Crash can occur and the possible effects of such a crash. But I would love to hear your opinions as well so feel free to drop in and leave your comments and opinions. What else do you think can happen? Can a crypto crash cause major ripples in the world today? Please don’t forget to check out the rest of our site and stay updated.

Thanks for reading see you next time.

Leave A Comment3 Comments on "Can Ripple Crash? Full Analysis"

  1. Arsetechnica
    Arsetechnica March 26, 2018 at 3:15 pm

    Meh.

    -1
  2. swati kapoor
    swati kapoor April 6, 2018 at 6:02 pm

    Short Break for Investors as Bitcoin, Litecoin, Monero, NEO Prices Freeze

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  3. Edwin
    Edwin April 17, 2018 at 11:40 am

    7 important mistakes:
    1: Ripple the company is centralized, XRP and the XRP-ledger are decentralized.
    2: It’s not premined (since it’s not mined in the first place).
    3: Ripple works with closed source on private blockchain…. the XRP-ledger is an open source, decentralized ledger on which anyone could create their project. Just look at Allvor, they got absolutely nothing to do with Ripple but are using the XRP-ledger with their own token.
    4: Ripple doesn’t rely on wallets…. it simply does for XRP (the fact you’re mixing up Ripple and XRP says enough about your knowledge on Ripple and XRP.
    5: Quantum computers could pose a threat to all systems, but with Ripple they would have to hack 80%+ of the nodes that you choose to trust. If bots etc. were to spin up 10.000 fake nodes a day, it would still be safe to use for banks etc. For the Ripple blockchain to be hacked for e.g. banks etc. they would need to hack 80%+ of those trusted nodes (that probably have a much higher security than any POW mining pools). Any POW system would be much easier to shut down. If hackers were to get control over 51% of the POW-mining power they can create a hard fork by double spending. Therefore the XRP-ledger is a lot more secure, most likely the most secure as to date.
    6: Ripple is only for big banks etc. Check Mojaloops with whom Ripple is working together….
    7: This freeze FUD has been explained very clearly, and developpers have shown the progamming code of this so called freeze function. Nobody can freeze XRP or the ledger.

    All the speculation stuff, that goes for all crypto. Regulations (globally) are coming, what that brings…. we’ll see.

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