Stellar Lumens Is Not a Traditional Crypto Which is Why It May Take Hold

A few weeks ago, I had an opportunity to write about Ripple (CCC:XRP). And the insights I drew from that article will come in handy as I write about Stellar Lumens (CCC:XLM). Both companies are using the efficiency and security of cryptocurrency tokens to facilitate the movement of money, particularly across borders.

Before I get too far ahead of myself, I realize some of you may be unfamiliar with Stellar Lumens. It is is a not-for-profit company that is designed to be a universal open-source system for digital money. Currently the company has approximately 4.3 million accounts.

The Lumen is Stellar’s cryptocurrency. And the company requires that every account hold a modest number of Lumens at all times. This is partially to cover the small fee that is charged on every transaction. At the time of this writing, XLM is the 10th largest cryptocurrency by market capitalization, at $7.1 billion, according to CoinMarketCap.com.

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A Fintech For Cryptocurrency

The primary benefit of financial technology (fintech) companies such as PayPal (NASDAQ:PYPL) is that they allow individuals to move money easily — and in real time — to other individuals. As our society becomes ever more cashless, these companies become ever more essential. This is particularly true for the unbanked. And this is where I take this analogy into the cryptocurrency world.

Currently Stellar and Ripple are the two main players in this space. The argument for buying XLM is similar to the case for Ripple. The two companies act as peer-to-peer lenders for moving money across borders. One of the largest differences is that Ripple caters more to banking institutions and Stellar targets the unbanked.

But in many ways, the two companies serve the same purpose. That is, they are trying to make it easier for people to use the speed and security of digital tokens to facilitate the movement of hard assets, including fiat currency across borders.

Stellar is not a proof of work (PoW) coin like Bitcoin. Instead of using miners, transactions are settled within 2-5 seconds through a method known as consensus. Instead of using miners to validate the transaction, the consensus method uses a series of servers that sync with each other for verification.

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Lumen Has Strong Bitcoin Correlation

Despite not being a PoW coin, XLM has a strong price correlation to Bitcoin. According to website Coin Predictor, the correlation coefficient of the two cryptos is 0.55. The correlation coefficient ranges between 1 to -1. A positive number indicates that the two currencies will move in the same direction, although not necessarily at the same rate.

Of course, the opposite is true as well. When Bitcoin drops, as it’s prone to do, investors can expect the price of a Lumen to drop.

In the last month, investors have gotten a taste of the Lumen’s volatility. On Jan. 1, 1 lumen was valued at 13 cents. By Jan. 6, it was up to 44 cents. As of this writing, 1 lumen is just over 31 cents.

Should You Invest In Stellar Lumens?

I concluded my article with Ripple feeling that the company excited me more than the coin. With Stellar Lumens, the coin is interesting, but by many accounts, it will have an ultimate value. The Lumen is not a proof-of-work coin like Bitcoin (i.e., it’s not mined). The currency already exists and according to the company there are now only about 50 billion lumens in existence and no more will be created.

That scarcity alone should drive up the value over time, particularly since the demand for Stellar’s platform is likely to increase. And that means that buying some XLM and holding it in your digital wallet may turn out to be a solid investment even if the Lumen will at best always be a fraction of the price of Bitcoin.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.