Cheatsheet: Why Ripple is suddenly the cryptocurrency of the moment

The price of bitcoin is down and a new digital currency is surging: Ripple. Its price hit a record high Wednesday at $3.08 -- a 27 percent increase in a day and a 35,000 percent jump in a year. This year may be the year of Ripple’s rise, some say, but what it’s different from other digital currencies: it’s a token, not a currency, backed by fiat currency and whose controlling company is backed by the world’s largest financial institutions. Since Ripple’s 2012 launch it’s raised more than $93 million, most recently closing a $55 million Series B round in 2016. Santander, SBI Holdings and Accenture Ventures are among its most prominent investors. We break down why Ripple is the digital currency of the moment. What is it? Ripple started as an open-source, peer-to-peer software project similar to bitcoin, but has been pitching its technology to financial institutions to use behind the scenes. “Ripple” can refer to two things: the Ripple protocol, the blockchain-based cross-currency settlement solution; and XRP, the native digital currency of the Ripple network. Why's everyone talking about it now? With so much buzz around initial coin offerings in 2017 and mainstream financial firms incorporating cryptocurrencies into financial products that everyday people will be able to access — like Fidelity’s experiments with Coinbase and CME Group offering bitcoin futures — there’s been a resurgence in public blockchain and cryptocurrency interest. Each Ripple token, XRP, was worth about $3.57 as of Thursday morning, compared to the half U.S. cent they were worth a year ago. Two weeks ago, the price surpassed $1 for the first time, according to data site CoinMarketCap. Ripple does not allow XRP price fluctuations to influence its strategy, said Asheesh Birla, Ripple’s vp of product. The price surge also seems in part motivated by rumors that Coinbase, the cryptocurrency exchange the and wallet with one of the cleaner names in the industry, may soon add Ripple support to its trading platform, which currently supports bitcoin, ethereum, litecoin, and bitcoin cash. How is it different from bitcoin? Bitcoin, like other cryptocurrencies, isn't owned by anyone. Ripple tokens are owned by Ripple the company. XRPs are also called “tokens,” and not coins as if they were just another cryptocurrency, because they’re backed by traditional currencies like dollars or pounds. Why do banks care? Ripple was a first mover in the blockchain space and relatively quiet for a long time compared to its fellow vendors and consortia like Hyperledger or R3 CEV. But now it’s anything but shy about going head-to-head with Swift, the current hub at the center of the global banking. Swift’s biggest problem is that of “nostro accounts,” basically correspondent bank accounts that eat up time and money throughout the exchange and rack up holding fees – and that’s where Ripple can provide real value to the system. “The nostro problem is a big part of Ripple’s value proposition,” Tim Coates, managing consultant at Synechron told Tearsheet. “If we can do realtime settlements then we don’t need a whole store of nostro accounts. If not, then we always need a buffer of funds in each account and that buffer is just locked away. We shouldn’t have to put a lot of money away so we can exchange money between banks.” Using Ripple, the currency would be converted to XRP en route and then changed again to the destination currency, a process that would take seconds. Ripple counts 100 financial institutions as customers. "The problem today is, for example, when a client wants to move U.S. dollars to a recipient in Mexico, they have to open an account in Mexico, convert U.S. dollars into Mexican pesos and hold it in that account and pay out from that local account -- it's awfully time consuming," Birla said. What to watch in 2018 Ripple expects momentum in the Asian markets to push more North American partners to join. Ripple has cornered at least a third of Japanese banks; last weekend, three of Japan’s largest credit companies announced they're using Ripple to handle payments and settlement. "We've laid the groundwork of building those end points [in Asian markets], and now you can use those end points to attract the originating countries like U.S.," said Birla. "We saw Europe start adopting it last year and you'll see an acceleration in the U.S. side as well." Tanaya Macheel contributed reporting.