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Ripple is currently valued at $2 to $3 billion, but its XRP assets are worth around $70 billion.
The equity of Ripple, the corporation that develops infrastructure around XRP — the digital asset used by networks like RippleNet to process cross-border payments — is currently trading in the secondary market for $2 to $3 billion.
Nonetheless, Ripple’s XRP holdings are currently worth $70 billion, which is several times the firm’s equity value.
Returns over last year…
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Ethereum $ETH: +1,171%
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XRP $XRP: +532%
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Bitcoin Cash $BCH: +161%
US Dollar Index $USD: -8%
— Charlie Bilello (@charliebilello) April 10, 2021
Michael Novogratz, the billionaire cryptocurrency investor and the CEO of Galaxy Digital, said:
“Ripple equity is ‘trading’ in secondary market at $2-3bn valuation. The $XRP on their balance sheet is worth approx $70bn. One price seems wrong. If $XRP price is saying settlement coming, the equity is crazy cheap. If not, the token seems expensive. Thoughts?:
So is XRP undervalued? Not exactly
According to Leonidas Hadjiloizou, a long-time cryptocurrency researcher, XRP that is locked in Ripple’s balance sheet are in escrow are likely not priced into Ripple’s equity.
As such, these holdings are not accessible until they start unlocking, which might not be priced in the value of the firm’s equity.
“Well, $62 bn of the XRP in Ripple’s balance sheet is locked in escrow. At the same time, Ripple’s XRP sales are the ones under attack from the SEC so the market probably hasn’t priced in Ripple’s XRP holdings since they are in limbo right now.”
In December 2017, the Ripple team explained that the XRP holdings in Ripple’s escrow unlock by one billion XRP per month for 55 subsequent months.
— Whale Alert (@whale_alert) April 1, 2021
The team said at the time:
“The escrow consists of independent on ledger escrows that release a total of one billion XRP each month over the next 55 months. This provides an upper limit on the amount of new XRP that can be brought into circulation. The amount of XRP actually released into circulation will likely be much less than this.”
In theory, the stock valuation of Ripple will be deemed undervalued if the sum of XRP on the firm’s balance sheet opens when the price of XRP does not fall.
The issue of the disparity between the valuation of Ripple’s stock and the amount of XRP held by the company began to surface as the price of XRP began to rise above $1, amid a pending litigation with the US Securities and Exchange Commission (SEC).
Since April 1, the price of XRP rallied from $0.57 to as high as $1.49, by around 160%.
What is behind the XRP rally?
The primary drivers of the 160 percent surge over the last two weeks have been wins in the company’s legal fight. A court refused the SEC the right to publish the financial records of two Ripple executives, including CEO Brad Garlinghouse, and gave Ripple lawyers access to internal SEC discussion history on cryptocurrencies.
Another cause may be the convergence exchange between Bitcoin (BTC) and altcoins, particularly when BTC experiences sideways market action, which allows alternate cryptocurrencies to rally and catch up.
According to Kelvin Koh, managing partner at Spartan Group, one of Asia’s largest DeFi-focused funds, big quant funds aim to trade the convergence of Bitcoin and global altcoins.
As a result, the process of money flowing into altcoins and then back into Bitcoin continues on a regular basis.
“The reason this happens periodically is because there are a bunch of quant funds out there that play the convergence trade between $BTC and a handful of liquid alts. Whenever there alts look cheap relative to $BTC, they pile in. When they look expensive, they rotate back to $BTC. No fundamentals involved so don’t try too hard to rationalize the moves. This strategy has proven effective over time and there are enough managers playing this that it becomes self-fulfilling and keep recurring.”