How to trade stellar (lumens)

What is stellar?

Stellar is an open-source, decentralised payment technology, which aims to provide a bridge between users and financial institutions. The network was founded in 2014 by Jed McCaleb – the co-founder of RippleNet – as a non-profit organisation called the Stellar Development Foundation. The Stellar protocol aims to provide financial services to those who previously had no access to banking.

Transactions on the stellar network are facilitated by the native cryptocurrency, lumens or XLM, which acts as the bridging mechanism between fiat currencies. The tokens are often referred to as ‘stellar’, in lowercase, while the name of the network or organisation is capitalised.

How does stellar work?

Stellar works as a peer-to-peer network that enables the transfer of digital and fiat currencies, as well as facilitating cross-border transactions.

These transactions are not always directly between two participants, as there can be chain of currency conversions. For example, a transaction from euros (EUR) to US dollars (USD) could involve transactions from EUR to bitcoin (BTC), BTC to XLM and then XLM to USD.

What is the stellar ledger?

The stellar ledger is a representation of the entire network at any given point in time. Like a traditional ledger, the stellar ledger holds a list of all of the balances and exchanges of every account on the network.

As the network is decentralised, there is no need for a third party or middleman. Instead, each transaction that occurs on stellar’s network needs to be verified by the network’s participants – known as nodes – before it is recorded onto the public ledger.

The ledger is not hosted on a single server but is recorded on any server that runs the Stellar software. The servers sync and validate the ledger through a process known as consensus.

What is consensus in blockchain?

Consensus is a mechanism through which a blockchain system validates transactions. In traditional centralised systems, a single administrator will maintain the database, but through consensus, multiple Stellar network nodes communicate and validate exchanges together – decentralising the process of record keeping.

Let’s say that you want to transfer five XLM to another party. The majority of nodes will have to agree that you have five XLM worth of credit on the network before the transaction can take place. Once there is consensus, the monetary exchange can be recorded on to the ledger.

This entire process occurs approximately every two to five seconds on the network.

What is an anchor?

An anchor is an entity that people trust to hold their funds and issue credits into the stellar network. They are essentially the connection between the different currencies and the network itself – all transactions (except those that are carried out in lumens) occur in the form of credit issued by an anchor.

If you wanted to make a transaction on stellar, you would pay a deposit to an anchor and they would credit your account with the corresponding amount. When you were ready to make a withdrawal, you would simply bring them the credit that they issued you with.

Anchors are not unique to stellar, for example, payment networks like PayPal have worked in the same way for years.

Four steps to trading stellar

1. Decide how you want to trade stellar
2. Develop a trading plan and outline your strategy
3. Create a risk management strategy
4. Open and monitor your first position

Decide how you want to trade stellar

There are two routes to taking advantage of changes to stellar’s value: buying it, or trading on its price movements.

When you buy stellar, you would pay the full value of XLM upfront, in the expectation that it will increase in price and you can profit from the market movement. You would buy stellar through a cryptocurrency exchange, which can be a lengthy process as you may have to join a waiting list in order to open an exchange account.

When you trade on stellar’s price, you do not take ownership of the underlying coin, but speculate on its price instead. You can do so by using a leveraged trading account. This means that you only need to put down a small deposit – known as a margin – in order to receive full market exposure. Although leverage can magnify your profits, it can also magnify your losses, so it is important to be aware of the risks involved.

The most common leveraged products are CFDs. As derivative products, both enable you to speculate on stellar whichever direction it is moving in – if the market is rising, you would take a long position, and if it is falling you would take a short position.

A CFD or contracts for difference, is an agreement to exchange the difference in the price of stellar from when the position is opened to when it is closed. Your profit or loss depends on whether your prediction of the market movement was correct.

Learn more about CFD trading

Develop a trading plan and outline your strategy

Before you start to trade stellar, it is important to outline a trading plan that will help you to maximise your profits and minimise your losses. Your trading plan should always be unique to you, but on the whole a good trading plan will include:

• Goals. Your plan should outline exactly what you are hoping to get out of trading. This should look at daily, weekly and monthly targets
• Markets. Whether you will just be focusing on trading stellar, or looking at a range of other markets, your plan should include the list of assets you are interested in or comfortable trading
• Risk. It is important to outline a risk profile for yourself, including how much capital you have available to you and what your risk-to-reward ratio is – this is how much you would need to profit to justify the risk

At this point, it is also important to start thinking about what kind of trading strategy you will employ – this will outline a methodology for establishing market entry and exit points. This would be determined by how much time you want to dedicate to the markets and what style of trading you favour, whether this is day trading, scalping, swing trading or position trading.

Create a risk management strategy

Trading stellar does come with risk, especially if you decide to trade using leverage. This makes it important to create a strategy that will help you to manage your risk and protect your trades.

You can mitigate the risk of trading cryptocurrencies by attaching stops and limits to your position. A stop enables you to set a level that your trade will close at if the market moves against you, while a limit sets a level at which your trade will close so that you realise your profits.

Open and monitor your first position

Once you have established how you are going to trade stellar, it’s time to open your first position.

When you trade stellar, rather than buying it through an exchange, you have the opportunity to take advantage of markets that are rising as well as falling. You can do this by opening a position to ‘buy’ stellar if you think it is going to increase in price, or a position to ‘sell’ stellar if you think it is due to decline. Your decisions about which position to open should depend on the research and analysis you have performed, and the strategy you have in place.

After you have opened your position – attaching the appropriate stops and limits – it is important to monitor your position’s progress and to keep up to date with anything that could impact the price of stellar.

What moves the price of stellar?

Like most financial markets, the price of stellar is determined by the dynamics of supply and demand. But as it is decentralised, stellar is free from many of the economic and political concerns that impact fiat currency systems.

Some of the key factors that influence the price of stellar or lumens are:

1. XLM supply
2. Public perception
3. Mainstream adoption
4. Other cryptocurrencies

XLM supply

When stellar was first created, 100 billion lumens were mined. As of 6 February 2019, this number had reached 104,702,508,191 XLM. There is no maximum supply of lumens, instead there is fixed inflation of 1% every year.

Bitcoin’s price is influenced by its finite supply of 21 million coins – its scarcity makes it rare and people attribute a value to that. As there are so many more lumens in circulation, the price of a lumen has remained far lower than that of a bitcoin.

Public perception

Negative headlines about the Stellar Development Foundation, lumens or about cryptocurrencies in general, could play out across the market. The price of XLM is dependent upon how many people use it, so it will be impacted by favourable and unfavourable news.

You can keep an eye on key cryptocurrency events and announcements with our news and trade ideas.

Mainstream adoption

The future value of stellar is highly dependent on the adoption and success of the Stellar network’s technology. The stellar network has already found more mainstream uses than most other blockchain networks, and its strategic alliance with IBM Corp could see it become more widely integrated with public services – as IBM already has partnerships with a large majority of world banks.

The more the stellar protocol and XLM are used, the more market interest the cryptocurrency will gather, and the more valuable stellar will become.

Other cryptocurrencies

The stellar network and lumen tokens are in direct competition with the ethereum network for hosting initial coin offerings (ICOs) and RippleNet for partnerships with banks and companies.

Stellar (XLM) is still lagging behind both ripple (XRP) and ether (ETH) in terms of market capitalisation but, depending on which coin sees more success in the above areas, we could see a change to the rankings.

Stellar (XLM) trading summed up

Trading cryptocurrencies can be complex and requires a lot of planning. Here are some key points to bear in mind before you trade stellar:

• Stellar (XLM) is the native cryptocurrency of the Stellar network – a non-profit organisation seeking to provide financial services to individuals who were previously unbanked
• The stellar network facilitates transactions across borders in multiple currencies, both fiat and digital
• Stellar network transactions are decentralised. They are recorded in a public ledger through a method known as consensus
• Before you take a position on stellar, you should take time to decide whether you want to buy or trade the cryptocurrency and build a trading plan
• When you trade stellar, you can manage your risk by attaching stops and limits to your position
• Key factors such as XLM supply, public perception, mainstream adoption and the popularity of other cryptocurrencies can impact the price of stellar

¹ CoinMarketCap, 2019