In order to continually improve the health of XRP markets globally, we share regular updates on the state of the market including quarterly sales, commentary on previous quarter market developments and company-related announcements.
In Q3 2017, market participants purchased $19.6 million directly from XRP II, LLC* — our registered and licensed money service business (MSB). These participants tend to be institutional buyers and their purchases include restrictions that mitigate the risk of market instability due to potential subsequent large sales.
Additionally, XRP II, LLC sold $32.6 million worth of XRP programmatically as a small percentage of overall exchange volume. For Q3, the sales represented 0.20 percent (20 basis points) of the total $16.50 billion traded, an 11 basis-point increase from Q2 2017’s 0.09 percent (9 basis points). The increase was primarily due to an expansion of the number of exchanges on which Ripple sells XRP.
*XRP II, LLC is licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services.
Market Commentary: Turmoil in Digital Asset Markets in Q3
There were numerous broad market developments in Q3 with material impacts on the digital asset space.The Bitcoin fork, ICO legality, and China’s stance on digital assets all contributed to a whirlwind three months for the markets.
Turbulence hit going into July with a broad market sell-off due to ICO-related ether (ETH) concerns. By July 7, total market capitalization across all digital assets had declined by more than $20 billion due to fears of large ETH liquidations. Additionally, rumors of an ICO crackdown by the Securities and Exchange Commission (SEC) contributed to the unease in the market as participants exited positions en masse. On July 25, the SEC finally issued a statement that decreed some ICOs could be “subject to the requirements of the federal securities laws.” However, by this point, markets seemed to have been priced in the worst case scenarios — namely an outright SEC ICO ban and massive ETH liquidations. As it became clear neither would occur immediately, most digital assets including XRP rebounded. Unfortunately, there were a few challenges ahead.
After the dust from the SEC announcement settled, market attention turned to an unresolved scaling debate which had been brewing for years between developers and miners in the bitcoin community. This Bitcoin fork — a change to the protocol meant to increase throughput which would also result in competing versions of the Bitcoin blockchain and the creation of bitcoin cash (BCH) — was quickly becoming a real possibility. Many long-term traders and developers in the community were expecting significant volatility as the situation evolved. When miners missed the first BIP 148 deadline on July 16, bitcoin swiftly sold off — briefly touching $1,885. That market reaction to a lack of support from the miners helped to persuade the bitcoin community to align on the appropriate course forward.
Towards the end of July, markets slowly became more comfortable with the ramifications of a split, and money began significantly rotating into BTC. Since anyone holding BTC pre-split would receive an equal amount of BCH post-split, market participants realized there could be free money to be had by holding BTC going into the fork. On August 1, markets witnessed the BTC fork and subsequent creation of BCH, with very little commotion.
With the worst seemingly over, BTC saw large flows re-enter the space. From early August through early September, the total market capitalization of the digital asset space doubled, with BTC trading to a new high of nearly $5,000 on September 2.
As September began, the relative euphoria from August’s success quickly faded and gave way to another large sell-off in early September as China, unlike the SEC, took an increasingly hard-line stance against digital assets. On September 4, China declared initial coin offerings (ICOs) illegal and ordered ICO fundraises to “cease immediately.” Days later, it ordered domestic digital asset exchanges to stop trading altogether. What was once one of the largest and most influential market for digital currencies was pulling the plug without warning. Adding fuel to the fire, Jamie Dimon, chairman and CEO of JPMorgan Chase, called BTC a “fraud” and stated that it would soon “shut down” in an interview on September 12.
It was a maelstrom of news and the markets reacted accordingly. In two weeks, total market capitalization plummeted $80 billion. And yet, after dipping so significantly, on September 15, markets began to recover. Ultimately, Dimon’s remarks were relatively meaningless, and China’s actions lacked a lasting effect. While the former is not surprising, the latter is important.
Over the last few years, China’s influence on digital asset markets has diminished and been supplanted by the growth in liquidity pools in other major trading hubs, such as South Korea and Japan. On September 29, regulators in Japan approved licenses for 11 digital asset exchanges (including one by our partner, SBI Holdings), with 17 exchanges still under review, all a clear sign of a significant shift.
Despite Market Turbulence, XRP Remained Stable
Compared to the substantial uptick in XRP market interest and activity in the second quarter, Q3 ushered in relative stability. The dramatic events in the digital asset space over the course of the quarter detailed above largely, and sometimes fortunately, did not involve XRP directly.
After the stunning 1,159 percent Q-o-Q increase in Q2, XRP retraced 24.9 percent to finish the third quarter at $0.20, but still up 2,963 percent from last year. Impressively, daily volatility in XRP decreased to 6.80 percent from 22.56 percent in Q2. Much of this consolidation was due to the continued development of XRP liquidity. In fact, Q3 XRP volumes were the highest on record at $16.50 billion.
XRP Maturing Past Younger Digital Assets
Q2 saw drastic increases in XRP volatility as digital asset prices soared, but the “relative normality” reached at the end of the previous quarter continued in Q3. The high watermark for 30-day volatility of daily returns for Q3 was 8.7 percent, a far cry from the 36.1 percent in Q2.
Compared to the markets of younger digital assets, XRP’s price stability in Q3 is likely a sign of market maturation. The fact that XRP is now listed on 30 exchanges and traded an average of $179.3 million per day in Q3 points to significant development for an asset that was only trading on seven exchanges just six months ago. Additionally, its relative independence from Chinese markets, lack of involvement in ICOs, and clear governance model shielded XRP somewhat this quarter.
Volumes Grow, Correlations Weaken, and a Swell Announcement Boosts XRP
Although XRP price action during the quarter was not driven by broader digital asset volatility, XRP did not completely divorce itself from the rest of the market in Q3. Initially, its correlations to ETH and BTC were relatively low — 11.3 percent and 17.1 percent, respectively. However, as the ICO-related worries and Bitcoin fork concerns took hold in July, most digital assets began trading in unison and correlations shot up as a result.
Interestingly, before and after the fork, XRP remained highly correlated to ETH (96.9 percent), but unsurprisingly, diverged from BTC. From August 1 to September 1, BTC rallied and XRP held steady, sending correlations from 70 percent to -5 percent. This lack of correlation became pronounced on August 21, when Ripple began its campaign around Swell.
Anticipation around the event spurred a meaningful spike in XRP, pushing it up 100 percent, from $0.15 to $0.30 on $4.56 billion of volume, all without a corresponding rally in BTC or ETH. In fact, XRP’s 23 percent Q-o-Q volume increase, as well as the overall volume record set during the quarter, can largely be attributed to activity during the three-day period between August 22 -24.
As the quarter came to a close, XRP’s correlation to BTC and ETH was back up to nearly 90 percent, a stark reminder that announcements from Chinese regulators, as well as Dimon’s BTC remarks, were equally influential to the most important currencies in the market. However, the quarter clearly illuminated an interesting dynamic.
XRP, at times overwhelmingly independent, and at others somewhat dependent, gave clear hints that there could come a time when BTC and ETH developments begin to lose their impact on XRP. As it continues to gain adoption, as its volumes continue to grow, as the days without XRP forks and governance issues continue to pass, its correlative relationships may shift, and XRP could continue to find itself independent of the noise as it charts its own path.
What’s on the Horizon for Q4 2017
In Q3, two of our most important objectives were to bolster our XRP lending and help grow over the counter (OTC) XRP markets. Our work in OTC markets was quite successful. We were able to diversify our pipeline of OTC buyers and establish relationships with most of the key OTC market makers in the space. We’ll look to leverage this momentum as we continue to help build out OTC liquidity in Q4.
Unfortunately, our efforts around lending were more challenged. In the world of digital assets, the devil is in the details, and it turns out there are several considerations to account for when lending XRP. As a result, that initiative is taking a little longer than expected, but we expect to have it up and running in the middle of Q4.
During the fourth quarter, we’ll also continue to expand our xRapid partnerships. Our long-term goal is, and has always been, usage of XRP as a liquidity solution for more and more corridors, and partnerships are key to achieving this goal. Our Cuallix announcement was a clear indication of significant progress, but it’s just the beginning. In the fourth quarter, we’ll announce additional xRapid partnerships, an innovative approach to using XRP to further Ripple Network adoption, and new ways XRP will drive broad development of the digital asset space. Visit Ripple Insights throughout the quarter to read the latest developments as they unfold.