The Meteoric Rise and Icarian Fall of XRP (in Two Months)

KEY TAKEAWAYS 

  • XRP’s meteoric rise over the last month concludes with what seems to be part of another “pump-and-dump” scheme
  • XRP supply is lower than what’s been disclosed to the market; the discrepancy in circulating numbers may be its Achilles’ heel during sudden surges
  • The surge was bolstered by excitement around the imminent XRP Flare fork and a sudden airdrop of Spark tokens; the latter offers incentives to XRP holders and could potentially become a game-changer in the Ripple ecosystem

XRP soared significantly over the last month, bouncing back from a tough August to almost tripling its price. These wild price swings are more often than not associated with fundamental changes. 

So what’s different this time?

The total market capitalization of XRP, at its height, reached $68.9 billion. It momentarily overtook  ETH (then total market cap at $68.4 billion), second on the global ranking. According to CoinMarketCap, XRP’s floating value is just $31.2 billion, with only less than 50% of its total supply in circulation. 

In December 2017, when XRP’s price tumbled from its May 2017 peak, Ripple decided to lock 55 billion XRP (55% of the total possible supply, owned by Ripple) into a series of escrows to address market concerns of Ripple dumping its holdings in the future. The escrow account was scheduled to release 1 billion XRP each month over the following 55 months. 

In the weeks that followed, the price of XRP exploded, from approximately $0.25 on December 7, 2017 to $3.43 on January 3, 2018. It would then shed nearly all its value in just over three months, falling to a low of approximately $0.46 on April 6, 2018.

But not all of the allocated XRP were actually released into the market. For example, in Q3 2020, 3 billion XRP were released out of escrow (1 billion each month), but 2.4 billion XRP were returned and subsequently put into new escrow contracts. As a result, XRP’s nominal floating supply is around 50.5 billion. On a net basis, only 5.5 billion XRP (5.5% of total supply) have been released since the start of the escrow program in Q4 2017. 

Source: Ripple

We also have to consider XRP held by founders and partners, which are restricted from sale. In 2012, Ripple founders Chris Larsen, Jed McCaleb, and Arthur Britto signed an agreement allocating 80% of the total supply to the company. The remaining 20% was split among the three founders. 

Source: Ripple

Even though their stakes are restricted for sale, over the years, Jed has sold tokens within the permissible trading limits. Tracing Jed’s four XRP addresses, we discovered that his XRP holdings have decreased to around 3.85 billion. While Chris Larsen did not decrease the bulk of his stake, he has promised to donate them to Rippleworks, a charity foundation initiated by him. Rippleworks funds its operations by converting a tiny fraction of its XRP holdings into dollars. If we combine Chris Larsen’s holdings and Rippleworks’ estimated holdings, we can see Chris Larsen hasn’t sold significant amounts.  

Source: Ripple, Messari, Bybit Insights

Our final estimate puts XRP’s circulating supply at 38%, lower than the 45% that’s been publicly disclosed. Messari’s claim of 22% in January 2019 is even lower than our estimate. The discrepancy could be due to the gradual release of Rippleworks’ and Jed’s tokens to the market, or possibly a higher estimation of Rippleworks holdings. More importantly, rumor has it that around 4% of total supply sold by Ripple to partners were in fact, illiquid. 

The claim isn’t entirely unfounded, considering Ripple’s previous litigations with R3 due to unfulfilled commitments. MoneyGram — a strategic partner of Ripple — also reported that it received $9.3 million in XRP tokens during Q3, and $41 million year-to-date, as market development fees from Ripple. The payment is partially offset by related transaction and trading expenses of $400,000 and $11.2 million, respectively. This implies that MoneyGram doesn’t hold the XRP it received from Ripple, which could partially confirm Messari’s claim that tokens sold to partners were restricted for resale. If true, XRP’s circulating supply would be even lower than our estimate. 

With a circulating supply of just over 30%, XRP could be very susceptible to pump-and-dump as more supply will be released in the long run. Meanwhile, current demand is weak except for short-term speculative demands. 

Chris Larsen claimed, “If you look at the XRP Ledger, XRP the decentralized digital currency, most of what happens in that ecosystem is really correlated with Bitcoin and Ethereum. It’s like $100 billion trading per year, let’s say. The vast, vast majority relates to what is happening in the overall market, and it is being driven by all the things that drive Bitcoin and Ethereum. Is it a store of value? Is it maybe just holding it as something that we value in a digitized, globalized future? Is it speculation? That’s just all happening in its own economic reality, completely separate from what Ripple is focused on.” 

Larsen also said Ripple’s XRP-powered cross-border payment solution — On-Demand Liquidity — only accounts for a small fraction (about$ 2 billion) of the XRP marketplace. 

The salient issue with XRP is that its demand is not necessarily correlated with the success of Ripple. To put this into context, the same lack of use cases also drove the price collapse of UNI from its peak at $7.10 to $1.80, before Uniswap announced its intent to pay 0.05% trading fees to UNI holders next year. 

What really matters to the price of XRP (beyond a possible pump-and-dump scheme), is the imminent XRP Flare fork. Analysts associated the November surge with Flare Network’s airdrop of “Spark” tokens to XRP holders. Flare, the smart contract platform, integrates with Ethereum’s Virtual Machine, allowing existing Ethereum decentralized applications (Dapps) to be ported over to Flare to build the XRP ecosystem. The free distribution of 45 billion Spark tokens, based on a snapshot of XRP addresses on December 12, is supported by Ripple’s investment arm RippleX (formerly Xpring). A XRP ecosystem could become reality in the future, but at least for now, remains in speculation. 

It’s likely that astute investors would have sold their holdings after the recent price surge in November and are waiting for new catalysts to influence their next trading direction.