Ripple is soaring, but you wouldn’t know it from just looking at the price. The cryptocurrency geared at professional use made waves this week after its price soared by more than 1,000 percent in less than a month. One Ripple token is now worth $2.89, which on paper seems like a paltry sum compared to the $15,334 price of a single bitcoin. Comparing the two on a like-for-like basis is a fool’s errand, though.
It’s similar to how you can’t simply compare the price of various currencies. Say you wanted to use your dollars to buy euros. At the time of writing, one dollar can buy you 83 euro cents. You could look at this figure and say that one euro is worth less than one dollar, but it’s the price of goods and services will determine whether you’re getting a good deal. If a smartphone is $500 in the U.S. and €500 in France, all else being equal you’re better off buying the phone in the U.S. using dollars. If the phone is €300 in France, though, those 83 cents don’t seem like such a bad deal. The exchange rate is just one piece of the puzzle.
It’s a similar deal with cryptocurrencies. Watching the price of a single token is good for understanding market movements, but it won’t help you compare the real value of cryptocurrencies. While one bitcoin is worth $15,334 and one Ripple token is worth $2.89, it’s distorted by the fact that there are fewer bitcoins to go around in the first place. There are nearly 17 million bitcoins in circulation, while there are nearly 40 billion XRP tokens on the market.
This helps explain why analysts place emphasis on market cap when comparing cryptocurrencies. The total valuation of all the tokens in circulation show how much the total market is worth. Ripple has a market cap of $112 billion, while Bitcoin rests at $257 billion. Ethereum is in third place, with a market cap of $86 billion. Ripple seems like a tiny player based on its token price, but its market cap reveals it’s a juggernaut with billions of dollars sloshing around. The price of a token is so low simply because there are so many in circulation.
That isn’t to say token prices are useless. They’re a good indicator of the gains and losses investors are making over time. The price of Ripple has moved from $0.26 per token on December 2, 2017, up to $2.89 on January 3, an over 1,000 percent increase in value over the space of a month. From this we know that an investor that bought $100 of Ripple tokens last month now owns around $1,100 worth. We don’t know anything about the total number of investors in Ripple, though, which is where market cap comes in handy.
Next time someone tells you that Bitcoin is performing better than Ripple because one token is worth more, you now know to laugh at them.
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