Sale of Ripple (XRP) Tokens Blamed for Collpase in Value
According to an article published by Bloomberg on August 23, the reason why XRP price has been falling during 2019 could be due to a continuous sale of XRP by Ripple. In response, people have started an online petition on change.org called “stop Ripple dumping”.
What Happened to Ripple?
Bitcoin along with most of the other cryptocurrencies have shown excellent signs of recovery through 2019 so far, according to data from CoinMarketCap. The overall cryptocurrency market rose from around $125 billion from January 1, 2019, to a maximum of $387 billion by June 26, 2019, an increase of more than 200 percent. Though this has changed significantly with the current total capitalization is hovering at $262 billion.
However, not all cryptocurrencies benefited from this recovery. In particular, it seems that the bear market for XRP never came to an end. Even though its market position remained stable in third place with a capitalization of $11.5 billion, the token has recorded a loss of 20 percent since the beginning of the year.
Cause and Effect
XRP is a “cryptocurrency” (only by name) that got increasingly popular as big financial institutions would start to use it as an alternative for international settlements. Apparently, that is what Ripple Labs, the primary firm behind the development of the Ripple Payment Protocol, is working on. They are making dozens of partnerships with financial institutions all over the world in order to establish Ripple technology as a standard for cross border payments.
But then, why is the price collapsing?
To better understand this step we must first analyze the structure on which the XRP token was created.
Ripple was initially conceived in 2011 by Arthur Britto, Jed McCaleb, and David Schwartz with the aim to optimize the weaknesses of Bitcoin, namely the risk of 51% attacks, speed in transactions and transaction capacity. The project was actually implemented in 2012 but the team made very different choices than that of Bitcoin, as set out in the original Bitcoin whitepaper.
The company in fact decided to create the totality of the tokens in advance by distributing:
- 80 billion XRP to Ripple Labs
- 9 billion to Jed McCaleb
- 7 billion to Chris Larsen
- 4 billion to other founders
One of the fundamental pillars of cryptocurrencies is that they do not have a central issuer or a regulating authority as those two characteristics would make it much more similar to a security that hence would be regulated.
Over time, Ripple has distributed the tokens to its users, but still holds a majority of XRP (around 58 percent) as it uses them as a natural part of its revenue model. This distribution gives enormous power to the company and its creators who could decide from one day to the next to flood the market with a massive sell of XRP and crush its price.
For this reason, the company announced publicly to move 55 billion XRP to escrow in May 2017, with a promise to not manipulate XRP market price. The transition was effectuated in December 2017. To add transparency to the use and sale of XRP, the company publish quarterly XRP market reports, accounting for how much is spent of the escrow fund, on what, and how much is returned to escrow.
But as we can see this requires a certain level of trust towards the company, and this trust is starting to wane.
Many investors believe that the 2019 price drop is mainly due to an increase in monthly XRP sales which prevented a price recovery. The company denies this, but according to a report by Coin Metrics, Ripple’s reports have differed from actual sales numbers at least twice and the unspent funds that should have been returned to the escrow were used differently.
According to Eric Turner, director of research at Messari:
“Ripple has been more aggressive in their selling lately…Last quarter’s $251.5 million was up almost 50% from the $169.4 million sold in Q1.”
This implies that the company violated the promise made in 2017 which pledged that Ripple would have access to a maximum of one billion XRP per month.
Control over Money Supply
Despite that Ripple has been on a mission to dispel the notion that it is responsible for the XRP currency it issues, this latest dose of reality indicates that the company has control over the token and its supply.
This sheds some light on an astonishing facet of the technical accomplishment that is Bitcoin. Bitcoin’s supply is strictly limited, no matter how many people use the network, how much its value rises, or how advanced is the mining equipment, there can only ever be 21 million bitcoins in existence. That is why Bitcoin is an asset that is well-suited for playing the role of a store of value.
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