This article is also available in Spanish.
XRP has been one of the underperformers in the current cryptocurrency market cycle, remaining approximately 86% below its all-time high of $3.84 reached on January 4, 2018. Remarkably, despite the significant volatility Meanwhile, XRP is trading at a similar price to XRP. That was two years ago in October 2022. A cryptocurrency expert known as CryptoTank (@Tank2033js) shared an explanation of X to explain why the price of XRP is not moving as some might expect. With 214 thousand views string It gained a lot of attention.
Why is the price of XRP stagnant? When will it change?
“I’m getting a lot of comments about the price of XRP and why it’s not moving,” CryptoTank began. “Let me explain once again how the price of XRP is determined for people who are new to this field and those who still find it difficult to understand.”
According to his analysis, the price of XRP is calculated by dividing the value or volume transacted on the XRP Ledger (XRPL) by the circulating supply of XRP. However, he stresses that the cited circulating supply figure of around 56 billion XRP is misleading. “Just because there is $56 billion in circulation, does not mean that all $56 billion is on the ledger for use,” he noted. A large portion of XRP is held in private wallets, by large holders known as “whales,” or stored on exchanges, and therefore not actively involved in daily transactions on the ledger.
Related reading
“What matters for price is how much of that supply is active on the ledger,” he asserts. It is estimated that around 20% of the circulating supply is active daily, and indicates that around 10 billion XRP are in use within the ledger ecosystem. This active supply is crucial to providing liquidity in Automated Market Maker (AMM) pools, which facilitate transactions by pairing XRP with other tokens or currencies such as RLUSD (Ripple USD).
He explains that banks and financial institutions that plan to use XRPL for settlements will operate using their own tokens or central bank digital currencies (CBDCs), linking them with RLUSD and tapping into the liquidity available in AMM pools. XRPL uses an algorithm designed to find the most efficient path to settlements, with XRP defaulting to the primary source unless an alternative offers a better path. “This algorithm uses XRP as the default source of settlement and will not use something else unless it is better than XRP, which will likely not be the case,” he explains.
To illustrate the potential amount of value being transacted on the ledger, CryptoTank highlighted the daily settlement volumes of several major financial institutions. SWIFT, a global provider of secure financial messaging services, processes approximately US$5 trillion in daily settlements. JPMorgan Chase, one of the largest banking institutions in the United States, handles about $10 trillion every day. Bank of America processes about $7 trillion to $8 trillion daily, and SBI Holdings in Japan settles nearly $2 trillion daily. He points out that “this equates to about $25 trillion per day in settlement with only four banks/institutions.”
Furthermore, Ripple, the company behind XRP, is said to have more than 1,700 non-disclosure agreements (NDAs) with various banks and financial institutions, indicating a wide network of potential users of XRPL. By conservatively assuming that only 10% of the settlement volume from these four institutions moves to XRPL, the volume of transactions recorded on the ledger was estimated at $2.5 trillion per day. To ensure smooth, frictionless transactions without failure – a critical requirement for banks – liquidity in AMM pools must be large. “These pools must be worth about twice the value of $2.5 trillion to avoid failed transactions and friction within the pools. He stressed that banks cannot have failed transactions. This means that the total value or volume in the ledger must be about $5 trillion to accommodate Settlements efficiently.
Related reading
Using these numbers, it calculates the necessary price of XRP to facilitate this level of daily settlement. “To determine what the price of XRP should be to avoid friction and have liquidity pools deep enough to settle without failure between different currencies or central bank digital currencies, you take $5 trillion and divide it by the 10 billion XRP in the pools,” he explains. This calculation results in a desired XRP price of $500. “The price of XRP should be $500 to facilitate daily settlement,” he asserts.
“This is a very basic example of what will happen when these banks start using XRP daily for settlement,” he adds. He acknowledged that there are other factors that could further enhance the value in the ledger, such as the tokenization of assets, debts and real estate. “There are other factors such as tokenized assets, tokenized debts, tokenized real estate, etc., which will all add value to the ledger in the future,” he points out.
Addressing skeptics who doubt XRP’s ability to reach such high valuations, he said: “For anyone who says XRP will never be a high price, you don’t really understand what XRP is going to be used for or how it works.” Retail It doesn’t matter, market cap doesn’t matter, and it’s nice to look at the charts, but it doesn’t matter either and he argues that the traditional metrics used to evaluate the value of a cryptocurrency are less important in the context of XRP’s intended utility for institutional settlements.
“You can’t plot the amount of liquidity or depth of AMM pools required to handle the settlement of 1,700-plus NDAs on a daily basis,” he asserts. “No one has any idea how high that number is. The price of XRP has to be high or it won’t work efficiently to do what it was designed to do, which is handle large transactions quickly and cheaply.
However, not everyone in the cryptocurrency community agrees with his assessment. A user representing chart analysts on % of retail. Sad but true.”
In response, CryptoTank defended its position, emphasizing the impending shift in the cryptocurrency landscape due to institutional adoption. “You clearly have no idea how tokens work or what is about to happen globally in this space,” he replied. “Soon retail speculation will be dwarfed by adoption and institutional use. 99% of coins will become obsolete. Big money is coming into the game and everything will change.”
At press time, XRP was trading at $0.542.
Featured image created with DALL.E, a chart from TradingView.com
Comments are closed, but trackbacks and pingbacks are open.