What differentiates Stellar Lumens (CCC:XLM-USD) from other cryptocurrencies is its simplicity. That’s both good news and bad news.
The good news is that the case for the Stellar Lumens network and the underlying Lumen token is relatively simple. As the foundation behind the platform puts it, Stellar Lumens “makes money borderless.”
The bad news is that, particularly for ardent cryptocurrency bulls, that mission isn’t quite enough. In some adherents’ eyes, the point of Bitcoin (CCC:BTC-USD) or other ‘altcoins’ is to replace fiat money.
Much like Ripple (CCC:XRP-USD), Stellar Lumens is an evolution, not a revolution. That’s not coincidental; the two coins share the same co-founder.
The question for XLM going forward, particularly after ~200% gains year-to-date, is whether an evolution is enough.
Understanding Stellar Lumens
At its heart, the Stellar Lumens network aims to make cross-border payments frictionless. It’s a similar proposition to that of Ripple, in fact. But while Ripple focuses on banks, Stellar generally (though not exclusively) targets individuals and small businesses.
On the Stellar platform, an entity can issue financial tokens backed by fiat currencies. Via Stellar, a buyer can then exchange, say, dollars for Mexican pesos. Stellar’s low costs (transaction fees are low) and speed make this potentially a more attractive process.
Obviously, on Stellar the buyer is exchanging a dollar token for a peso token, but the end result is the same. In theory, the platform can be used for remittances to foreign countries, cross-border payments, and other applications.
At least as far as Stellar goes, processing times should be far faster: the platform claims “near instant transaction times,” while banks might require several business days.
There’s another angle: micropayments. Again, traditional banks require fees that are significantly higher. The likes of Visa (NYSE:V) and Mastercard (NYSE:MA) charge a per-transaction fee. Even though those fees often are only a few cents, they can take up a chunk of revenue garnered from, say, selling access to a single online article for 99 cents.
Stellar can get around that problem, too, and the platform highlights a firm named SatoshiPay (an ode to the pseudonymous Bitcoin founder) which is trying to do precisely that.
It’s an intriguing offering with a number of potential use cases. The optimism toward Lumens thus does make some sense.
What Goes Wrong
But there are concerns.
The first for crypto bulls is the fact that, like Ripple, Stellar is centralized. The blockchain underlying Stellar Lumens is controlled by a nonprofit organization, the Stellar Development Foundation.
If the SDF goes bust for whatever reason, Stellar Lumens goes with it. That’s not the case for Bitcoin, Ethereum, or many other altcoins.
This becomes a bigger issue on a platform designed to host stablecoins. A stablecoin, after all, is only as good as the issuer. This was made clear in the scandal over Tether and exchange Bitfinex, which resulted in a lawsuit that was settled last month.
At the end of the day, Stellar Lumens has to have trust in the central authority, but that very problem is what many cryptocurrencies are trying to fix. The point in their eyes is to get around the gatekeepers, not create new ones.
Whether that argument is correct (and I personally have some doubts), it’s still a problem. It’s difficult for a coin to gain adoption if the biggest crypto bulls, not to mention developers, retain skepticism toward the structure.
The second concern is the U.S. Securities and Exchange Commission lawsuit against Ripple. The SEC charged Ripple with executing an unregistered securities offering. Some fear that Stellar Lumens might well be next. Indeed, the price of Lumens fell sharply along with XRP when the lawsuit was announced in December, before recovering over the first two and a half months of 2021.
The Price Problem
Then, of course, there’s the price problem. How, exactly, should a cryptocurrency be valued?
It’s seemingly an impossible question. Even the use of market capitalization — the number of tokens in existence times the price — seems potentially unhelpful. What, for instance, is the market capitalization of the U.S. dollar? It depends dramatically on which base an investor uses.
All that said, Stellar’s price doesn’t necessarily seem cheap. There are almost 20 billion lumens available, with a total supply capped at 50 billion lumens. The latter figure (which seems appropriate, given that those lumens will be granted over time) suggests a market capitalization of about $20 billion.
Given relatively thin adoption so far, that figure feels a bit high. And while “feels” isn’t necessarily a word often used in fundamental analysis, it’s about the best we can do with cryptos.
Stellar has talked up customers like IBM (NYSE:IBM), but that company’s effort was just a pilot project which does not appear to have moved forward. Stellar is an intriguing idea, but so far there’s not much to it.
The 200% or so rally year-to-date doesn’t necessarily help either. The environment for Stellar Lumens hasn’t changed all that much, if at all. Perhaps Bitcoin’s quickly-rising tide will lift all boats, but a roughly $13 billion increase in market cap seems to price in some level of optimism.
At the least, there doesn’t seem much need to rush in, particularly with the SEC still a threat. Stellar can work, certainly. That doesn’t mean it will. More evidence of potential success would be a big help at this point.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.