Analyst: ETFs Limited in Options to Buy XRP

What to Know:

• The circulating supply of XRP available to ETFs may be far lower than generally reported, potentially leading to a supply squeeze.
• Ripple’s escrowed XRP is not accessible for ETF purchases due to regulatory constraints, limiting sourcing options to exchanges, OTC markets, and secondary sellers.
• Analysts predict significant price volatility for XRP as ETF demand accelerates, outpacing the thinning accessible liquidity.

The potential launch of XRP ETFs has brought renewed focus on the actual circulating supply of XRP available to meet institutional demand. With analysts suggesting the true float may be significantly lower than reported, a supply crunch could be on the horizon. This scarcity, coupled with regulatory restrictions on sourcing XRP directly from Ripple’s reserves, may set the stage for considerable price volatility, impacting both institutional and retail investors.

Assessing the True XRP Float

The debate around XRP’s circulating supply highlights a critical aspect of digital asset market structure. While market trackers report a circulating supply around 60 billion XRP, the actual amount freely available for trading may be much lower. Factoring in the holdings of existing XRP ETFs, estimated retail holdings, and the reserves of Tier-1 exchanges, the accessible liquidity pool could be significantly smaller. This discrepancy raises concerns about the market’s ability to absorb further institutional inflows without causing substantial price dislocations.

Regulatory Constraints on XRP Sourcing

A key constraint on XRP ETF sourcing is the regulatory framework established by the 2023 court ruling in the Ripple-SEC case. This ruling prevents ETFs from directly purchasing XRP from Ripple’s escrowed reserves, as these sales were deemed unregistered securities offerings. While Ripple has obtained waivers to raise capital from accredited investors, this does not extend to direct institutional sales. Consequently, ETF issuers must rely on open market sources, further limiting their options and potentially exacerbating supply pressures.

Limited Sourcing Options for ETFs

ETFs face a limited set of options for acquiring XRP, primarily consisting of Tier-1 exchanges, remaining OTC and dark-pool liquidity, and secondary market sellers. As ETFs accumulate XRP, they are effectively drawing down these reserves, which could lead to a supply shock if demand continues to outpace supply. This dynamic is reminiscent of the early days of Bitcoin ETFs, where limited availability of Bitcoin led to significant price appreciation as institutional interest surged.

Potential for Price Volatility

Analysts predict that the combination of thinning liquidity and increasing ETF demand could trigger significant price volatility for XRP. As ETFs “eat through” OTC and dark-pool reserves, the market may experience a supply shock, leading to “crazy” price action. This scenario is not unprecedented in the digital asset space, where sudden demand surges have often resulted in sharp price spikes, followed by periods of consolidation or correction. Investors should be prepared for potentially rapid and significant price swings in XRP as the ETF market develops.

Implications for Institutional Adoption

The potential supply crunch in XRP could have implications for the broader institutional adoption of digital assets. If ETFs struggle to source XRP without causing significant price volatility, it may raise concerns about the liquidity and stability of other digital asset markets. However, successful navigation of this challenge could also demonstrate the resilience of the XRP market and pave the way for further institutional investment in the digital asset space. The market’s response to these supply dynamics will be closely watched by institutional investors and regulators alike.

Related: XRP Price: $12M Max Pain for Bears

Source: Original article