If history is a guide, Ripple is due to disclose its Q4 2018 transparency report this week. In advance of that report, we conducted extensive research into the health and legitimacy of the currently quoted XRP “market cap” available on third party crypto data services and exchanges. We believe the figure is significantly overstated. Potentially by as much as $6.1 billion. We have reached out multiple times to Ripple representatives for comment, but have not yet received a response to our inquiries. We acknowledge that some of the estimates in this report lack precision, but believe they are directionally correct, and presented in good faith. We look forward to Ripple’s response, and will update this report accordingly if and when they do reply.
Summary:
- XRP’s liquid “circulating supply” and “market cap” could be overstated by 48%, which would put total XRP “market cap” at $6.9 billion vs. $13.0 billion widely reported at current USD-XRP exchange rate.
- We recommend major indices, including Bloomberg-Galaxy, MVIS CryptoCompare, Bitwise, and others, as well as passive funds such as Grayscale’s Digital Large Cap, and Bitwise’s 10 Large Cap Crypto, consider revising their circulating supply assumptions for XRP downward to more appropriately reflect its true network liquidity, and cease to rely on Ripple’s XRP API for accurate circulating supply figures. A more precise estimate of XRP’s supply will likely requires disclosures from Ripple, given the contractual restrictions the company has placed on a large percentage of XRP resales.
- In addition to the 59 billion XRP held on Ripple’s balance sheet (52.5 billion in long-term escrow, and 6.5 billion available for sale), there could be significant, persistent sell-side pressure in the XRP market depending on the length and structure of selling restrictions placed on Ripple’s market making partners, a Ripple affiliated foundation, and Ripple’s co-founders, all of which appear to have negotiated rate limits for sales based on exchange trading volume of XRP.
- Ripple has not shared the methodology or reference exchange data it uses to calculate trading volume for XRP, a critical data point that drives selling restrictions. More than 99% of XRP trading volume appears to come from overseas, many of which have been suspected of wash trading. We urge Ripple to disclose its volume-based selling methodology, as well as the amount of XRP subject to contractual volume-based selling limitations over time. This is necessary in order to help investors better understand the inflation and selling pressure in one of the industry’s largest assets, and is necessary to protect consumers and promote fair and efficient crypto markets.
- A snapshot comparison of our circulating supply estimates vs. Ripple’s highlight the drastic difference between our deep dive and the company’s proposed statistics.
Methodology:
- Today, Ripple’s selling restrictions on co-founder Jed McCaleb have locked up at least 6.7 billion of current XRP supply that can only be sold at a theoretical rate of 1% of daily trading volume. Jed told us: “What I can sell a day is significantly less than 1% of the total daily volume. I’m not sure I’m at liberty to say how (reference trading volume) is calculated.” Ripple co-founders Arthur Britto and Chris Larsen could have similar selling restrictions on their multi-billion dollar XRP allocations. However, we do not include those unknown amounts in our analysis, with the following exception…
- We believe current circulating supply estimates include an illiquid position of 5.9 billion XRP, which has been publicly committed, but not yet donated, by co-founder Chris Larsen to RippleWorks, an affiliated California foundation, and registered 501c3 non-profit. Ripple previously communicated the existence of this donation on a (now deleted) post from the company’s CMO on the “RippleForum.” This was in August 2014; the same time it announced the existence of Jed McCaleb’s original XRP liquidation agreement.
- We reviewed public tax records for RippleWorks as well as XRP wallet addresses, which shows the foundation held at least 2.8 billion XRP as of April 30, 2017, and currently holds 2.5 billion XRP. These holdings contain daily selling restrictions “based on a percentage of the previous 24 hours total trading volume on designated exchanges.” We do not assume additional contributions from either Ripple or Chris Larsen to the Foundation in 2017 and 2018, as these could not be estimated from wallet address analysis, and is not yet publicly reported in RippleWorks Form 990 for the year ended April 30, 2018. We have reached out multiple times to Foundation representatives as to its 2017-2018 activity, but have not received any comment. We will update our analysis if and when we do.
- Finally, we estimate that 4.1 billion XRP sold via the company’s money services business, XRP II since 2016, may be subject to re-selling restrictions (per the company’s own transparency reports). It is impossible to track the magnitude of this illiquidity without direct disclosures from Ripple, so we use a reasonable estimate.
- Combined, this means 19.2 billion of the 41.0 billion XRP currently quotes as “in circulation” may be illiquid or subject to significant selling restrictions. In reality, this estimate may prove to be conservative, as they belie XRP trading volumes which have consistently fallen well below that of EOS and Litecoin, two cryptoassets whose current referenced market caps are a mere 17% and 15% of XRP’s, respectively. In addition, we believe the actual amount of “restricted” XRP in distributions to investors, banking partners, and team members may be significantly higher than our initial estimates reflect.