Editors note: This article was updated on Dec. 7 to correct information about the relationship between Ripple and Spark.
Since November, the valuation on XRP (CCC:XRP) has almost tripled on mania over the upcoming “XRP Airdrop,” a promise by blockchain network Flare Networks to give away up to 45 billion free XRP tokens. According to the company, anyone owning XRP on Dec. 12 (barring those working at Ripple Labs) will receive Spark tokens, which can be exchanged 1:1 for XRP.
It almost sounds too good to be true: The company is giving away free money to nearly everyone who owns XRP.
But there is some reason for the madness. Payment processor Square (NYSE:SQ) pulled a similar trick when it launched its mobile payments app Cash App. To gain initial users, Square gave away cash every week. And it worked. People joined by the hundreds, looking to win the $200 or more in weekly prize money. And the more people joined, the stronger the network became. Cash App now boasts 30 million users and could even be worth more than its parent company.
Flare’s Airdrop could work similar magic on XRP. With more people buying into the altcoin, its popularity could jump, driving XRP prices, currently hovering above 62 cents to $3 and beyond. So, what’s the catch?
Ripple Price: What Does Flare Gain from the Airdrop?
Seasoned investors would naturally wonder why Flare Networks would willingly give away 45 billion XRP tokens. If it seems too good to be true, there’s likely a catch.
And here it is: Flare Networks is giving away Spark tokens, not XRP. The company is looking to get users onto its Flare Consensus Protocol, and giving away tokens acts as an incentive for people to join.
What’s more, the company isn’t particularly clear about what those Spark tokens will eventually be worth. All we know is that the company will distribute Spark tokens on its own Flare network, rather than on the Ethereum blockchain.
This isn’t the first time a company has attempted to build a new cryptocurrency off an established currency. In 2015, Tether offered a 1:1 exchange rate with the U.S. dollar. In other words, anyone owning Tether could “sell” Tether back to its parent company.
But the arrangement started to fall apart in 2017 when investors began questioning whether Tether had enough cash in the bank. Today, Tether has bounced back from its 92-cent low to par with the dollar, but questions remain about its parent company’s solvency.
XRP holders might encounter even more difficulties since the 1:1 Spark conversion only goes one way. There’s no guarantee that the Spark/XRP will remain 1:1, or worth anything at all, when you’re trying to convert back. In the meantime, Flare might proudly claim to have a massive Spark user base while they go looking for a SPAC to take them public.
What Drives XRP Price?
So, will Flare’s XRP Airdrop boost the cryptocurrency’s price? Absolutely.
To understand why, I’ll let you in on a secret about cryptocurrency investing: prices aren’t driven by investors looking for safety. Correlation between XRP and U.S. bond returns (a proxy for “safe” assets) stands at only 3%. Even gold, the ultimate “safe haven,” only has a 20% correlation with XRP prices.
Instead, XRP prices are driven by other cryptocurrencies, particularly Bitcoin (CCC:BTC).
Between 2016 to present day, the correlation between XRP and BTC has averaged almost 40%. That’s not as high as other altcoins that use Bitcoin’s architecture (Litecoin has a 60% correlation with Bitcoin), but it still means that investors can chalk up half of XRP’s return to BTC’s gyrations.
And here’s where things get interesting.
To break the link with Bitcoin, XRP needs to grow a life of its own. And that’s where Flare Networks comes in. By adding protocols (i.e., more services for XRP), the company hopes to differentiate itself from Bitcoin and other altcoins. Succeed there, and XRP will ride on Flare’s coattails as adoption spreads. And as long as demand grows faster than Ripple Lab’s supply, prices will naturally rise.
Why Invest in Ripple’s Crypto?
XRP already uses a different architecture from Bitcoin. Ripple Labs, the cryptocurrency’s creator, initially created the currency to send money between banks; today, the company still controls the “mining” process of validation.
While some users might balk at XRP’s centralization, the process does come with some benefits:
- Centralization prevents the massive race-to-the-bottom waste that happens when miners compete against each other.
- Validation happens far faster since there’s no distributed blockchain to update continually.
- New protocols like Flare can get added in quickly.
How to Invest in the XRP Airdrop
Those looking to profit from Flare’s XRP Airdrop need to act quickly. The Dec. 12 cutoff date is fast approaching, and you need to own XRP before that time.
So, how can you get started?
- Get yourself signed up on a cryptocurrency exchange
- Buy XRP
- Make sure you claim your Spark tokens before they expire
- Convert the tokens into XRP, and finally
- Convert your entire XRP holdings back into U.S. dollars
Of course, the risk is that the XRP price collapses in the meantime from gyrations in Bitcoin prices. And several catalysts could make that happen. But if you’re willing to brave those risks and hang on, XRP could quickly return 300% over the next several years as adoption continues.
Time to place those bets. It’s going to be a wild ride.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing