Stellar Price Analysis – Technicals suggest the continuation of an ongoing bull trend

Stellar (XLM) aims to create an open platform for building financial products. Users can write messages to Stellar network’s distributed database (similar to SWIFT and Ripple), use XLM as a medium of exchange, or use the asset to trade other pairs, similar to a decentralized exchange.

The protocol was originally a fork of Ripple (XRP), now with a unique codebase, launched in 2014 by founders Jed McCaleb and Joyce Kim. McCaleb left Ripple Labs in 2013 and is well-known for creating Mt.Gox, the now defunct Bitcoin exchange which he sold to Mark Karpeles, which was initially a Magic: The Gathering trading card exchange.  Kim left Stellar in May 2016 and is currently a managing partner at a US$100 million blockchain fund, SparkChain Capital. He is an attorney with degrees from Cornell University, and Harvard and Columbia Law School.

Initially, 100 billion Stellars (STR) were created, with a fixed inflation rate of 1% per year. In 2015, the name of the native asset changed from Stellar to Lumen. Of the 100 billion lumens created, Stellar intends to give 50% to individuals with an invitation link, 25% to partners to incentivize growth and adoption, 20% to Bitcoin and Ripple holders (one round was completed in October 2016 and another completed in August 2017), while 5% is reserved for Stellar.org operational expenses. The Stellar foundation created LightYear.io to aid with commercialization as well as institutional integration and onboarding on XLM products.

Unable to maintain reliable consensus using the original code, Steller brought on a Harvard and MIT educated computer scientist, David Mazières, as a paid consultant to establish an adjusted consensus algorithm. The Stellar Consensus Protocol (SCP) was adjusted to use a Federated Byzantine Analysis (FBA). Mazières remains on the XLM team as chief scientist.

FBA, similar to solutions related to the Byzantine generals problem, reaches consensus based on the agreement of a large number of individuals or validators. For Ripple, validators are selected by the Ripple foundation and for Stellar, 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.

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

XLM uses a default transaction fee of 0.00001 lumens to prevent spam or Denial of Service attacks, and requires each account to hold a minimum balance of 0.5 lumens. The low transactional overheard has made the platform attractive to ICOs, which have been hit with elevated and fluctuating gas costs when the Ethereum network is under heavy load.

In November 2017, SmartLands, an asset tokenization platform, was the first ICO to launch on XLM. Mobius, a platform for cross-blockchain login, payment, governance, and oracles launched in January. Payment processor Stripe also announced that it would no longer be accepting Bitcoin payments due to rising and fluctuating transactions fees at that time, and also hinted at XLM support in the future.

More recently, mobile messaging app Kik decided to fork the Stellar chain for its Ethereum based ERC20 token, Kin, and benefit from XLM’s low transaction costs and scalability. Keybase and Stellar have also teamed up to develop “strong cryptography to real-world identity.”

XLM has also partnered with IBM in a variety of ways. XLM joined the Hyperledger Fabric, IBM’s private and permissioned distributed ledger technology. IBM also runs nine XLM validators, a Universal Payment Solution on the XLM network, and will soon be releasing a “token lifecycle management product.”

On the network side, XLM has 119 public nodes, 77 of which are currently active. Transactions per day (orange fill below) have maintained an average of 80,000 since mid April compared to XRP which have averaged around 5-10 billion (grey fill below). In this case, transactions for XLM involve a payment and create account type whereas transactions for XRP involve a payment type.

Using an adjusted network value to transactions (NVT) ratio proposed by Kalichkin, XRP yields a much lower NVT than XLM, and has done so for XLM’s entire existence. The 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 relatively lower NVT suggests a coin is underpriced based on its utility.

Source: https://coinmetrics.io

XLM’s total market cap now stands at US$6.5 billion based on an 18.5 billion coin supply with trading volume of US$29.7 million in the past 24 hours. The top 100 addresses currently hold 95% of the XLM money supply.

Exchange traded volume in the past 24 hours is predominantly led by the Bitcoin (BTC) and Korean Won (KRW) pairs. The Tether (USDT), Ethereum (ETH), and U.S. Dollar (USD) pairs share a roughly equivalent percentage of trade volume. The Turkish Lira (TRY) also shows a surprisingly high percentage of the traded volume. The majority of trading has occurred on Binance, UpBit, and BCEX. The coin was recently listed on Bitfinex May 1st, 2018.

Technical Analysis

After breaking out from a price range that has existed since its inception in March 2015, XLM has continued to trend North. The status of this trend can be determined using Exponential Moving Averages (EMA), Pitchfork, Ichimoku Cloud indicator, and Chart Patterns. Further background information on the technical analysis discussed below can be found here.

On the daily chart, XLM has comfortably held a bullish 50/200EMA cross since late September. Price has recently returned to the 200EMA, and the median line (ML) of a Pitchfork with anchor points in May 2016, and May and September 2017 (red). Based on the ML, the current zone almost exactly represents the mean of the trend, with equal upside reward as downside risk. If price maintains on trend, a target of US$1.00 by late September is possible.

Turning to the Ichimoku Cloud, the Cloud uses four metrics 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 in above the Cloud, Cloud is bullish, TK cross is bullish, and the Lagging Span is in Cloud but above price. A long entry at the current zone is known as a Kijun Bounce, which occurs when price returns to the mean. If this zone holds as support, bullish continuation is very likely.

If price breaks both the Kijun and Cloud support, a sell signal or short entry is triggered. The target for this trade would be the bottom edge of the Cloud, ~US$0.22. This trade setup is known as an Edge-to-Edge (E2E) trade.

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

A traditional Cloud long entry signal will not occur until price is above Cloud with volume. The flat Kumos at ~US$0.57 and ~US$0.45 represent 50% retracement levels from the previous trading ranges. Each should act as a magnet for price.

The E2E long trade, which was triggered when price broke Cloud resistance and TK crossed bullishly, remains active with a target of US$0.57-US$0.45. Price has pulled back on an RSI bearish divergence, which suggested waning bullish momentum, and will likely consolidate at the current level before moving higher.

Not all E2E trade setups are created equally. The risk/reward for this E2E initially, based on breaching the Cloud, was not as favorable as other coins. For this reason, traders should be cautious and use capital wisely. Re-entries for this long trade should occur at or near the Kijun with a stop loss below the Cloud support (yellow zone).

The status of the Cloud metrics on the four hour time frame, with doubled settings (20/60/120/30) for more accurate signals, are almost entirely bearish; price is below Cloud, Cloud is bearish, TK cross is bearish, and the Lagging Span is below price and almost below Cloud.

After the tri-star doji close, price experienced a bearish Kumo breakout signaling a sell. Based on this timeframe, a long entry should not be taken until Cloud metrics are bullish. Price is currently near a previous zone of support based on the price history (green box) and has also showing a bullish RSI divergence, suggesting waning bearish momentum.

On the XLM/BTC pair, the two-day chart has formed a multi-month Cup and Handle pattern, which appears to have failed at breaking out near 5,000 satoshis. The pattern yields a 1.618 fib extension of 7,900 satoshis. Additionally, there is potential for a Cup and Handle on lower time frames which yields target resistance above the all time high.

The status of the Cloud metrics on the daily time frame, with doubled settings (20/60/120/30) for more accurate signals, remain bullish; price is above Cloud, Cloud is bearish but should flip bullish within the next few days, TK cross is bullish, and the Lagging Span is bullish but will enter price soon. An optimal long entry would occur near the Kijun, around 3,500 satoshis.

Conclusion

Much like XRP, it is difficult to distinguish or understand how the value of the XLM token will increase based on adoption and usage. Aside from retail speculation, use cases for XLM essentially involve holding the token temporarily as a go-between. Based on the fee-structure, XLM is an attractive platform to use for microtransactions, but therein lies another problem; there is no incentive for nodes to sustain themselves other than the self-serving interest of prolonged network usage. This issue makes it difficult to break the manacles of centralization due to incentivizing proprietary partnerships with node validators, like IBM.

Technicals suggest the continuation of an ongoing bull trend. Many metrics point to price sitting at or near the mean of the trend, meaning buying at the current price zone should be profitable leading into the end of the year. Based on the rate of change in the trend, target’s of at least US$1.00 by end of year seem highly likely.