In October, I wrote an opinion piece on the potential of Ripple to be a perfect hedge to Bitcoin.
Given that Ripple has exceeded my market capitalization target under the perfect hedge inversion scenario (at ATH), while Bitcoin has doubled, it is time to re-align the hedge assumptions. Note, the hedge play from October would have worked out favorably, but not necessarily because it was a "perfect hedge"( there was no inversion of market capitalization); rather because Bitcoin and XRP each went up in value.
The original article from October 26 is here:
The price and market capitalization (credit to coinmarketcap.com) is as follows:
Background
What is a Hedge?
A hedge is effectively an offsetting position that is supposed to move in the opposite direction of the original position as to limit risk/loss.
What is the difference between Ripple and Bitcoin
It is perceived the Bitcoin represents a decentralized currency with no central authority. Bitcoin was created after the 2008 Great Recession. Many perceive, on the other hand, that Ripple as a company is focused on bank/regulation-friendly approach, which could bring the crypto closer to centralization than Bitcoin. Whether such centralization potential for Ripple is a negative or positive is up for debate, but the risk that the market values regulation-friendly currencies is something that might be worth hedging, even for a Bitcoin maximalist.
Is Ripple (XRP) a perfect Hedge for Bitcoin?
The following assumptions are restated from my first article, to outline the risk that a XRP investor might be seeking to hedger:
Critical Assumption #1: I have considered that for an individual with an investment in 1 Bitcoin, they would be seeking a hedge of the risk that Bitcoin is made illegal through the lobbying efforts of the central banks.
Critical Assumption #2: Another consideration in this is the investor would have to believe that Bitcoin becoming illegal would drive it's price down to the current market capitalization of Ripple (in article #1 I defined this as a nominal amount but now it would still be a pretty significant $82+ billion amount).
Critical Assumption #3: I have considered Ripple XRP is a primary contender for bank adoption based on research (as stated in my first article, however, those more educated on the topic than me, feel free to speak up).
Critical Assumption #4: In order to have a perfect hedge, I would have to assume the news of Bitcoin becoming illegal worldwide, and an endorsement of XRP, would cause the market capitalization of the two currencies to Invert.
Old Analysis versus New Analysis
In my first article, to swap market caps, the $7.8 billion market cap of XRP would have to increase approximately 13-fold, and the opposite would have to occur for BTC's $98 Billion market cap.
In my update, to swap market caps, the $82.3 billion market cap of XRP would have to increase approximately 2.73-fold, and the opposite would have to occur for BTC's $224.3 Billion market cap.
Takeaway:
I am not a financial/investing expert, however, as with my initial conclusion in October, it seems 2,300 XRP is the correct amount to own per 1 BTC, in order to hedge a Ripple-Bitcoin market cap inversion.
What do you think?
Is there an inherent flaw in my logic? I find it strange that to get back to a perfect hedge scenario, the number of XRP is so specific to 2,313. This appears to be the rough math of the number of XRP in circulation divided by the number of BTC in circulation. Would appreciate any insights.
Disclaimer: Author is not an investment professional. This article is not an investment recommendation, do your own research, it is your sole responsibility to make your own financial decisions. This blog does not constitute, create or form a professional-client relationship of any kind, or in any manner, it places sole accountability and responsibility on the user or reader if they make any legal, financial or other decisions based on the information obtained. This information is purely a non-professional opinion, and thus should not be used in making any decision to buy/sell/hedge any investment in the mentioned cryptos. Author has holdings in both XRP and Bitcoin.
Cover Picture was obtained as a screenshot of https://coinmarketcap.com/
I recently moved some of my bitcoin into alt coins with smaller market caps and I am generally optimistic that it will be easier to see consistent positive returns in these rather than bitcoin. Thank you for your opinion piece and congrats on your hedge prediction. Spot on.
Thanks. Not exactly spot on because Bitcoins price increased (so when XRP increased it was not as an inversion).
In my opinion the pullback on Ripple will quite great when it comes. I feel there is less conviction in the fundamentals of that company, even though their story is intriguing. The steemit community is more longterm focused, the Ripple community is a lot of bankers and people that got a tip from their bank buddy that knows everything.
Thank you for adding to the discussion. There is certainly a lot of new money in many different cryptos (not just Ripple), many have ran-up very fast.
How do you feel about Ripple as a hedge?
Yeah sorry got carried and didn't actually answer the topic. As a hedge that's purely up to you. If you like the story stay with it. Not a bad idea. If you are more comfortable with feeling sure on the story of steem or ripple I would go with either or, or a small exposure to the least conviction you have of the two. In my opinion cryptos have almost taken over the precious metals play. The American economic picture seems fairly rosey right now going into the New Year which cuts down a bit on the rocket fuel that was being sprayed with the gridlock over the past year. I'd ring the hell out of the register on Ripple, especially if I got in low. Just my opinion you are smarter than me you owned ripple before the sore neck instahike.
No worries! Interesting take on the precious metals comparison.
One point about the hedge play, the hedge play outlined in the article was much cheaper add-on to a BTC investment in October than now (roughly, it would have cost 8 % of BTC price in October, but more than 36% of BTC price as of the recent article).
nice post
Hi! I am a robot. I just upvoted you! Readers might be interested in similar content by the same author:
https://steemit.com/cryptocurrency/@cryptotax/is-ripple-xrp-a-perfect-hedge-for-bitcoin-opinion-piece
@cheetah This is a December update to my first XRP article, it uses some overlapping language but has an updated analysis which is mostly pictorial in nature. Thus making it worthy of a second post (not a spam article).
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