- XRP is likely not near as liquid as Ripple reports
- With supply and market cap overstated and inflation understated, fundamentals would suggest that XRP is overvalued
Ripple* (the company) have released their Q1 2019 market transparency report for XRP on April 24th. With Ripple being the largest holder of XRP and responsible for the distribution of the tokens to the public, this report delves into the current distribution and issuance of XRP. Recently after the report was issued, data analysis company Messari broke down the report and compared the data they collected from the XRP network on-chain activity to the data presented in the Transparency report and through the Ripple API. Serious discrepancies were found between the data sources that have material implications for whether the current market price of XRP is a good representation of its value.
The evidence indicates that XRP may be drastically overvalued at current valuations. The data analysis completed by Messari strongly suggests that Ripple are understating their inflation rates and the market may be vastly overpricing XRP in response to this.
*Herein, Ripple will be used to refer to the company. XRP will be used to refer to the cryptocurrency and XRP network will be used to refer to the network which the cryptocurrency operates on.
XRP Fundamental Analysis: Liquid Supply and Distribution of XRP
According to CoinMarketCap, the leading data provider for investors in the crypto market, the circulating supply of XRP is approximately 42 billion. With the price of XRP being around $0.30, this equates to a market capitalization of $12.72 billion.
To put this into perspective, the reported market cap would be approximately the size of one medium-sized company listed on the NASDAQ. However, the reported supply has some significant liquidity restrictions indicating that the supply and thus market cap are overstated.
Much of the supply accounted for in these figures is held by institutions and Ripple affiliates, which as a result of this, have selling restrictions. Ripple consider the holdings of Chris Larsen, Jed McCaleb, and the Ripple Foundation as already distributed. However, in reality, these holdings are restricted from being sold and are thus illiquid.
The difference between what the market cap of the XRP network based on the reported tokens and the market cap of the XRP network based on the liquid tokens is significant. Messari previously completed an analysis delving into the discrepancies in the amount of XRP tokens reported to be liquid supply and the number of tokens which actually are.
|Number of tokens in circulation||Corresponding Market Cap|
|Reported Supply (as reported by CMC)||42.08 billion||$29.84 billion|
|Liquid Supply (as estimated by Messari)||23.75 billion||$17.09 billion|
Furthermore, from analysing the Genesis block of the XRP ledger, Messari identified major partners and affiliates of Ripple. It is estimated from this analysis that 75% of XRP is currently in the control of Ripple and its affiliates in approximately 80 wallets.
Such a large majority of the total token held in the hands of a small number of entities spawns serious questions to be raised over the level of decentralization of XRP. With decentralization being the key property playing into the value of cryptocurrencies, questionable levels of decentralization raise concerns over the long-term viability and value of cryptocurrencies whose network is controlled by a limited number of entities.
Sales from Ripple and Corresponding Inflation
Ripple, by a significant margin, has the most important role to play in the value of the XRP network. They own a dominant share of XRP, with approximately 54 billion XRP held in escrow. Also, Ripple distributes XRP to the market through both sales directly to institutions and programmatic sales which are executed through the company’s treasury.
Institutional sales can take place at a discount but often come with selling restrictions. Per the company’s policies, the programmatic sales cannot be sold at a rate greater than 0.25% of the average daily trading volume on selected exchanges.
There are a number of concerns raised by Messari regarding Ripple’s reporting of such sales. Firstly, the sales are reported in USD leaving uncertainty regarding the monetary inflation of XRP. Secondly, there is strong evidence that the exchanges used to calculate volume report artificially inflated volume figures indicating that the percentage of sales by Ripple is far larger percentage-wise than they contend. This second point is becoming an even greater concern over the past quarter given evidence that Ripple has now begun including highly questionable exchanges such as BW.com in their volume figures.
It really boils down to the following. The data provided by the Ripple API and the Transparency report indicate that Ripple’s inflation is 4.5%. This is quite a high figure regardless given the inflation rate of cryptocurrency market bellwether bitcoin being 3.91% but is continuing to decrease.
However, the data from Messari’s analysis of the on-chain activity of the XRP network and their estimates of the circulating supply give a much different figure. The circulating supply which Messari estimate is based on the liquid supply but makes adjustments to disregard holdings of founders and affiliates. This is the same methodology used to calculate the circulating supply in the equities market.
The inflation figure is estimated to be 11.6%. Such a high inflation figure poses serious dilution pressures on current XRP holders and will apply downward pressure on prices.
Who Disputes or Corroborates this Evidence?
The widely reported upon Bitwise presentation to the SEC corroborates the findings which highlight the volume data used to be inaccurate indicating that Ripple is distributing a higher percentage of tokens than their policies allow. As stated, programmatic sales are not to be sold at a greater rate than 0.25% of average daily XRP trading volume but evidence indicates that average daily trading volume is overstated.
Despite the discrepancies found by Messari, well-regarded news publications such as The Block have been reporting the figures stated by Ripple. This adds to the legitimacy of Ripple’s claims as if the investor pool accepts the figures as valid, the market price will reflect. The Block estimate that Ripple have sold $890 million worth of XRP in total.
XRP Fundamental Analysis: Impact on Price
With Ripple being the most important source of information regarding XRP, investors in XRP will be pricing this information into the market. Assuming the efficient markets hypothesis, the market will be pricing in all publicly known information into XRP.
But what if the source of the publicly accepted information is inaccurate? The discrepancies highlighted between the Ripple Transparency Reports and the data which the XRP network provides would indicate that if investors are valuing XRP based on what Ripple is reporting, the token is overvalued.
The key discrepancies that have an impact on price are the following:
● Much of the supply which is reported by major cryptocurrency data providers is illiquid. If the illiquid supply is disregarded, the network valuation of XRP would be drastically reduced.
● The inflation rate is being understated based on both the discrepancies between the API and Transparency report and also based on the issued XRP being brought into a liquid supply which is lower than what is being reported. This serves to dilute the holdings of current XRP holdings. This high inflation rate may be a driving reason for the months of consolidation we have been seeing in XRP (see our XRP Technical Analysis) in USD price terms.