Stellar Price Analysis – Bucking the trend

Stellar (XLM) is currently down 76% from the record high set on January 3rd. The XLM market cap is the 6th largest among coins tracked by bravenewcoin.com, at US$4.1 billion, with exchange-traded volume of US$57 million in the past 24 hours.

XLM was created in 2014 by founders Jed McCaleb and Joyce Kim. The blockchain uses the Federated Byzantine Agreement (FBA) consensus mechanism, pioneered by Ripple. The mechanism was adjusted to the Stellar Consensus Protocol (SCP) by David Mazières after the chain was unable to maintain reliable consensus. The XLM network currently has 203 public nodes.

FBA, similar to solutions related to the Byzantine generals problem, 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.

100 billion XLM were created by the genesis block in 2014, and there is a fixed 1% yearly inflation rate. According to the Stellar Dashboard, there are currently 104.24 billion XLM in existence, 8.14 billion XLM have been distributed as airdrops or to promote partnerships and user growth. Of the current total supply, 18.77 billion XLM tokens are not held by the Stellar Development Foundation is.

The coins created to satisfy the yearly inflation 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 tokens.

The low transactional overheard has made the platform attractive for remittances. The project team has announced partnerships with Tempo, ICOs like Smartlands and Mobius, the Stellar DEX, Hyperledger and a new stable coin called Stronghold.

Unlike most other cryptocurrencies and assets, daily active addresses on the XLM network recently made a record high. According to Metcalfe’s Law, the value of a network is proportional to the square of the number of connected users of the system. An uptick in active addresses, which can be used as an adoption metric, should be seen as a leading indicator of bullish price action.

Daily transaction volume (red fill) has continued in an increasing trend since January 2017, reaching an all time high in January 2018. The 30-day Kalichkin network value to transactions (NVT) ratio (red line) has been decreasing over the past few months. NVT ratio can be used to assess the network’s relative utility over time, although NVT is difficult to compare between coins which use different transaction types. A decreasing NVT should be considered a leading bullish indicator of price because it signifies increasing on-chain economic activity.

The Stellar project on GitHub has had a cumulative 619 commits over the past year and the network will be migrating to Stellar Core 10.0.0 in the next 4-6 weeks. Most coins use the developer community of GitHub, where files are saved in folders called “repositories” or "repos," and changes to these files are recorded with “commits.” Although commits represent quantity and not necessarily quality, a higher number of commits can signify higher dev activity.

Exchange traded volume during the past 24 hours has been predominantly led by the Bitcoin (BTC), Tether (USDT) pairs. Korean Won (KRW) also holds a significant share of volume. The majority of trading has occurred on Binance, Poloniex, OKEx, and Kraken. Coinbase is potentially adding XLM to their platform in the near future. XLM was also recently granted Islamic finance certification under Sharia law, paving the way for entrants in the Middle East and Asia.

Technical analysis

XLM has traded in a tighter and tighter range since January, without making lower lows like most of its counterparts. As the trading range decreases, a clear decision on the potential direction of the new trend is important. A bias in trend direction or the start of a new trend can be determined using chart patterns, exponential moving averages (EMAs), and Ichimoku Cloud. Further background information on the technical indicators discussed below can be found here.

On the two day chart, price structure has 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 is currently the case. The pattern carries a measured move and 1.618 fib extension to US$1, which would push the coin to near all time highs. The 50/200EMAs have also gone flat and are nearly completely converged, signifying a recharge of momentum for the next move up.

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 bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and Lagging Span is in Cloud and below price. A traditional long entry will not trigger until price is above the Cloud. If bullish momentum exists, price will likely move through the Kumo twist on September 6th, an area where Cloud resistance is negligible.

The status of the Cloud metrics on the daily time frame with doubled settings (20/60/120/30) for more accurate signals are also bearish; price is below Cloud, the Cloud is bearish, the TK cross is bearish, and the Lagging Span is below the Cloud and below price. Again, a traditional long entry will not trigger until price is above the Cloud. Both the Kijun at US$0.265 and Kumo at US$0.32 represent strong resistance levels until a Kumo breakout occurs.

On the XLM/BTC pair, there is also a multi-month bullish pennant with a descending volume profile (not shown). This pattern yields a measured move and 1.618 fib extension of 8000-8600 sats respectively, and is set to move by October 23rd at the latest. A large increase in volume will likely be the deciding factor for a break of either the support or resistance.

Conclusion

Both the growth in users and increasing economic activity suggests a trend of new entrants using the Stellar blockchain. This is in stark contrast to most other coins in the market. XLM also appears on the cusp of a Coinbase listing, and is working closely with several prominent partners. Unfortunately, the large concentration of coins in a limited number of wallets make it difficult to ascertain how and when the supply will be distributed to the market, although the Stellar mandate gives a direction for how and when those coins will be distributed.

Technicals suggest a pending bullish break of both the Stellar/USD and Stellar/BTC pairs. The most aggressive entry would occur at the bottom of the range, at support, with the most conservative entry after the range resistance is broken. If the range is broken, look to the Cloud indication of a new trend.