Why XRP’s shrinking liquidity is fuelling rally expectations despite a 41% price slide
Institutional demand for Ripple’s XRP remains surprisingly resilient even as the token battles heavy selling pressure and a deep correction from its January peak. According to Grayscale’s Head of Product and Research, Rayhaneh Sharif-Askary, XRP was recently the second-most requested asset among advisory clients – a clear signal that big money is still paying attention, even while retail sentiment appears cautious.
That institutional curiosity contrasts sharply with XRP’s recent price action. After surging to around $2.41 in the first week of January, the asset has given up roughly 41.35% over the past 45 days. This drawdown has reinforced the broader bearish mood across the crypto market, where long-term profit-taking and risk-off behavior continue to dominate.
Yet under the surface, several liquidity and derivatives metrics are hinting that the current backdrop may be setting the stage for a short-term rebound rather than a deeper collapse. In particular, the structure of XRP’s automated market maker (AMM) pools, compressed liquidity on key venues, and rising taker buy volume are combining to suggest that even modest demand could ignite a relief rally.
Liquidity tells a different story
On-chain analyst The Alchemist, writing on CryptoQuant’s analytics platform, highlighted that liquidity conditions often explain more about market behavior than price alone. One key metric, the “liquidity USD,” measures how much dollar-denominated capital is effectively backing the XRP market.
During the strong rally in November 2024, USD liquidity expanded meaningfully. That influx of capital helped sustain XRP’s upward trajectory, providing enough depth for large orders to be absorbed without causing extreme slippage. In other words, ample liquidity did not *cause* the rally, but it allowed the move to persist and reflected stronger conviction among participants.
In the weeks following the January high, however, liquidity has thinned out. The analyst noted that this low-liquidity environment has made XRP more sensitive to volatility: when order books are shallow and AMM pools are less stocked on the token side, even moderate trades can move the price more aggressively.
AMM dynamics and the “reduced active supply” narrative
The Alchemist also pointed to a period in late 2024 when token-side availability in the AMM pools dropped. That was interpreted as evidence of “reduced active supply” – fewer tokens readily available to sell at current prices. In standard market theory, a thinner active supply can amplify upward moves if demand suddenly increases.
However, there is a second plausible explanation. During steep rallies, AMM algorithms are often forced to rebalance by selling a portion of the appreciating asset (in this case, XRP) into stablecoins to maintain their target ratios. This mechanism can *appear* as reduced token-side liquidity when, in reality, it is simply the automated consequence of an aggressive price advance.
Regardless of which narrative dominates, the practical outcome is similar: lower XRP liquidity makes it easier for sizeable buy orders to push prices higher. That does not automatically imply a fresh explosive rally is around the corner, but it does mean conditions are primed for pronounced price swings if demand returns even modestly.
Compressed liquidity: bullish catalyst or warning sign?
The current “compression” in XRP liquidity is best viewed as a double-edged sword. On one side, the contraction reflects the aftermath of a strong rally and subsequent rebalancing in AMM pools, not necessarily a loss of long-term interest. On the other, it increases the market’s sensitivity both to fresh buying and to any renewed selling.
The analyst’s conclusion is cautious: the liquidity squeeze may simply be the residual effect of the previous uptrend and the structural impact of AMM operations, rather than a clear signal of another imminent leg higher. For traders, this means liquidity itself should be read as a context-setting factor rather than a direct buy or sell trigger.
Derivatives paint a more subdued picture
While spot and AMM indicators hint at the possibility of a short-term recovery, the derivatives market hasn’t yet confirmed that narrative. Open Interest in XRP futures and perpetual swaps has been in a “downward spiral,” reflecting a steady exit of speculative capital.
Falling Open Interest typically signals that leveraged traders are closing positions, either voluntarily or through liquidations. This decline suggests that the broader bearish trend has not meaningfully reversed, and that enthusiasm for aggressive directional bets remains muted.
For swing traders and position traders, a meaningful uptick in Open Interest – especially if accompanied by rising prices and positive funding rates – would be one of the more reliable early signs of a renewed bullish phase. Until then, the market is leaning more toward cautious positioning than outright risk-taking.
Taker Buy-Sell Ratio flashes a rare bullish hint
Despite the weak derivatives backdrop, spot order-flow metrics are beginning to show a subtle shift. The 7-day moving average of the Taker Buy-Sell Ratio climbed to 1.01 on 17 February. This ratio compares aggressive buy orders (taker buys) to aggressive sell orders (taker sells). A reading above 1 means buyers are more willing to lift offers than sellers are to hit bids.
For XRP, this is a statistically rare event. The last notable instance of the 7-day average moving convincingly above 1 was during the early January rally, when prices were accelerating to their recent high near $2.41. While one data point does not make a trend, a persistent ratio above 1 would suggest that dip-buying interest is returning even in the absence of a full sentiment reset.
Technical structure: short-term bullish, long-term cautious
From a pure chart perspective, XRP’s medium-term structure has started to show signs of strength. On the four-hour timeframe, the swing structure has turned bullish. Crucially, the $1.41 retracement level – a key Fibonacci zone from the preceding move – has already been retested as support.
This successful retest opens the door to a relief rally, with potential upside targets above $1.55 in the coming sessions or weeks, assuming the current momentum carries through. For traders, this zone above $1.55 represents the next logical resistance cluster where profit-taking could emerge.
However, the broader, higher-timeframe trend remains decisively bearish. Unless XRP can reclaim and hold significantly higher price levels, the recent bounce will likely be categorized as a corrective move within a larger downtrend rather than the start of a sustained bull market.
The Upbit factor and the $0.80 longer-term target
Another important element in the current setup is exchange behavior. Reserves of XRP on the Korean platform Upbit have been building, a sign that more tokens are being deposited onto the exchange. Rising reserves can sometimes precede selling, as holders send assets to centralized venues to take profits or exit positions.
Yet in this case, analysts have tied the build-up on Upbit to a broader thesis: the $0.80 region remains a key target level for XRP later this year. That suggests the market is still bracing for the possibility of deeper downside if macro or regulatory headwinds persist.
In practice, this creates a split outlook: in the shorter term, the combination of compressed liquidity, slightly bullish order flow, and a constructive H4 structure points toward a relief rally. Over the longer horizon, the potential slide toward $0.80 remains on the table if sentiment deteriorates or if the current bounce fails to gain traction.
How traders can use liquidity metrics in their strategy
For traders and investors trying to interpret these mixed signals, liquidity analysis can be a powerful complement to traditional technical indicators:
– Watch liquidity USD trends: Rising liquidity in dollar terms during a move up often confirms that fresh capital is supporting the trend. Falling liquidity during an uptrend can warn of fragility.
– Monitor AMM pool composition: A decline in token-side liquidity after a strong rally might not be outright bullish, but it helps explain why price swings become sharper.
– Track the Taker Buy-Sell Ratio: Sustained readings above 1 on a multi-day moving average suggest that buyers are increasingly aggressive, even if price hasn’t yet broken key resistance.
– Combine Open Interest with price: If XRP begins to climb while Open Interest also rises, that alignment is usually more reliable than a price move on shrinking derivatives participation.
Using these together helps differentiate between a “dead cat bounce” and an early-stage trend reversal.
Risk management in a high-volatility environment
Compressed liquidity means that order execution risk is elevated. Slippage can increase dramatically during fast moves, and stop-loss orders may be filled at worse-than-expected prices. Traders should:
– Use limit orders where possible instead of pure market orders.
– Adjust position sizes to account for wider intraday volatility.
– Place stops at logical technical levels rather than arbitrary percentages.
– Be cautious with high leverage while Open Interest is depressed and liquidity thin.
For longer-term investors, the 41% drawdown from the January high underscores the importance of staggered entries and exits rather than all-in, all-out decisions.
What to watch next for XRP
Heading into the next phases of the market cycle, several checkpoints will help determine whether XRP’s current setup resolves in favor of the bulls or the bears:
1. Sustainability above $1.41 – Holding this level as a firm support on multiple retests would strengthen the case for continued upside.
2. Break and hold above $1.55 – A convincing move beyond this resistance, supported by increasing volume, would validate the relief rally scenario.
3. Open Interest recovery – A trend of rising Open Interest alongside climbing prices would show that speculators are re-engaging on the long side.
4. Persistence of Taker Buy dominance – If the 7-day Taker Buy-Sell Ratio stays above 1, it will confirm that buyers remain in control at the margin.
5. Evolution of Upbit reserves – A reversal from rising to falling exchange balances could signal reduced selling pressure and a more constructive supply backdrop.
Bottom line
Despite a steep 41.35% pullback from its early January high near $2.41, XRP’s market structure is more nuanced than a simple bearish narrative suggests. Institutional curiosity remains high, AMM-driven liquidity compression makes the market more reactive to new demand, and aggressive buyers have started to reappear in spot markets.
At the same time, derivatives data and higher-timeframe charts urge caution. The long-term trend is still downward, Open Interest is shrinking, and a move toward the $0.80 region later this year cannot be ruled out.
For now, XRP appears to be in a transitional phase: technically primed for a short-term relief rally above $1.55, but still operating under the shadow of a broader bearish cycle. Traders and investors who closely track liquidity, order flow, and key price levels will be best positioned to navigate whatever comes next.
All information above is for educational and informational purposes only and should not be treated as financial or investment advice. Cryptocurrency trading carries a high level of risk, and every participant should conduct independent research and consider their own risk tolerance before entering the market.