Stellar Price Analysis – Nascent bull trend

Stellar is a platform that connects banks, payments systems, and people. The networks native token, XLM, is currently ranked 5th on the BraveNewCoin market cap table, having recently surpassed EOS. The XLM spot price is down 73% from the all time high set in January, the market cap currently stands at US$4.81 billion, and there has been US$75.77 million traded in the past 24 hours.

XLM was created by founders Jed McCaleb and Joyce Kim in 2014, with a genesis block that minted 100 billion XLM. Similar to Ripple, where McCaleb had originally worked, there was no deflationary distribution of coins through a block reward with Proof of Work mining. About 92% of the total supply is still held by the Stellar Development Foundation (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 Dashboard, there are currently 104.46 billion XLM in existence. 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 Stellar Development Foundation (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 week, the SDF announced an up-to-500 million XLM distribution, or airdrop, through blockchain.com, which has also added wallet support for XLM. The airdrop is said to encourage first-time crypto users, and the crypto-curious to begin using crypto. Each user receives US$25 in XLM after verification. No funds have been released as of yet, but the airdrop is slated to be one of the biggest giveaways of its kind ever.

The airdrop requires KYC in the form of an email address and identity documentation, provided through blockchain.com. Some have suggested that the airdrop and verification process represents an opportunity to data mine new users while on-boarding them into the Stellar network and blockchain.com.

The XLM blockchain uses the Federated Byzantine Agreement (FBA) consensus mechanism, pioneered by Ripple. This mechanism was adjusted to the Stellar Consensus Protocol (SCP) by Mazières 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 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 110 active public nodes, with 60 active validators over the past two days. Most of the nodes reside in the United States.

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

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 XLM network uses a default transaction fee of 0.00001 lumens to prevent spam or Denial of Service attacks. Transaction fees are collected and placed in the inflation pool.

Every account in the inflation pool selects another account as the inflation destination every 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. The top 100 addresses currently hold 95% of all XLM tokens, and there has been some concern that the holdings of the SDF are being used to perpetually collect the inflation pool reward.

The low transactional overheard has made the XLM blockchain attractive for remittances. The Stellar team has announced partnerships with; a remittance agency called Tempo, ICOs Smartlands and Mobius, at least 10 stable coins, including Stronghold and and Novatti, and Hyperledger.

Smartlands is a platform for security token offerings. Mobius raised US$39 million in January 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

On September 10th, Stellar announced that the Chain and Lightyear brands will combine and be renamed as Interstellar. Together, the new platform will allow enterprises and institutions to use and build on the XLM network. 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. Chain Core was software designed to operate and participate in permissioned blockchain networks. On September 14th, the ZED network announced a partnership with Interstellar to help reduce fees on remittance payments.

The current number of total transactions per day on the network (line, chart below) stands at ~1,200 transactions, which is down from a December high of 9,000 per day. The average transaction value (fill, chart below) is currently US$533, down from a July high of US$3,000. The average transaction fee is currently US$0.00407 and has continually risen since April 2017 (not shown).

The 30-day Kalichkin network value to estimated on-chain daily transactions (NVT) ratio (line, chart below) is currently in the upper-third of historic levels and beginning to fall. A clear uptrend in NVT suggests a coin is overvalued based on its economic activity and utility, which should be seen as a bearish price indicator, whereas a downtrend in NVT suggests the opposite. However, inflection points in NVT can be leading indicators of a reversal in asset value.

Daily active addresses (fill, chart below) have declined from the August high of 10,000 to the current 4,000. XLM currently has the fewest active addresses of all cryptocurrencies in the top 10 market cap, except ADA. Active addresses are important to consider when determining the fundamental value of the network based on Metcalfe’s law.

Over 240 developers have contributed to the XLM project on GitHub, with a cumulative 2,622 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 earlier this year. 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 in the past 24 hours has predominantly been led by Bitcoin (BTC) and Tether (USDT). There is also a high percentage of Korean Won (KRW) volume compared to most pairs. The majority of trading has occurred on Binance, Upbit, Poloniex.

XLM has also had several exchange-related announcements over the past few weeks. On September 19th, OKCoin listed three new trading pairs; XLM/USD, XLM/BTC, and XLM/ETH. On September 21st, XLM was added to the Circle Invest platform. On September 28th, Stellar released StellarX, a third-party client built on top of Stellar’s open marketplace. StellarX hold no custody of any assets, but the client is also not a DEX, and there are no fees. The platform also includes a fiat on-ramp through ACH transactions from a U.S. bank account. On October 5th, the custodian BitGo added XLM to their platform. Coinbase is also potentially adding XLM to their platform in the near future.

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. However, the terms "stellar lumens price" and "stellar lumens news" have seen an uptick in searches recently, likely due to the XLM airdrop. 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

The XLM price has been bound by a tightening range since the beginning of the year with recent signs of price expansion. The beginning of a new trend or potential price action can be mapped using exponential moving averages (EMAs), chart patterns, and Ichimoku Cloud. 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, which was 147 days ago. Price has remained in the same range since that cross. The 50/200 EMAs have begun to curve upward, and will likely cross bullishly in the next few day, which would be a long entry signal. There are no active RSI divergences, although a bearish RSI divergence is likely playing out now after a higher high on less momentum.

The XLM spot price has also formed a multi-month bullish continuation pattern, known as a pennant, with a descending volume profile. This pattern forms when price makes a series of lower highs and higher lows. All triangle shaped chart patterns typically break when at least two-thirds completed, as was the case in this example. The pattern carries a measured move and 1.618 fib extension to US$1 and above, which would push the coin to near all time highs.

Turning to the Ichimoku Cloud, four metrics are used to determine if a trend exists; the current price 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 bullish; price is above the Cloud, the Cloud is newly bullish, the TK cross is bullish, and the Lagging Span is in the Cloud and slightly above price. A traditional long entry triggered on November 6th with a bullish Kumo breakout. However, these previous breakouts in April, July, and September failed to gather bullish momentum, which may be because price remained bound by the multi-month pennant.

The status of the current Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are neutral: the price has re-entered the Cloud today, the Cloud is bearish, the TK cross is newly bullish, and the Lagging Span is in Cloud and slightly above price.

Again, a long entry signal will not trigger until price remains above the Cloud. A previous Kumo breakout in July also reversed on a bearish RSI divergence. When the Cloud signals are not clear, or giving mixed signals, waiting for all signals to turn bullish carries the least amount of risk for a long trade. In this case, waiting price to be above Cloud with a bullish Cloud will be the most conservative entry. The Cloud itself has not been bullish since April 3rd.

Lastly, on the XLM/BTC pair, the daily chart is very similar to the analysis above for the XLM/USD pair. The 50/200 EMAs have been bullishly crossed since September 21st. Price also broke above the multi-month bullish pennant in late September and has remain above the previous diagonal resistance. All the Cloud signals turned bullish on November 6th. Together, this indicates strong confluence for a long entry.

Conclusion

Network metrics for daily active users and transactions remain higher than they have been for most of XLM’s existence. Based on the XLM projects in the works, the network appears to want to compete with Ripple in the remittance realm, and Ethereum in the ICO and security token realm. XLM’s strength as a network are it’s low transaction fees, which have been rising since mid-2017, but are still lower than every project with a top 10 market cap except Ripple. The low transactional cost makes the platform more attractive than it’s peers for ICOs, dApps, and general value transfer.

Technicals based on trend indicators and a multi-month price consolidation suggest a nascent bull trend on both the XLM/USD and XLM/BTC pair. Targets for both pairs suggest a re-test of the previous all time high at US$0.94 and 6200 sats. A Coinbase listing will likely come before the end of the year, which will both propel price in the short term, and then drop price shortly thereafter. The blockchain.com 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.