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Correlation Crypto Strategy: Ripple vs Ethereum

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Cryptocurrencies have taken the world by storm, not only for their unique blockchain technology but also the massive volatility in their values. Bitcoin, the first cryptocurrency to be launched, has so far managed to retain its top position, despite the introduction of hundreds of new cryptos. However, recent months have seen the rising popularity of several other digital currencies, like Ethereum (ETH) and Ripple (XRP), which are based on different models to attract the attention of businesses and individuals.

While more and more investors seem to be gravitating to cryptocurrencies, attracted by the sharp appreciation in their values, they need to remember that these currencies are not investments that will generate sure or regular returns. But, as the adoption and demand for cryptos outstrip their supply, there is scope for further appreciation, as has been witnessed in the case of Bitcoin.

Apart from Bitcoin, the pioneer crypto, currencies like Ethereum and Ripple, based on a new framework that allows businesses to use their platforms, are becoming popular. And all eyes are now on the battle between Ethereum and Ripple for the #2 position among digital currencies.

Understanding the Correlation between Cryptos

Values of cryptocurrencies across the board have declined so far in 2018, largely due to regulatory concerns and the ban on cryptocurrency ads by several social media networks. While Bitcoin has remained the number one cryptocurrency since its inception, its supremacy is increasingly being threatened by the introduction of several new coins and blockchain networks in recent years.

The correlation amongst various cryptos refers to the degree to which they move in tandem. The correlation value can range between -1 and +1. A value of -1 means that the returns of the two cryptos move in opposite directions, while a value of +1 means the returns move in the same direction.

Of the various currencies that have become popular in recent months, Ethereum and Ripple stand out as the top performers and ones with the capability of taking over Bitcoin in 2018. While Ethereum is a digital token intended as a unit of exchange, Ripple is being marketed as a useful mechanism for cross border transactions. Values of both currencies have, however, declined in recent weeks, largely due to a broader sell-off in cryptos.

Both cryptos have been showing a positive correlation in recent months. The 90-day correlation matrix between ETH and XRP is 0.72, which means that the two cryptos share a strong positive correlation. This could be largely because of the similarity in their platforms and their applications for businesses.

Adoption-wise, both Ethereum and Ripple are attracting the attention of investors and businesses alike, driven their platforms that can service the needs of businesses. Ethereum’s popularity is attributable to the fact that it is backed by an organization, besides offering an entire platform running on blockchain technology and allowing Initial Coin Offerings for funding.

Another feature of Ethereum is its plans to shift its transaction validation system from a Proof of Work mining-backed one used by Bitcoin to a Proof of Stake system. Last, but very important, is the framework created by it, which allows for smart contracts or agreements that can be executed on fulfillment of certain conditions. And not to forget the fact that Ethereum supply can be increased at any point of time by its central organisation.

Ripple or XRP, on the other hand, is backed by a company started by Wall Street finance executives in 2012. The main attraction of Ripple is that it is working with banks and has already entered into 100 partnerships. While it works like Bitcoin, by having a decentralised ledger for tracking and verifying all transactions, it is capable of scaling exponentially large transactions and that too in a matter of seconds. The network is capable of delivering a phenomenal 1,500 transactions every second, which is 100 times that of Ethereum. Therefore, Ripple offers significant benefits for today’s banks, since it allows faster processing at a much lower cost and thus is likely to be increasingly adopted by the banking system.

But one area where Ethereum scores over Ripple is its ability to deal with a wide range of complicated interactions between several parties. Ripple, in contrast, is a much simpler network, allowing simple transactions at a fast speed.

To conclude, while Ethereum allows businesses to raise funds through ICOs, Ripple allows the use of its network for sending payments. Consequently, Ripple is being welcomed by mainstream organisations and institutions for its ability to facilitate transactions at a superfast speed.

Meanwhile, Ethereum continues to be far ahead of Ripple in terms of value, as its token sale model continues to gain popularity. Also, many new applications built on Ethereum are expected to hit the market in 2018, making the crypto network even more popular and in demand.

On the whole, the value of these cryptocurrencies is likely to be driven by the level of acceptance of their individual networks by businesses and the investor perception about them.


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