It had to happen. After several massive rallies in the stock market, traders turned to parabolic moves in the cryptocurrency market. Altcoin Ripple (CCC: XRP) was quoted on Thursday at 26 cents – and on Sunday evening at 59 cents.
The culprit isn’t the same suddenly infamous R / WallStreetBets bunch targeting a number of sharply shortened stocks. However, the mechanics appear to be the same, albeit without the same leverage from call options, which was an underestimated factor in the volatility of recent sessions on the exchange.
According to CoinDesk, Ripple has seen a coordinated wave of purchases sparked by members of a Telegram channel. Basically it’s a “pump and dump”.
To be fair, Ripple isn’t like the stocks normally associated with the term, many of which are worthless or close to it. And just looking at the XRP chart, you might think the rally actually makes sense. Ripple is still trading below what it was six weeks ago.
However, there is a logical reason why this should be the case. In fact, there’s a logical reason why XRP only traded at 26 cents a few days ago. And this reason will continue to affect trading with Ripple even after this buying attack ends.
The problem with pump & dump
The term “pump and dump” has a negative connotation that may be unfair here. Again, pumps and dumps are often just frauds. They’re usually an organized attempt to convince unsuspecting investors to buy an asset that has little real value.
This is not quite the same situation. It’s not like the members of ‘Buy & Hold’ at Telegram are spreading falsehoods about the cryptocurrency. They just buy in bulk to increase the price.
But the effect is the same. And it’s worth noting that the link to the original channel actually includes the phrase “pumpxrp”. This channel has long since reached its maximum of 200,000 members.
These members achieved their goal: They moved Ripple up a lot. What now? The price will only stay at or above these levels as long as pumping continues.
There are no short sellers who need to cover. There is no basic news to suggest that the actual value of the altcoin has changed. The price was simply increased – artificially.
As with stocks, which have seen similar moves recently, there may be some debate as to whether these measures constitute market manipulation or whether they instead show some sort of rebellion against a “rigged” system. To be honest, I am not particularly interested in this debate.
Rather, I’m interested in finding value in cryptocurrency. Nothing that has happened to XRP in the past four days has created value. It’s the same crypto as Thursday, with the same problems.
The SEC Sanctions Ripple Labs
The biggest problem is the actions taken by the US Securities and Exchange Commission on December 22nd. The SEC has claimed so Ripple Labs, the developer of Ripple, has launched an “unregistered, ongoing offering of digital asset securities”.
The allegations are part of a longstanding debate about cryptocurrencies as a whole, and altcoins in particular. To simplify this debate, the key question is: are cryptocurrencies actually an asset or a security like a stock or a bond?
In the latter case, the SEC requires issuers to register their offers. These offers, in turn, require a significant amount of disclosure, particularly including the risks associated with the investment.
Ripple Labs did not meet these requirements with Ripple. The company has announced that it will combat the action, arguing that the SEC is “completely wrong about facts and laws”.
Ripple has a sane case. The regulation of cryptocurrencies by the SEC has left more questions than answers. The problem, however, is that the SEC move has already had enormous consequences.
Several exchanges have already banned Ripple from trading. And so it’s no surprise that the currency has fallen; Some investors had no choice but to sell.
However, this is not just a short-term problem. Ripple as a crypto is independent of Ripple Labs. But Ripple Labs is still monitoring XRP, and Ripple Labs could run into funding problems as the expensive SEC battle continues.
Problems for Ripple Labs would likely impact the entire ecosystem. Large corporations – and XRP’s purpose of facilitating cross-border transactions has brought a number of large corporations to their knees – might step back instead of having an association. As one industry participant put it, XRP now has “one foot in the grave”.
To be fair, Ripple Labs can win its battle with the SEC. The problem there, however, is that the price of XRP has already risen far enough and fast enough to indicate that the uptrend is limited in this case.
Ripple was trading at 57-58 cents before the SEC interfered. It has already returned to this level, even if a significant period of uncertainty lies ahead. In a crypto world with so many options, there is no need to deal with that uncertainty – or try to determine how and when an orchestrated, short-term buying frenzy is likely to end.
At the time of this writing, neither Matt McCall nor the InvestorPlace Research employee primarily responsible for this article held any positions (either directly or indirectly) in any of the securities identified in the article.