How to Buy Stellar as an Investment
If you have been into crypto for any period of time, you are likely aware of Stellar. It has just rebranded, ditching the ‘oh so 2017’ rocket logo for a more abstract, professional design. Given the rebrand, it seemed high-time to delve back into Stellar.
What is Stellar Lumens?
Stellar Lumens is an opened-sourced, decentralized payments platform.
The base concept underlying Stellar (XLM) is to transfer funds reliably, at speed, and low-cost. It focuses on both acting as a bank remittance coin and a means of banking the ‘unbanked’. It is guided by a non-profit organization (Stellar Development Foundation) with a focus on improving the access of ordinary people to financial services.
In their own words:
The mission of the Stellar Development Foundation (SDF) is to promote global financial access, literacy, and inclusion. SDF accomplishes this by expanding worldwide access to low-cost financial services through the development and maintenance of technology and partnerships. SDF’s vision is an open and affordable financial system where people of all income levels can access simple-to-use, secure, and low cost financial services.
As already mentioned, Stellar does also aim to become a ‘banker’s choice’ for remittance services in a similar fashion to Ripple. In fact, the Co-Founder of Ripple Jed McCaleb went on to found Stellar in July 2014. The network started as a fork of Ripple but the ensuing years have seen many technological changes separate the two chains. At this point, they share very little code and furthermore, as Stellar is a ‘non-profit organization, very few organizational similarities.
How Does Stellar Work?
In simple terms, the network runs on an array of distributed servers (nodes) that track the Stellar ledger (record) to ensure global consensus (agreement). Once funds are placed on the XLM network they are accessed very like a Paypal account (see above) except that the third party element (a centralized authority) is removed. Thus, transactions are peer to peer requiring no intermediary beyond a network of nodes who do not themselves dictate whether a transfer will take place.
The network is secured by the Stellar Consensus Protocol (SCP) designed around Federated Byzantine Agreement (FBA). The key characteristic of FBA is decentralization by design and a tolerance of arbitrary (unpredictable) behavior by a fraction of the contributing nodes. A deep dive into the Consensus mechanism of Stellar is beyond the scope of this article but we can state that Stellar does not utilize a Proof of Work (PoW) system but rather one closer to Proof of Stake (PoS) though different (FBA). More information on this consensus system can be found here.
The Basics – Stellar (XLM) Snapshot
At inception, XLM had 100 billion tokens (pre-mined). The current Maximum supply of Stellar 104.8 billion due to the annual inflation rate of 1%. Other factors also feed into XLM supply such as network use. The Stellar Development Fund control about 5% of the supply. More information on coin emission can be found here.
Stellar is currently the seventh (or eight) largest crypto project by market capitalization and has a trading volume of roughly $250 million per day.
What is the Problem that Stellar Seeks to Solve?
The core proposition of Stellar can be broken down into three areas:
No surprises here. In these key areas, Stellar seeks to out-perform its current competition.
Stellar is extraordinarily cheap to use with fees fixed at 0.00001 XLM per transaction. One XLM is approximately $0.11, so the fee is negligible. Even if the coin were to explode to a $1.00, network fees would still be near zero ($0.00001).
The current transaction (operations) per second speed of the Stellar Network is 1000. While slower than a third-gen system like EOS, this is nonetheless much faster than most of its competitors. Blocks are resolved in under a second (0.08). The Block Explorer below displays an active chain but one which is also far from congested. Confirmation time ranges from 3 to 8 seconds. Once again, slower than a chain like EOS but far faster than Bitcoin and Ethereum.
Stellar operates through a distributed node system. As the number of nodes increases so too does the capacity of the network. Theoretically, this should allow Stellar to scale with demand. The current 1k transactions per second are more than enough to handle network traffic but should the need arise, more nodes may onboard the system and subsequently increase its throughput. In fact, the current system has been demonstrated to be capable of far higher TPS – in excess of 3k. Even back in 2017, the founder Jed McCaleb was claiming figures above 4k:
It really depends on the hardware you are running Stellar Core on, so it is hard to give solid numbers. We’ve gotten it up to 4000 transactions per second, and that wasn’t on that crazy of hardware. It was basically a machine with a SSD drive. You can take it much further on big hardware.
What is Stellar? (Lumens) – A Deeper Look
What Does Stellar Bring to the Market?
At a tech level, Stellar doesn’t greatly distinguish itself from other projects. Perhaps what does separate it is the non-profit motivation allied to the goal of legacy finance adoption. Few other projects display this breath of vision. The Stellar Lumens white paper can be found here.
In the Founder Jed McCaleb, we see an obvious track record of success. He created eDonkey2000 which became one of the largest file-sharing networks of its time. He later created Mt. Gox, the first bitcoin exchange and Co-founded Ripple, a project still going strong today and third by market capitalization.
Once again, we have a case of a project dominated by one individual. Dan Larimer for EOS, Vitalik Buterin for Ethereum, Charles Hoskinson for Cardano and Jed McCaleb for Stellar. This is both a blessing and a potential weakness. Clearly, McCaleb knows the path to success but were he to leave the project, Stellar would very likely flounder.
Stellar Development Foundation lists 68 employees on LinkedIn. As you can see below Stellar.org is clearly hiring, a very positive sign in such an extended bear market. More information on prominent team members can be found here.
Stellar is clearly a functioning cryptocurrency and dominates its own blockchain. There’s no question of it becoming redundant within the Stellar ecosystem. However, the supply is immense and will continue to grow at approximately 1 billion per year. Therefore, unless the network shows continual growth and expansion, there will be considerable downward price pressure on the token. It is worth noting, that XLM is integrated into Ledger Nano S facilitating secure storage of the coin. A general introduction to coin tokenomics can be found here.
Stellar has a large and engaged community following – placing it in the top tier of crypto projects. Its not for profit focus likely bodes well for the long-term engagement of its community as speculation alone is not why they have become involved. In September 2018 Stellar achieved 1 million active account users with a sharp spike in new account creation for July 2018. Since then the number of accounts has continued to climb and now stands at over 2.8 million.
Twitter – 266k followers
Reddit – 99k subscribers
Facebook – 22.8k followers
Keybase – 1465 members – cryptography focused
Is the Project Still Active?
Well, 2.8 million accounts would certainly seem to indicate so. However, we can also clearly see a sharp decline of trading volumes.
A quick glance at the github repository shows plenty of recent activity. Though as I’m not a developer – I can only quote the raw figures alone.
Adding in a daily volume of just under $250 million. We can confidently say Stellar is an active and developing project.
Is That It?
Stellar does have another string to its bow in that it encourages the deployment of decentralized exchanges that trade a wide range of assets.
The Stellar Decentralized Exchange (SDEX) functions like a typical decentralized exchange but with the key advantage of facilitating atomic pathfinding which automatically finds the cheapest asset trading pairs. At the moment the trade volumes for the Stellar DEX are very low as you can clearly see below:
How the Stellar Decentralized Exchange (DEX) Works is very concisely explained in this short video:
Stellar Exchange (StellarX)
An interesting development for the Stellar project has been the rollout of the Stellar Exchange (StellarX)). StellarX is not, in fact, a decentralized exchange but a browser.
StellarX lets you live the inter-chain dream of swapping your Philippine Pesos for Litecoin for municipal bonds for lumens, and all of those trades settle in seconds.
It touts some features that most of DEXs do not offer:
- Trading is free (though there is a fee to transfer fiat into the exchange).
- Fiat is integrated into the exchange.
- Cross chain trading – It’s possible to trade across chains using a tether system.
- Trades are true peer-to-peer – the exchange never holds funds/ it only matches.
- No orderbook is held.
Though Stellar has a wide-range of industry partnerships including Stripe and Deloitte the standout is IBM. IBM has been working closely with Stellar since Oct 2017. It’s important to remember that IBM has regularly stated it is blockchain agnostic, so it is not ‘tied’ to Stellar. Nonetheless, on March 18th, 2019 IBM announced the launch of a blockchain based global payments system using Stellar’s cryptocurrency. The service IBM Blockchain World Wire is targeted at financial institution’s cross-border transactions. According to IBM, this is the first comprehensive service of its kind. No doubt, this has something to do with XLM trading up 6% over the following 24hrs. More information on Stellar’s partnership network can be found here.
Let’s have a look at the charts.
Looking at the complete chart a couple of things leap out. Stellar is about to retest BTC resistance going back to June 2017. Breaking through or being rejected at this level will tell a lot about short-term price movement. We may also discern a decoupling from its USD valuation. In dollar terms, XLM has lost a lot more value than against BTC.
3 Month Chart
Looking at the 3-month chart we can see that XLM may have bottomed out in early February but we can also clearly see that it was rejected at the local high from late January. In recent days, price has traded sideways then popped on the IBM announcement.
The Top 10
Comparing Stellar to its direct competitors we can see that though it has rallied substantially in the last month, it has lagged behind most of the rest of the top cryptos over a 3 month period. However, with the marked exception of Binance Coin (BNB), it has substantially out-performed all its competitors when it comes to retention of BTC valuation; being 53% down from its ATH Bitcoin price point. Compare this to 68% for Ripple and 77% for Ethereum.
The Bullish Case for Stellar
- Long established coin with a clear use-case and comparatively mature network. – Essential to institutional interest.
- A founder with a track record of success – again and again, Jed McCaleb has demonstrated the ability to drive project success.
- Location, location, location – being a long-standing member of the top ten attracts interest and capital.
- Perception of good value – should a bull run erupt less sophisticated investors may see the low unit price as cheap.
- Relative strength to Bitcoin – few other major crypto projects have demonstrated such resiliency.
- IBM partnership may be a major driver of token utility.
- None of this is compelling. The chart offers a glimpse of opportunity – no more.
- Banks show no inclination to adopt XLM.
- Where’s the buzz? – I can’t find any, aside from the recent IBM announcement.
- Jed McCaleb is too dominant and therefore a potential weak point in the long-term outlook for the project.
- The potential returns are somewhat limited by supply and already elevated valuation. This is not a good ‘moon’ investment (though it is much more likely to be around in 5 years than 90% of its competitors).
My Investment Thesis
I have already purchased XLM on a number of occasions:
- Aug 2017 at 0.00000427 BTC – mostly sold off buying the bear market. Remainder still in nice profit.
- Sept 2018 at 0.0000316 BTC – down approximately 10%
- Feb 2019 at 0.0000237 BTC – up approximately 20%
- Price currently sits at 0.0000284
On a break above 0.0003170 BTC (Daily candle opening and closing above this level). I will enter another position increasing my holding by 25%.
Exit Plan – Up or Down
- Sell 75% of XLM position on a retest of May 2018 highs approximately 0.000048 BTC.
- The remainder left as a longterm investment looking for new ATH over a multi-year horizon.
- If price falls below the recent lows of 0.000021 BTC Sell 66% of current holdings.
The Final Word
A tepid endorsement. Stellar is a solid project with sound fundamentals. It is also lacking that X-factor and therefore not a project of primary focus going forward.
In Review – What is Stellar? / The Key Features of Stellar
- It is a decentralized and open database.
- Short confirmation time: 3-8 seconds.
- It can process more than a thousand transactions per second.
- Uses the Stellar Consensus Protocol.
- Stellar is smart contract and multi-signature enabled.
- It has a range of significant partnerships.