What is happening with Stellar Lumens (XLM)?

What is happening with Stellar Lumens (XLM)?

By raven | Investment | 9 Nov 2019


In my last post I made a very optimistic prediction for XLM future prices. I hope you guys followed the "this is not financial advice" part, because so far this has been a bad trade. I bought some XLM after the big spike (when SDF announced they burned half the XLM supply), and since then the price has only fallen. It was risky but calculated move.

Just a quick recap: on November 4th the Stellar Development Foundation (SDF) announced that they had burned 55 billion XLM (out of the existing 105 billion). In less than 2 hours the price went up 28.9% against the USD -- from 0.07 USD to 0.09 USD. Nothing surprising, right? Half the supply, double the price. What is surprising is that from then on, the price has been in steady decline, going as low as 2.75% less than the initial 0.07 USD, to 0.068 USD. What on earth is happening here?

351665157-dc08459be7160aa4f5a5d40a00a81bfd4ceb6342043940431264e2e106b54dc6.png
XLM hourly chart for the last few days

How can we understand why the market has not received well the token burn news? Imagine what would happen if some "whale" holding 9 million BTC (half the current supply) just decided to burn them (send to an address without known private keys). The price would skyrocket, there should be no doubt about it. Or, if some company just decides to reorganize its shares, let's say from 1 million shares to 500 thousand shares. It is clear that the share price should double. Whatever value the market gives to the total shares, it should be preserved whether you double or half the supply of shares. But that is not what happened with XLM.

In economics there is a thing called the Efficient Market Hypothesis (EMH) that states that:

Asset prices reflect all available information.

What is important about this hypothesis, and that some people have discussed also in the context of Bitcoin halving, is that if you know something will happen in the future, the current price should already reflect that. For example, let's say you have a house that is normally worth 100,000 USD, and you want to sell it. If it happens to be the case that the government has announced that in 2 years it will buy any property in that area for double the current market value -- say they want to build some kind of public structure -- it would be very irrational of you to sell the house by 100,000 USD, since in 2 years it will be worth 200,000 USD. So that should be already included in the price. Of course there is inflation, and present money usually is worth more than future money, so maybe you could sell it by 190,000 USD or something like that, but 100k? No way.

So back to the cryptocurrency discussion, it is a weird thing, according to the EMH, that the price of BTC soars after the halving. Didn't people know of that already in advance? Don't we know that the final supply is 21 million anyway? Why care about halving? The same thing applies to XLM here. Indeed, the only viable explanation for the very apathic reaction of the market to the halving of XLM supply is that, in fact, the total supply has been cut in half but the circulating supply is the same. So what? It is as if people don't fully believe that the total supply will eventually be reached, or that it could be increased past 50 billion eventually, if SDF so decides. Which would be a valid fear, actually. Maybe what is depressing XLM price is the lack of decentralization, the concentration of power in the hands of SDF. It might be.

All in all, the market reacted somehow to the news of supply halving, but the price has now corrected and sits around the same value previous to the halving. It is as if the halving event triggered people to re-evaluate XLM, and they came to the conclusion that it was highly overvalued. I think that is a very weird -- and interesting -- phenomenon, and for some reason I haven't seen much discussion about it. What are your thoughts about it?

But, I don't care much for short term price fluctuations anyway, so I still hope to see the market getting back to its sense and valuing XLM rationally -- let's say at about 0.10 USD at the very least. Not all hope is lost though:

351665157-6b126c7d6e315091a95a1bb3d77e9edad9e9bfaa6392f454cfaec12d0baab06a.png

XLM/BTC daily chart

In the daily chart against BTC the XLM price seems to be in a medium-term upward trend. But let's see how it develops.


raven
raven

I've heard of bitcoin a long time ago, but only recently I became interested in investment in general, which brought me to the world of cryptocurrencies. I am also interested in learning to develop blockchain applications.


Investment
Investment

In this blog I will talk mainly about cryptocurrencies and other forms of investment. The intention is to share and discuss ideas, so do not take any of this as investment advice.

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