Analyzing Jed McCaleb’s departure and the ripple currency plunge (XRP)

KEY UPDATE, 5/27/14: Ripple Labs has responded by saying that Chris Larsen has “authorized the creation of a foundation to distribute his donation of 7 billion XRP to the underbanked and financially underserved.” Ripple’s full response can be seen here.

KEY UPDATE, 5/25/14: Ripple Labs intends to sue Jesse Powell per Powell’s post on Reddit. Read my post Ripple soap opera continues with board member’s resignation.


The ripple train wreck started yesterday at May 21, 2014, at 04:18 a.m. when Jed McCaleb logged onto XRPTalk’s forum and wrote that he’s planning to sell off his 9 billion XRPs.

Hi Everyone,
I started working on ripple in the summer of 2011. I soon hired Arthur and David to help me. In 2012, I met Chris Larsen. He joined us about 5 months before ripple was launched. Chris, Arthur and I kept 20 billion XRP, of which 9 billion were mine. We gave the remaining 80 billion to OpenCoin.
I have given away and donated some of my 9 billion XRP to charities such as MIRI, Literacy Bridge, Give Directly, Mission Bit and others. I plan to start selling all of my remaining XRP beginning in two weeks. Because I have immense respect for the community members and want to be transparent, I’m publicly announcing this before I start. So just fyi…. xrp sales incoming.
Thanks,
Jed.

Not much happened at first as people weren’t sure whether the post was authentic. Anticipating skepticism, Jed posted the message with a Keybase OpenPGP Signature and later made a transaction from a large ripple account to prove it was him. Ripple prices reacted by falling by more than 50 percent, and they haven’t shown any sign of abating.

Why the sell-off?

Interestingly, the price of XRP has plunged significantly and Jed hasn’t sold a single XRP yet! Per his message, he won’t start selling his XRP for “two weeks,” which we can assume means June 4, 2014. XRP investors see clouds on the horizon, and they’re running for the hills. Here are two theories on why:

  1. Investors are getting out before the XRP market size more than doubles.
  2. Investors could be assuming that Jed’s exit from XRP indicates that he doesn’t believe the platform will succeed.

Point No. 1 is rational. There are currently about 7.8 billion XRP trading on the open market. Jed didn’t indicate how many of his 9 billion XRP he’s given away, but let’s just pick a number of the air and say he’s given away half a billion XRP. That still leaves another 8.5 billion XRP that will soon flood what’s effectively a tiny market.

So, we’ve got the XRP market size going from 7,817,888,647 XRP to 16,817,888,647 XRP in the span of a few weeks (or months depending on how long Jed spreads out his sales).

Point No. 2 is more troubling. However, I believe fears over ripple’s future are unfounded. The company’s in the capable hands of Chris Larsen (formerly of Prosper.com), Arthur Britto and their team of 52 employees.

“The short-term price of XRP does not hinder our ability to execute on the vision,” Britto said today in a post on Ripple’s official forums. “Our company is well-funded. We’re not dependent on XRP.”

What does McCaleb’s sell-off mean?

Theory No. 1: He wants to move on and forget about ripple.

That’s something of a pattern for the entrepreneur. He started Mt. Gox in July 2010, then sold it March 2011 to focus on Ripple. By May of 2011, he was at work on Ripple, hiring Chris Larsen and building out the protocol. He left Ripple in July of 2013, and since then he’s been at work on a secret bitcoin project.

At this point, all we really know about McCaleb’s departure from ripple comes from a choppy video where he says “I left in the summer due to disagreements with the person I brought on to be CEO.”

I’m not sure McCaleb’s the kind of guy who likes to stick with one project for years, though. His sale of Mt. Gox is evidence of that, and I think it’s a trait that a lot of creatives share.

Theory No. 2: He doesn’t think ripple will succeed.

Why sell nearly 9 billion ripple if you think the currency could appreciate substantially and forever alter the global financial system? If he believes ripple will ultimately fail, selling now is a way to get value out of the 2+ years he spent working on ripple.

Theory No. 3: He’s low on cash or he needs to raise cash for his new venture.

Start-ups aren’t cheap. It’s not outside of the realm of possibility that he needs funds to hire programmers, pay lawyers or launch a marketing campaign for his new bitcoin project.

Theory No. 4: He thinks his latest start-up will kill off ripple.

If he’s come up with the next big idea in cryptocurrency (and if anyone could do that, I’d say it’s Jed), he might see the writing on the wall and assume ripple will be out-classed by his new “secret” project.

I’ve got an email out to Jed to see if he’s willing to share some thoughts with me in an interview, but in the meantime, all we can do is speculate.

If you want my unsolicited opinion, I’d say it’s a combination of all four theories above. Why? If Jed didn’t need the money, he’d probably donate the XRP to a worthy cause. He’s a tinkerer who likes working on new projects, and if he didn’t think his current project was the next big thing I doubt he’d be working on it (working on small, purely profit-driven projects doesn’t seem to be in Jed’s DNA).

What’s in store for ripple now?

As I mentioned above, the XRP market will go from 7,817,888,647 XRP to 16,817,888,647 XRP in the span of a few weeks. That’s more than twice the current market size, which means ripple prices should logically fall by more than 50 percent … and they already have.

In the 24 hours since Jed’s announcement, ripple prices fell 53 percent from $0.006 to $0.0026 – and Jed hasn’t sold a single XRP! That means, look out below. We could see a plunge upwards of 90 percent or more once Jed starts selling in earnest. If that happens, look for XRP prices around $0.0006!

Prices are going to keep falling. And once they stabilize, I plan to buy more XRP. I’ll buy more because I believe in the protocol and its requisite currency. Until bitcoin gets transaction times down to seconds rather than minutes or a new, more impressive peer-to-peer payments system that handles multiple currencies is unveiled, I’m sticking with what’s already been released, enjoys a growing user-base and has the capital to continue operations well into the future. If Jed launches a bitcoin-based competitor that improves upon ripple’s functionality, I may very well sell my XRP and move on. Right now, though, I still believe XRP is in a class of its own.

Before I go, too, I want to point out two big takeaways from all this. First, Jed made a rather stand-up move by pre-announcing his sale of XRP. I’m not sure everyone would have done that. Secondly, I believe that this shake up has made it clear to Ripple Labs that they need to be more transparent with their XRP distribution model. Indeed, they had this to say:

“We’ve heard and shared your concern about the founders’ XRP allotment. Prior to today, we’ve been working on a founders’ XRP lock up plan, which Chris and I are participating in. You can rest assured that a dumping event like this won’t happen from other co-founders.”

Even beyond the founders allotment, though, we need some sort of rough timetable for the release of the other 72 billion XRP that Ripple Labs controls. Until that happens, investors can’t be sure whether their investment in XRP will steadily rise or tumble 50 percent in a day. That sort of volatility scares away not just investors but the institutions who might adopt the ripple protocol as well. A commitment from Ripple Labs to release between (x) and (y) percent of their ripple holdings annually would go a long way toward stabilizing the currency.

Want to read more more? Check out my post on the best Jed McCaleb quotes of all time or my post on the top 20 quotes from the co-founder of Ripple Labs, Chris Larsen. I also regularly update my ripple price prediction page, and earlier today, I posted this: One screenshot showing why ripple will rule them all.

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6 comments

  1. Ethan

    Really interesting turn of events and I totally agree with all of your points. It’ll also be very interesting to see what Jed’s new project is since it seems everything he does has potential to shake things up.

    I’ll be taking this opportunity to buy more xrp as well because it’ll be a steal for something that still holds a lot of promise.. That being said I’ll surely be coming back here to monitor your thoughts on any future developments ;).

  2. Bryan

    Its my understanding that Jed held 12% of MtGox, so he probably is selling because that kicked his ass pretty badly.

  3. GR

    Theory 5: Jed is spiteful about his departure and wants to harm Ripple Labs by impairing the asset they have relied on for funding. (He also hurts himself in the process).
    —–

    >We could see a plunge upwards of 90 percent or more once Jed starts selling in earnest. If that happens, look for XRP prices around $0.0006!

    This would imply Jed’s whole stake of 8.5 billion XRP would be worth only $5.1mm. There are likely plenty of investors that will step in to own 8.5% of the total supply of XRP for that amount of money.

    • Fred
      Fred Marion
      Author

      Hopefully you’re right about new investors stepping up. I’ve even wondered if Ripple Labs is considering buying Jed’s stake. On the other hand, Jed’s sell-off could scare off serious institutional investors. We’ll see.

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