XRP Price Analysis – Weak but increasing network use

Ripple (XRP) has fallen almost 50% from November highs and remains down 92% from the record high set in January 2018. The XRP market cap stands at US$12.78 billion and is second among all crypto assets, surpassing Ethereum in mid-November. There has been a total of US$460 million in trade volume over the past 24 hours.

XRP was created on November 2012 by three founders, Arthur Britto, Chris Larsen, and Jed McCaleb, in collaboration with Ryan Fugger, who had begun working on a payments protocol in 2004 called RipplePay. The project was originally closed source and incorporated under the name NewCoin in September 2012. The project rebranded to OpenCoin in October 2012, and then changed to Ripple Labs in September 2013. McCaleb resigned in May 2013, officially left the project in July 2013, and went on to create Stellar in July 2014. McCaleb previously founded the MT GOX exchange in 2010, which was sold to Mark Karpeles in March 2011.

Initially, 100 billion XRP were minted by the founders, with 80% of that supply held by NewCoin/OpenCoin/Ripple Labs, which is also known as "Ripple." In May 2015, the U.S. Treasury’s Financial Crimes Enforcement Network determined that Ripple Labs was "administrator" of XRP and levied the company with a fine of US$700,000 for failing to register as a money service business.

In December 2017, Ripple announced a programmatic escrow system for the remaining 55 billion XRP held by the company at that time. Each month, one billion XRP are unlocked from escrow and offered for sale to any XRP customer. Any unsold XRP is then placed back in escrow. The last quarterly report by Ripple revealed that only 0.4 billion of the three billion XRP released from escrow was purchased on the open market. Currently, the top 100 largest XRP accounts, excluding escrowed XRP, hold 79% of the total circulating supply.

Unlike most cryptocurrencies, XRP does not use a Proof of Work or Proof of Stake consensus algorithm but instead uses The Ripple Protocol Consensus Algorithm, which uses collectively-trusted subnetworks of nodes and validators. There are currently 1001 public nodes with 112 validators. Ripple currently owns less than 30% of the existing validator nodes. As of November, a Ripple server required ~12GB of data storage per day and 8.4TB to store the full history of the XRP ledger. However, a full node is not required to participate in the network and nodes may prune the ledger to free disk space.

Ripple offers a suite of tools for enterprise and banking solutions, collectively known as RippleNet, which is currently available in 40 countries. The tools include xCurrent, xRapid, and xVia. xCurrent processes global bank to bank payments for customers and is analogous to SWIFT. xRapid, which went live on October 1st, 2018, sources on-demand liquidity through buying and selling XRP. xVia can be used to send unidirectional payments. Of the three tools, only xRapid requires the use of the XRP token.

Ripple also has two other monetary arms to foster the growth of the ecosystem, a venture capital arm and a university research initiative. The venture capital arm, XPRING, invests in, incubates, acquires, and provides grants to companies and projects run by proven entrepreneurs. The research initiative has US$50 million in funding reserved for grassroots research and development.

The XRP ecosystem also includes Interledger, Coil, and Codius, all of which are related in terms of functions and development teams. The Interledger Protocol (ILP) is capable of sending payments across different distributed and decentralized ledgers, and moves funds via intermediaries. Coil enables subscription-based donations for content monetization on the internet, without advertising or selling user data, and pays sites in real-time through a Web Monetization API. A similar micropayment system for content monetization is used by the Brave browser. Codius is a smart contract and smart program platform allowing for interoperability between blockchains. In November 2018, the Bill & Melinda Gates Foundation announced plans to use ILP and Coil, in conjunction with Mojaloop, to bring payments to the under and unbanked.

On the network side, transactions per day have continued to decline since January, and are currently at levels last seen in 2014. Most of these transactions are generated by the OfferCreate function, a currency exchange facility. The average transaction fee to send XRP, which correlates with network traffic, has been minimal when compared to other coins, and is currently around US$0.001 for each transaction.

Source: bitinfocharts.com

Daily active addresses (DAA) have also decreased substantially since January (line, chart below) although data between April and July is absent. DAA is currently sitting at levels last seen during the July to October period last year. A large uptick in DAA should be seen as a bullish indicator for price, as it suggests increasing demand.

Average transaction value (fill, chart below) has increased substantially over the past few months, and is nearing January highs. However, this is likely caused by the large transactions sent to and from escrow and not user transactions. As total transactions per day have declined, these larger escrow transactions have had a more significant impact on the average transaction value per day.

Source: coinmetrics.io

Kalichkin’s network value to estimated on-chain daily transaction ratio (NVT) has steadily decreased since October (line, chart below) after sitting near an all-time high. Transaction data between April and July is absent resulting in a falsely elevated NVT for that time period. A falling NVT should be considered bullish for price. However, again, escrow transactions or coin arbitrage will skew NVT significantly lower.

Although NVT is difficult to compare between coins, which use different transactions types, it can be useful when comparing a networks relative utility over time. For example, XLM, which uses a similar network structure to XRP, has a much higher NVT.

Source: coinmetrics.io

Turning to developer activity, over 176 developers have contributed to the XRP GitHub repos, with a cumulative 1,138 commits over the past year. Most coins use the developer community of GitHub where files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest. Most of the XRP relate commits occurred in the Ripple dev portal (shown below).

Recent XRP exchange traded volume has been led by the Tether (USDT), Bitcoin (BTC), Japanese Yen (JPY) and Ethereum (ETH) pairs. The majority of trading has occurred on Bitbank, ZB.com, Binance, and OKEx. JPY volume has jumped significantly over the past week.

On November 6th, OKEx opened the XRP/BTC pair for margin trading. On November 7th, the Trezor Model T hardware wallet announced support for XRP storage. On December 3rd, the exchange KuCoin listed several XRP pairs. A few days ago, Coinbase announced the possibility of adding XRP to the platform, but made no promises. Fidelity Digital Assets, which began in October, and offers crypto services to more than 13,000 clients, may also list XRP pairs in the near future.

Google Trends for the term "XRP" remain down sharply over the course of the year, with a small spike in September. A slow rise and large spike in searches for "XRP" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between the google trends data and bitcoin price. A May 2017 study concluded that when the U.S. Google "bitcoin" searches increase dramatically, bitcoin price drops.

Technical Analysis

XRP has continued to sell off over the past month, on strong bearish trend continuation. To determine entries and exits throughout a trend exponential moving averages (EMAs), volume profile, Pitchforks (PFs), and the Ichimoku Cloud can be used. Further background information on the technical analysis discussed below can be found here.

On the daily chart, the 50/200EMA has continued to hold a bearish cross since May 21st. Price is currently far below both the 50EMA and 200EMA. A bullish Golden Cross in the coming weeks would suggest further upside strength and a definitive trend reversal. There are no active bearish RSI divergences on the daily timeframe. The volume profile from 2017 to date shows that most of the volume has occurred in the US$0.14-US$0.27 range. The volume profile also shows relatively little volume above US$0.54. Long/short open interest (top panel, chart below) on Bitfinex is currently net long, with longs falling significantly over the past month, and shorts near record highs.

A potential bearish Pitch Fork (PF), with anchor points in December and April, encapsulates the range of the current downtrend. The lower bounds of support represent a buy zone whereas the upper bounds of the resistance represent a sell zone. Price will continually attempt to return to the median line (yellow) throughout the duration of the trend. The trend will remain bearish until price rises above the entire PF, currently above US$0.6766.

Turning to the Ichimoku Cloud, there are four key metrics; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. Trades are typically opened when most of the signals flip from bearish to bullish, or vice versa.

On the daily chart, Cloud metrics are bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is below Cloud and below price. Once price closes below the Cloud, asks near the Kijun should be placed for short entries. A traditional long entry triggers when price is once again above Cloud.

In contrast to the XRP/USD pair, the XRP/BTC pair is considerably more bullish. On the daily chart, price is in bullish territory and above the 200EMA. There is also a possible bullish continuation pattern, the Cup and Handle, with a 1.618 fib extension at 126,000 sats. Hallmarks of the pattern include a U-shaped cup with a V-shaped handle that does not breach 50% of the cup.

Conclusion

Fundamentals suggest weak but increasing network usage and relatively high average transaction values with nearly zero fees. It remains difficult or impossible to determine if this represents institutional usage or purely speculation, with transfers between exchanges and user wallets. Ripple’s RippleNet has yet to convert a large degree of continuous high volume on-chain network traffic. xRapid is the only part of RippleNet that uses the XRP token and only recently went live. Even so, xRapid’s buying and immediate selling of the XRP token is not a net gain for demand in and of itself.

The gorilla in the room continues to be whether or not XRP represents an unregistered security. Ripple has created, escrowed, owns a majority of, and continues to control the flow of XRP tokens. Ripple argues that the network is decentralized because the XRP token does not represent shares of Ripple, the company, and the XRP network would continue to exist if Ripple did not. Several pending court cases, as well as clarity from the U.S. Securities and Exchange Commission, would clear any regulatory uncertainty surrounding the asset.

Technicals are strongly bearish after a failed bullish reversal attempt throughout November. Litmus tests for trend reversal include price position relative to both the 200EMA and the Cloud on the daily timeframe. A breach of US$0.51 on high volume would likely meet these requirements. In the meantime, trend indicators show the possibility of mean reversion to US$0.43, but suggest overall bearish continuation in the near term.