Ripple CTO Details How RLUSD Might Trade At $1,200 On Debut

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As a seasoned analyst with over two decades of experience in the financial markets, I’ve witnessed many intriguing phenomena that defy conventional wisdom. In the case of Ripple‘s upcoming stablecoin RLUSD, the potential for initial price spikes to $1,200 or even $3 is an interesting twist on the usual stablecoin dynamics.

David Schwartz, Ripple’s Chief Technology Officer (CTO), has explained that when the upcoming stablecoin on the XRP Ledger, known as RLUSD, is first introduced, its price could temporarily skyrocket, potentially reaching around $1,200, even though it’s intended to be worth $1. This unexpected increase in value may be due to early supply limitations, intense speculation, and the inherent market dynamics of stablecoins causing a temporary price surge. He shared these insights in a recent interview (X).

Why The Ripple Stablecoin RLUSD Could Hit $1,200

In a reply to community chatter around a screenshot that showed an RLUSD value of $1,200 on the Xaman wallet, Schwartz confirmed such a price is theoretically possible. He remarked that “as RLUSD goes live, there may be supply shortages in the very early days before the market stabilizes. There actually is someone willing to pay $1,200/RLUSD for a tiny fraction of one RLUSD. Tools will show you the highest price anyone is willing to pay, even if it’s just for a tiny bit. Maybe someone wants the ‘honor’ of buying the first bit of RLUSD on the DEX.”

However, he was quick to stress that “the price will come back to very close to $1 as soon as supply stabilizes,” suggesting that any eye-popping listing would be more of a novelty event than a real market assessment of RLUSD’s long-term value. “But rest assured, the price will come back to very close to $1 as soon as supply stabilizes. […] If you want to spend a lot of money to get a tiny bit of RLUSD before anyone else does, you can. But please don’t expect the price to stay over $1 once things stabilize, which I expect they will do very quickly.”

According to Ripple’s CTO, some anomalies in stablecoins are due to their fundamental creation and destruction mechanisms. When demand increases for a Ripple stablecoin, new units are created through minting, while reducing supply by burning happens when demand decreases. These processes help keep the price at $1, but they can’t always keep up with real-time trading. At the start, there might be an imbalance between the number of tokens in circulation (supply) and those wanting to buy them (demand), which could lead to significant initial price distortions.

Schwartz’s comments on social media mirrored the same ideas he presented at the Emergence conference in Prague. He touched upon potential issues that could arise when a stablecoin is launched for the first time, humorously suggesting that people might overspend just to be among the first owners of RLUSD.

In a situation he outlined, an individual would opt to spend $3 instead of $1, primarily for the bragging rights of being an early holder of the stablecoin. Although this is small compared to $1,200, his point was that such exceptions might mislead some buyers into perceiving the Ripple stablecoin as a potential investment rather than a stablecoin due to these unusual occurrences.

The Ripple CTO pointed out that it’s likely for the price to drop from $3 to $1 once enough of it is minted. He explained that this is an area where arbitrage traders become crucial. When the cost of a stablecoin deviates significantly from its standard value, these traders take advantage by either selling at a higher price or buying at a lower price and then redeeming at face value. This process helps to bring the price back to its intended level.

Schwartz added a word of warning: “Avoid the urge to jump into stablecoins! This isn’t a chance to become wealthy.

When initiating a stablecoin, there are several unusual issues that may not initially cross your mind. JoelKatz recently discussed this in Prague approximately 10 days ago. Keep an eye on RLUSD as it ascends! This cryptocurrency world never ceases to amuse us.

— Crypto Eri Carpe Diem (@sentosumosaba) December 15, 2024

An important point to note is that numerous stablecoins depend on an external party or system for minting and redemption. If these operations aren’t continuously available, or if liquidity becomes limited during off-hours, the value of these coins can drift away from the $1 mark on certain trading platforms or markets.

Hartner used Circle’s USDC depegging event in March 2023 as an example of something to be wary of. “Price fluctuations can occur when minting and burning aren’t continuously possible,” he explained. “Just like USDC depegged during a weekend in March 2023 due to market panic and Circle having limited liquidity operations outside of normal business hours.

Khaled Elawadi.XRP, a community member, pondered over the idea that stopping minting or burning wouldn’t affect a stablecoin’s price if redemptions for fiat always equaled $1. He pointed out, “It seems reasonable to assume that there should be a consistent buy and sell price on decentralized exchanges (DEX) and other listed platforms.

In response, Hartner emphasized that the peg isn’t maintained through a universal price-setting algorithm but by traders themselves. “You don’t withdraw stablecoins from exchanges for cash,” he clarified, “you trade them for fiat with other traders.” If more stablecoins are being sold than there are traders ready to buy at $1, the price on that specific exchange can drop until market participants or liquidity providers intervene.

At press time, XRP traded at $2.40.

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2024-12-16 10:27