Ripple stock: what comes after the SEC?
I had the pleasure to attend the genfinity.io twitter space, hosted by the lovely @CrypticCarola, who asked witty questions about ripple, the sec case and the valuation scenarios.
What is your current assessment of Ripple's valuation, and how do you arrive at this estimate?
My valuation is based on my recent transaction. We sold some stock to a secondary buyer in the company's name. Because it was a bid and we received real dollars in our bank account, we know the price was true, and the buyer was a swaggy fund. At the end of Q1, we valued the stock as low as $16 because we have a model called valuation at the market that takes prices from the most liquid brokers. They seem wrong; we got paid well above that, so those lower offers were fake or had already been lifted. So, because we bought and sold many shares in Ripple since 2021, we think I know that the fully diluted number of shares in the company, multiplied by the price we got paid, gives you a real back-of-the-envelope valuation of 4.7 billion dollars.
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How do you think the outcome of the SEC v Ripple case may affect Ripple's valuation and the value of its cryptocurrency XRP?
The most obvious catalyst for a stock re-pricing would be an IPO, exposing the business to a much wider pool of potential investors and analysts. In the past, Ripple has stated that they intend to submit an IPO application as soon as the SEC litigation is settled. According to the previously released schedule, this would occur in the first half of 2023 if the matter is settled at summary judgment.
What potential scenarios could play out in the SEC v Ripple case, and how would each scenario affect Ripple's valuation?
There are four broad buckets that the outcome could fall into:
1. The court finds that XRP was and still is a security, and Ripple is forced to disgorge all its sale proceeds and stop using XRP globally;
2. The court finds that XRP was and still is a security under US law; Ripple has to disgorge the proceeds of its US-only sales but can continue its business offshore;
3. The court finds that XRP was a security in the past but isn’t a security now; Ripple has to disgorge the proceeds of its sales up to a certain time in the past and can continue to use XRP in its business globally;
4. The court finds that XRP was never a security, or the fair notice defense holds that Ripple doesn’t have to disgorge and can continue to use XRP in its business globally.
h/t @joshgiersch on the above.
What are the key risks and uncertainties could impact Ripple's valuation going forward, and how might these risks be mitigated or managed?
Regarding how to manage adverse scenarios, there is one last card Ripple can play, and that has to do with ROFR. Do you know what that is? ROFR, or right of first refusal, is the right of a company to refuse the seller of its share to sell to a buyer, usually exercised to block unwanted buyers or transactions at a price that could depress the company's valuation. An alternative for repricing would be if Ripple becomes more aggressive in buying back its stock and exercising its right of first refusal on secondary-market sales. Brokers have indicated that Ripple is ROFR-ing trades below $20 in the common stock; this is far below the value of Ripple’s assets, and secondary-market volumes are low enough that Ripple could significantly raise its ROFR level without spending too much of its billion-dollar-plus cash holdings. Ripple’s buyback of the series C preferred shares at $92—spending over $200 million in the process—indicates that it can conduct significant buybacks and raise the price of its existing ROFRs, should it choose to do so.
How do you think the regulatory environment for cryptocurrencies may evolve in the coming years, and what implications might this have for Ripple's business and valuation?
If Ripple comes out of the SEC case clean, it will be the best game in town because it will have more certainty than any other digital asset. So, more investors, funds, analysts, and projects will invest in XRP, pushing the price up. Also, it will become palatable for institutional investment at IPO. Even if the company is forced out of the US, let’s say to the UK, for instance, it will be an interesting digital payment player for investors. What is bad is if the case drags on, then the uncertainty may last longer and kill the investment story completely. Ripple has to come out of it before the fatigue settles in. Investment stories inevitably fade, and the SEC case is taking away the best year of this story.
Ripple
Ripple is a San Francisco-based technology company that provides a global payment protocol called RippleNet. This protocol is designed to facilitate fast and low-cost cross-border payments. Chris Larsen and Jed McCaleb founded the company in 2012, and CEO Brad Garlinghouse now leads it.
Ripple's technology uses a distributed ledger, or blockchain, to enable real-time settlement of payments between parties without the need for intermediaries such as banks or payment processors. The company's native digital currency, XRP, is used as a bridge currency to facilitate these transactions.
Ripple partners with various financial institutions and payment providers, including Santander, American Express, and MoneyGram. These institutions use Ripple's technology to improve the speed and efficiency of cross-border payments and reduce the costs associated with traditional payment methods.
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