Zack Rector: Canary Will Need to Buy a Lot More XRP After Today. Here’s why

Interest in Canary Capital’s new XRPC exchange-traded fund (ETF) has surged following its launch, with commentary from market participants highlighting its potential impact on XRP's supply dynamics. Zach Rector, a notable figure in the cryptocurrency space, has drawn attention to this aspect, stating, "Canary will need to buy a lot more XRP after today!"

Early Structure and Initial Backing

The XRPC ETF commenced operations with an initial seed creation of 10,000 shares, each valued at $25. This seed capital of $250,000 was utilized to acquire XRP, at a time when the cryptocurrency's price ranged between approximately $2.39 and $2.5.

These figures correspond to an initial backing of roughly 100,000 XRP for the entire fund, which translates to about 10 XRP per share. This structure signifies the sponsor's intent to provide physical backing for the ETF, as opposed to synthetic or futures-based exposure.

The creation unit for the ETF comprises 40,000 shares. Authorized participants are required to adhere to the procedures outlined in the fund's official documentation when initiating or redeeming units. Each creation or redemption transaction necessitates the delivery of a proportional amount of XRP corresponding to the required basket.

Supply Reduction and ETF Purchases

A physically backed ETF effectively removes XRP from active trading markets when authorized participants create new units. While the XRP tokens held by the fund remain in custody, the ETF shares themselves are issued. Consequently, an increase in creation activity drives demand for XRP, thereby reducing the supply available for retail investors and other market participants.

This reduction further exacerbates an ongoing trend. Data from exchange wallets has indicated a decrease in XRP balances in recent months, and an ETF that sources actual XRP tokens for collateral could accelerate this decline, particularly if inflows remain consistent.

When investors allocate capital to the ETF, market makers and authorized participants are compelled to secure the necessary XRP to fulfill the creation units. In practice, this process directly boosts spot demand for XRP.

These acquired XRP tokens do not immediately re-enter circulation, resulting in a net tightening of the circulating supply. A reduced circulating supply can significantly alter market dynamics by diminishing the quantity of XRP available to meet buy-side pressure from other market participants.

Price Effects to Watch

The combination of reduced exchange inventories and ETF-driven purchases can create conditions conducive to upward price movements, provided that buying pressure is sustained. The price of an asset is influenced by both demand and the available supply.

When supply diminishes and demand remains stable or increases, buyers may be compelled to offer higher prices to acquire tokens. This scenario can lead to an increase in market prices, especially as exchanges face shortages of available XRP. The extent of any price reaction will be contingent upon the volume of inflows, the frequency of ETF creations, and the overall liquidity within the market.