XRP, Ripple’s cryptocurrency, has seen a sharp decline in its value, dropping over 12% to $0.381 on July 5, marking its lowest level in three months. This downturn in XRP’s price is in line with a broader decline in the cryptocurrency market, predominantly driven by large-scale Bitcoin selloffs and the U.S. Securities and Exchange Commission’s (SEC) persistent demands concerning Ripple’s penalties.

Major Bitcoin Selloffs Trigger Market Panic

One of the primary reasons behind XRP’s price drop is the large-scale liquidation of Bitcoin holdings by the German government. Reports indicate that the government is in the process of liquidating hundreds of millions of dollars worth of Bitcoin that were seized from criminal activities. Despite this massive selloff, the government still retains approximately $2.4 billion in cryptocurrency reserves.

Furthermore, the now-defunct Mt. Gox exchange has initiated the long-awaited return of over 140,000 Bitcoin (BTC) to its creditors. This move has sparked speculation about the potential market impact, particularly regarding the extent of the $8 billion worth of Bitcoin that might be sold. These developments have significantly impacted smaller cryptocurrencies like XRP, Ether (ETH), and Binance Coin (BNB), which have all seen substantial declines in market capitalization due to their high correlation with Bitcoin.

Correlation Between XRP and Bitcoin

The correlation between XRP and Bitcoin has been notably high, with a daily correlation coefficient of 0.94 as of July 5. This close correlation suggests that movements in Bitcoin’s price heavily influence XRP’s market performance. Consequently, traders liquidating their altcoin positions to cover losses in the Bitcoin market have further exacerbated XRP’s decline.

SEC’s Firm Stance on Ripple’s Penalty

Adding to the pressure on XRP’s price, the SEC has reiterated its demand for a $2 billion penalty from Ripple. This stance was made clear in the SEC’s response to Ripple’s “Notice of Supplemental Authority” filed on July 3. Ripple had requested reconsideration of the penalty in light of the SEC’s recent legal setbacks against Binance, where the SEC’s case regarding the secondary market sales of Binance’s native token, BNB, was dismissed.

Despite a similar outcome in its case against Ripple in 2023, the SEC has maintained its $2 billion penalty demand. Ripple’s defense has refused to pay the fine, proposing to reduce the penalty to $10 million instead. The SEC’s unwavering stance has increased market uncertainty, contributing to a 20% decline in XRP’s value since the filing.

Massive Long Position Liquidations

The XRP derivatives market has also seen significant liquidations, further driving down the price. As of July 5, over $7 million worth of long positions in XRP futures were liquidated in the last 24 hours, compared to only $298,370 worth of short positions. When long positions are liquidated, it means that bullish traders are forced to sell their holdings, adding downward pressure on the price and accelerating the decline.

Drop in Open Interest and Funding Rates

XRP’s price decline has been accompanied by a decrease in open interest and funding rates. The total number of unsettled XRP contracts fell from $577.74 million to $524.74 million within a day. Meanwhile, XRP’s funding rates dropped from 0.13% per week to 0.05% per week, indicating reduced demand for long positions and increased caution among traders.

Market Implications and Future Outlook

The combination of massive Bitcoin selloffs, the SEC’s firm stance on Ripple’s penalties, and the significant liquidation of long positions in the XRP derivatives market have created a perfect storm for XRP’s price decline. The high correlation between XRP and Bitcoin means that any significant movement in Bitcoin’s market will likely continue to impact XRP.

As traders and investors navigate these turbulent times, the future of XRP will heavily depend on developments in the broader cryptocurrency market, regulatory decisions, and the response from the trading community. For now, caution remains the key approach as the market absorbs these significant events.