Ripple is reportedly being traded at a valuation of $2 to $3 billion, but its holdings in XRP are worth about $70 billion. What is behind the monstrous rally?
April 12, 2021 | AtoZ Markets – The equity of Ripple, the company that builds the infrastructure around XRP - the digital asset used by networks like RippleNet to process international payments - is being traded for $2 to $3 billion in the secondary market.
Still, Ripple's holdings in the XRP are reportedly worth $70 billion, a number that is much higher than the value of the company's equity valuation.
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Michael Novogratz, the billionaire cryptocurrency investor and CEO of Galaxy Digital, said:
"Ripple equity is 'trading' on the secondary market with a valuation of $2-3 billion. The $XRP on its balance sheet is worth approximately $70 billion. A price seems wrong. If the $XRP price is saying settlement is coming, the equity is very cheap. no, the token seems expensive. Thoughts?"
So XRP is undervalued? Not exactly
According to Leonidas Hadjiloizou, a longtime cryptocurrency researcher, the XRP that is blocked on Ripple's balance sheet are in custody probably not listed on Ripple's equity.
As such, these holdings are not accessible until they start to be released, which may not be priced in the company's equity value.
"Well, $62 billion of XRP on the Ripple balance sheet is blocked on deposit. At the same time, sales of Ripple's XRP are the ones under attack by the SEC, so the market probably didn't price Ripple's XRP assets, a they are in limbo right now. "
In December 2017, the Ripple team explained that XRP's holdings in the Ripple deposit unlock at one billion XRP per month for 55 subsequent months.
The team said at the time:
"The deposit consists of independent deposits on the ledger that release a total of one billion XRP each month for the next 55 months. This provides an upper limit on the amount of new XRP that can be put into circulation. The amount of XRP actually released into circulation is likely to be much less than that."
Theoretically, the value of Ripple's equity would be considered undervalued if the value of XRP on the company's balance sheet was unlocked and the price of XRP did not fall.
The question about the discrepancy between the value of Ripple's equity and the value of its holdings in XRP started to arise when the price of XRP started to rise above $1, despite an ongoing lawsuit with the US Securities and Exchange Commission (SEC).
Since April 1, the price of XRP has risen from $0.57 to $1.49, about 160%.
What triggered the XRP rally?
Over the past two weeks, the main catalysts for the 160% rally came from victories in the company's legal battle. Ripple's lawyers had access to the SEC's history of internal cryptocurrency discussions, and a court denied the SEC the ability to disclose the financial records of two Ripple executives, including CEO Brad Garlinghouse.
Another reason could be the convergence trade between Bitcoin and altcoins, especially as BTC sees a side price action, allowing alternative cryptocurrencies to recover.
Kelvin Koh, the managing partner of the Spartan Group, one of the largest DeFi-focused funds in Asia, said that large sum funds are trying to negotiate the convergence between Bitcoin and major altcoins.
Consequently, the trend of capital shifting to altcoins and back to Bitcoin occurs periodically. Koh wrote: "The reason this happens periodically is because there are a lot of money funds out there that play the $BTC convergence trade and a handful of net alts. Whenever the alts look cheap compared to $BTC, they accumulate. When they look expensive, they spin back to $BTC. There are no fundamentals involved, so don't try to rationalize the moves. This strategy has proven effective over time and there are enough managers doing it that makes it self-fulfilling and remains recurring."
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