Stellar Price Analysis – Bullish fundamentals

Stellar (XLM) is a platform that connects banks, payments systems, and people. The network’s native token, originally STR, is currently ranked 6th on the Brave New Coin market cap table. The XLM spot price is down 89% from an all time high of US$0.72, set in January 2018. The market cap currently stands at US$2 billion, and there has been US$65.43 million traded in the past 24 hours.

XLM was created in 2014 by founders Jed McCaleb and Joyce Kim. The genesis block minted 100 billion XLM. The project is similar to Ripple, where McCaleb originally worked, in that there is no deflationary distribution of coins through Proof of Work mining block rewards. However, the XLM supply is currently growing at a fixed rate of 1% per year.

The coins created to satisfy the yearly inflation rate are distributed through an inflation pool. The network transaction fees are also collected and placed in the inflation pool. Every account in the inflation pool voted for an account to receive the reward, which is deposited once a week. An account is required to obtain at least 0.05% of the votes to collect the inflation pool reward. Voting is weighted according to the number of lumens the voting account holds.

There are currently almost 2.5 million accounts on the XLM ledger, a number that grew exponentially throughout 2018. The top 100 addresses currently hold 95% of all XLM tokens, and there has been some concern that the holdings of the Stellar Development Foundation (SDF) are being used to perpetually collect the inflation pool reward.

Source: https://stellar.expert/explorer/public/asset/XLM?filter=asset-holders

About 92% of the total supply is still held by the SDF, which is run by McCaleb and chief scientist Mr. David Mazières. Unlike Ripple, there have been no announcements of programmed or controlled escrow plans regarding the large non-circulating supply held by the SDF.

According to the Stellar ashboard, there are currently 104.64 billion XLM in existence. About 8.65 billion XLM have been distributed through airdrops or to promote partnerships and user growth. Of the current total supply, 18.93 billion XLM tokens are not held by the SDF.

The mission of the SDF is to promote global financial access, literacy, and inclusion by expanding worldwide access to low-cost financial services through the development and maintenance of technology and partnerships. The SDF was incorporated in 2014 as a non-stock nonprofit corporation in the U.S. State of Delaware. The SDF is not currently an independently operated 501(c)(3), or non-profit, but did apply for this distinction in 2015.

Last November the SDF announced its intent to undertake an up-to-500 million XLM distribution, or airdrop, through blockchain.io, which added wallet support for XLM. The airdrop is touted as encouraging first-time crypto users, and the crypto-curious. Each user will receive US$25 in XLM after KYC verification in the form of an email address and identity documentation. No funds have been released as of yet, but the airdrop is slated to be one of the biggest giveaways of its kind.

For consensus, the XLM blockchain uses the Federated Byzantine Agreement (FBA) mechanism, pioneered by Ripple. This mechanism was adjusted to the Stellar Consensus Protocol (SCP) by Mazières in 2016 after the chain was unable to maintain reliable consensus.

FBA is similar to solutions related to the Byzantine Generals Problem and reaches consensus based on the agreement of a large number of individuals or validators. Anyone in the XLM network can be a validator, so the user must decide which validators to trust. Ideally, each trust group, or quorum slice, has overlapping transactions with other groups, and thus can collectively achieve consensus.

For the SCP, quorum intersection ensures that each quorum slice is always linked by one node. There are no incentives or rewards for nodes other than participating in the network and ensuring consensus. The XLM network currently has 125 active public nodes, with 66 active validators over the past two days. Most of the nodes reside in the United States and Europe.

Source: https://dashboard.stellar.org/

The XLM network uses a default transaction fee of 0.00001 lumens to prevent spam or Denial of Service attacks. The low transaction overhead has made the XLM blockchain attractive for remittances. The Stellar team has announced partnerships with remittance agencies Tempo and ZED, ICOs Smartlands and Mobius, at least 10 stable coins, including Stronghold and Novatti, and Hyperledger.

Smartlands is a platform for security token offerings. Mobius raised US$39 million in January 2018 and compares itself to the Stripe payment gateway. Stronghold is an FDIC-insured USD stablecoin backed by IBM. Novatti is a 1:1 backed Australian dollar (AUD) stable coin, with funds held in trust, similar to Tether. Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies and includes almost 300 companies.

Last year, Stellar announced a new platform which allows enterprises and institutions to use and build on the XLM network. The product combines the Chain and Lightyear brands. Chain’s products included Sequence and Chain Core. Sequence was a cloud-based ledger service for managing balances in financial and commerce applications like wallet apps, lending platforms, marketplaces, and exchanges. The Chain Core software was designed to operate and participate in permissioned blockchain networks.

The current number of total transactions per day on the network (line, chart below) stands at ~2,300, which is down from a December high of 9,000. The average transaction value (fill, chart below) is currently US$533, down from a July high of US$3,000. Both the number of transactions per day and the average transaction value have increased substantially since July 2018. The average transaction fee is currently US$0.00117 and has continually risen since April 2017 (not shown).

Source: coinmetrics.io

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) has fallen substantially since November and is sitting at a multi-year low. A clear downtrend in NVT suggests a coin is undervalued based on its economic activity and utility, which should be seen as a bullish price indicator. Inflection points in NVT can also be leading indicators of a reversal in asset value.

Daily active addresses (fill, chart below) have continued to increase from the September lows, and are nearing record levels around 10,000. Active and unique addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law. Grassroots interest in the project includes 7,851 members in 25 Stellar groups on meetup.com.

Turning to developer activity, Stellar Core v10.1.0 was released in December, which improved ledger stability and updated the command line. In total, over 300 developers have contributed to the XLM project on GitHub, with a cumulative 2,695 commits over the past year, mostly in the main repo (shown below).

Most coins use the developer community of GitHub, which was acquired by Microsoft for US$7.5 billion in 2018. Files are saved in folders called "repositories," or "repos," and changes to these files are recorded with "commits," which save a record of what changes were made, when, and by who. Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity and interest.

XLM exchange traded volume over the past 24 hours has predominantly been led by Bitcoin (BTC) and Tether (USDT). There is also a higher percentage of Korean Won (KRW) volume when compared to most pairs. The majority of trading has occurred on ZB.com, Exrates, BCEX, and Binance.

Last year, XLM had several exchange-related announcements including; OKCoin listing XLM/USD, XLM/BTC, and XLM/ETH trading pairs, and XLM added to the Circle Invest and BitGo platforms. Coinbase is also potentially adding XLM to its platform in the near future. Stellar also released StellarX, a third-party client built on top of Stellar’s open marketplace. StellarX holds no custody of any assets, but the client is also not a DEX, and there are no fees. The platform includes a fiat on-ramp through ACH transactions from a U.S. bank account.

Google Trends data for the term "Stellar" remains down sharply over the course of the year and is sitting at a yearly low (chart below). A slow rise in searches for "Stellar" preceded the bull run in Q4 2017, likely signaling a large swath of new market participants at that time. A 2015 study found a strong correlation between the Google Trends data and BTC price. A May 2017 study concluded that when the U.S. Google "bitcoin" searches increased dramatically, BTC price dropped.

Technical analysis

After making a fresh low after a multi-month period of bullish consolidation, XLM has followed the rest of the crypto market with a significant downward decline. The strength of an existing trend or potential reversal price action can be mapped using exponential moving averages (EMAs), Volume Profile of the Visible Range (VPVR), Pitchforks, Ichimoku Cloud, and chart patterns. Further background information on the technical indicators discussed below can be found here.

On the daily chart, the 50/200 EMAs have been bearishly crossed since June 21st. Price has remained mostly below the 200EMA since that cross. Price is also bound by a bearish Pitchfork with anchor points in January, June, and November. A breach of the median line support would likely result in a drop into the US$0.07 to US$0.05 zone. VPVR also shows support near US$0.05 and lower. There are no active volume or RSI divergences.

Turning to the Ichimoku Cloud, four metrics are used to determine if a trend exists; the current price position in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, and the Lagging Span. The best entry always occurs when most of the signals flip from bearish to bullish, or vice versa.

The status of the current Cloud metrics on the daily time frame with singled settings (10/30/60/30) for quicker signals are bearish; price is below Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span below Cloud and in price. Price experienced four bullish Kumo breakouts throughout 2018, all of which quickly turned bearish after failing to gain additional momentum. The flat kumo at ~US$0.18 remains a high probability reversal target if the current lows hold.

The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are bearish: price is below Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below the Cloud and in price.

Again, a long entry signal, or Kumo breakout, will not trigger until price remains above the Cloud. The TK lines have formed a C-clamp, which is suggestive of oversold conditions. When a TK disequilibrium exists, price is more likely to mean revert to the Kijun at US$0.175 than break for lower lows. The flat Kumo at US$0.20 will also act as a magnet for price.

Lastly, on the XLM/BTC pair, the daily chart is very similar to the analysis above for the XLM/USD pair. The 50/200EMAs have been bearishly crossed since December 22nd. Cloud metrics are entirely bearish with a TK C-clamp suggestive of oversold conditions. There is also an active RSI and volume bullish divergence with a falling wedge chart pattern suggestive of waning bearish momentum. If price does reverse, the flat kumo at 3700 sats will act as a magnet for price.

Conclusion

Fundamental network metrics for XLM remain poor when compared to other networks. However, current metrics including transactions per day, mean transaction value, NVT, and daily active addresses have continued to paint a bullish picture over the past few months. Based on the recent XLM projects released, the network wants to directly compete with Ripple in the remittance realm, and Ethereum in the ICO and security token realm. The low transactional cost makes the platform more attractive than its peers for ICOs, dApps, and general value transfer.

A Coinbase listing also looms, which will likely result in a large price spike on the announcement, and a swift reversal once the pair is live. The blockchain.io airdrop will also likely be a near-term bearish event, as most users will collect the XLM and sell it on the spot market, which has been the case for both of the previous XLM airdrops.

Technicals based on trend indicators show a fresh bearish trend, although with waning bearish momentum. Both the XLM/USD and XLM/BTC pair show the potential for mean reversion targets of US$0.18 and 3700 sats respectively. If price makes lower lows, a 50% drop is likely based on the lack of historic price support.