It was bound to happen. After several massive rallies in the equity market, traders turned their eyes toward making parabolic moves in the cryptocurrency market. Altcoin Ripple (CCC:XRP) traded at 26 cents on Thursday — and 59 cents on Sunday evening.
The culprit isn’t the same, suddenly infamous, r/WallStreetBets bunch that has targeted a number of heavily-shorted stocks. But the mechanics seem the same, albeit without the same leverage from call options that has been an underappreciated factor in the volatility of the last few sessions in the stock market.
According to CoinDesk, Ripple has seen a coordinated wave of buying driven by members of a Telegram channel. Essentially, it’s a “pump and dump.”
To be fair, Ripple isn’t like the stocks usually associated with that term, many of which are worthless or close to it. And, simply to look at the XRP chart, one might think the rally actually makes some sense. Ripple still trades below where it did six weeks ago.
There’s a logical reason as to why that should be the case, however. In fact, there’s a logical reason that XRP traded at 26 cents just a few days ago. And that reason will impact trading in Ripple even once this buying attack has ended.
The Problem with a Pump & Dump
The term ‘pump and dump’ has a negative connotation that might be unfair here. Again, pump and dumps quite often are simply scams. They’re usually an organized attempt to rope unsuspecting investors into buying an asset that has little actual value.
This isn’t quite the same situation. It’s not as if the members of ‘Buy & Hold’ on Telegram are spreading falsehoods about the cryptocurrency. They’re simply buying en-masse in a bid to push up the price.
But the effect is the same. And it’s worth pointing out the link to the original channel actually includes the phrase “pumpxrp.” That channel long since hit its 200,000 member maximum.
Those members have accomplished their goal: they’ve moved Ripple sharply higher. Now what? The price only stays at or above these levels as long as the pumping continues.
There are no short sellers who need to cover. There’s been no fundamental news to suggest that the actual value of the altcoin has changed. The price simply has been moved higher — artificially.
As with the stocks that have seen similar moves of late, there may be some debate about whether these actions constitute market manipulation, or whether they instead show something akin to a rebellion against a ‘rigged’ system. I’m honestly not terribly interested in that debate.
Rather, what I’m interested in is finding value in cryptocurrency. Nothing that’s happened with XRP over the past four days has created value. It’s the same crypto it was on Thursday, with the same problems.
The SEC Sanctions Ripple Labs
The biggest problem is the action taken by the U.S. Securities and Exchange Commission on Dec. 22. The SEC has alleged that Ripple Labs, the developer of Ripple, has executed an “unregistered, ongoing digital asset securities offering.”
The allegations are part of a long-running debate about cryptocurrencies as a whole, and altcoins in particular. To oversimplify that debate, the core question is: are cryptocurrencies actually an asset, or a security like a stock or bond?
If it’s the latter, the SEC requires that issuers register their offerings. Those offerings in turn require a significant amount of disclosure, notably including the risks inherent in investing.
Ripple Labs hasn’t satisfied those requirements with Ripple. The company has said it will fight the action, arguing that the SEC is “completely wrong on the facts and law.”
Ripple does have a reasonable case. The SEC’s regulation of cryptocurrencies has left more questions than answers. But the problem is that the SEC’s move already has had enormous consequences.
Ripple Takes a Hit
Multiple exchanges already have delisted Ripple from trading. And so it’s little surprise that the currency has plunged; some investors had little choice but to sell.
This isn’t just a short-term issue, however. Ripple as a crypto is independent of Ripple Labs. But Ripple Labs still oversees XRP, and Ripple Labs could run into funding problems while the expensive SEC fight rolls on.
Problems for Ripple Labs likely would, well, ripple across the ecosystem. Major companies — and XRP’s purpose in facilitating cross-border transactions has brought a number of major companies into the fold — may step away rather than have any association. As one industry participant put it, XRP now has “one foot in the grave.”
To be fair, it’s possible that Ripple Labs winds up winning its fight with the SEC. The issue there, however, is that the price of XRP already has risen far enough, fast enough, to suggest that upside in that case is limited.
Ripple traded at 57-58 cents before the SEC got involved. It’s already moved back to that level, even with a significant period of uncertainty ahead. In a crypto world with so many options, there’s no need to deal with that uncertainty — or to try and time how and when an orchestrated, short-term buying spree is likely to end.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
