As Cryptos Recover, Stellar Lumens Must Prove Its Value

Although it bounced back from its late-May lows, Stellar Lumens (CCC:XLM-USD) is still struggling after the latest crypto sell-off. As of this writing, the price of XLM has dropped 20% since April 30. And since I first wrote about Stellar Lumens in January, the altcoin has dropped out of the top 10 cryptocurrencies by market capitalization. 

A concept coin for Stellar Lumens (XLM).

Source: Shutterstock

In January, I noted Stellar Lumens’ similarity to Ripple (CCC:XRP-USD). In both cases, I’m more intrigued by the system than the currency. While the token allows customers to use the system, they lack much of a utility beyond that. 

With that in mind, crypto investors will need to decide if the latest dip in Stellar Lumens is a momentary disruption, or a sign of more trouble to come.  

Stellar Lumens Is Still Highly Correlated With Bitcoin 

One thing I’ve noticed about Stellar Lumens is that its price movement is highly correlated with Bitcoin (CCC:BTC-USD). For example, in the 30-day period ending May 30, Bitcoin was down 37%. Stellar Lumens was down about 30% in that same time period. 

The reasons behind that correlation elude me. After all, Stellar Lumens does not carry the environmental baggage of Bitcoin. This is because, unlike Bitcoin, XLM is not a proof-of-work (PoW) coin. Instead, it settles transactions via the consensus method. This is also what gives the altcoin network its appealing transaction speed.  

And unlike Bitcoin, which is a decentralized cryptocurrency, the blockchain underlying XLM is controlled by the Stellar Development Foundation, a nonprofit organization. 

One could argue that it’s better to not fight the trend. And from a short-term view, I can see that. However, if you believe that cryptocurrency is a long-term story, then you could say that traders are not appreciating the real value of Stellar Lumens. 

Transfer Money Anytime, Anywhere 

The value of XLM is rooted in its origin story. The cryptocurrency was created for cross-border transactions primarily (but not exclusively) between individuals and small businesses. Their user base distinguishes the cryptocurrency from Ripple, which largely targets banks.  

But Vince Martin raised a point in another article for InvestorPlace that echoes my concern about XLM: it doesn’t replace fiat money. In essence, it serves as a convenient translator. One individual can purchase XLM in their preferred currency. They can then send their Lumens across borders, and the transaction is approved in just 2-5 seconds. However, once the transfer is complete, recipients still have to convert their Lumens into fiat currency or another cryptocurrency that can be used to make purchases. 

That means the ultimate value of the altcoin will come from the Stellar network. In January, the company disclosed that there were 4.3 million Stellar Lumens accounts. But I haven’t found any indication that the number has grown in the last few months.  

How to Approach the Future of Stellar Lumens 

Until cryptocurrencies gain much wider acceptance as a medium of exchange, investors should exercise caution. However, because Stellar Lumens is currently not useful as more than a peer-to-peer transaction tool, it needs to be analyzed separately. 

The value of XLM will depend on the value of the Stellar network. And the scarcity of the coin will contribute to its value in this price discovery phase. That means investors should use this dip as an opportunity to add to, or initiate, a position in XLM. If you’re wondering how to approach Stellar LumensI’d recommend that you read this article by Mark Hake 

If you’re still on the fence about buying cryptocurrency directly, the Grayscale Stellar Lumens Trust is a good passive investing strategy. By investing in the trust, investors gain exposure to XLM without having to buy or store the digital currency.  

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for Investor Place since 2019. 

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC