The Stellar Foundation, blockchain for Lumen tokens, announced the completion of a 50% token burn of their total supply. Designed to provide more efficiency in the Stellar ecosystem, the destruction of 55 Billion XLM tokens has been met with opposing views. On the positive side of things, the token gained 25% after the announcement, and bullish sentiment is shown through the weekly chart which indicates a full retrace since an all time high of $1.10. In retrospect, the current level has held fairly steady over the last couple of weeks as support trends upward.
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Let’s not celebrate quite yet. XLM is still in a 23-month downturn since it’s all time high so, in order to conclude that XLM is moving out of its downtrend, Lumens need to break the 23-month downtrend to the upside and cross the highs and higher lows.
If the altcoin crosses $1.10 then we can conclude that the situation is fundamentally beginning to shift, which can be observed on the smaller time frames. As the altcoin surged, the daily candle printed an all-time high volume candle on some exchanges like Bitfinex. This caused the price to break through an important resistance at $0.07 whereby the price immediately pushed further into the range-high at $0.09.
In order to have a sustainable continuation on the upward trend, a retest should occur at the $0.073 area in order to confirm the support/resistance flip of this zone. The price has moved above the $0.07 zone. To be able to sustain upward momentum, a clear support flip of the green zone around $0.07 is needed for a trend shift towards the range high.
The high point in the range is at $0.13 and there may be a rally from the current rate of $0.08 to $0.12 and the downward trend will be breached completely for the first time in months. The coin has completely traced its price action on the weekly chart and this has been observed in the XLM/BTC chart.
During the 2017 price rally, there were price hikes above 800 Satoshis. Since the peak of January 2018, the trend has been down for the XLM/BTC pair which finally retraced to a support level around 0.00000550. This area was previously a resistance and marked a bottom during the last few months.
The daily chart suggests that Stellar may have hit the bottom.
Quite often bullish divergences mark a bottom on a certain asset in the same bearish divergences can be indicators of price tops. From July to September 2019 a few bullish divergences were observed. This also marked the bottom during previous cycle lows in July and September of 2017.
After the bullish divergence and falling wedge construction was confirmed, the price made a comeback with an increase of 2200%. XLM’s strength hasn’t been tested during this divergence but the similarities are the bullish divergences and falling wedge pattern.
The first resistance on the weekly time frame can be found near the 1500 Satoshis area, with resistance near $0.13 with a range that can be defined around a 900 satoshis resistance area even as constant higher lows are constructed since the beginning of September.
The current price action has pushed XLM to the range highs, however, it was not able to break through the upside. On the smaller time frames, a bullish trend was formed before the breakout. XLM may not be able to cross the upper resistance before a clear breakout is likely to occur.
The first strong support area is around 820 satoshis. If XLM is able to hold that level for support and move toward the resistance again, it’s likely to see a breakout to the upside with potential resistance zones between 1230-1250 levels. But, if XLM is not able to break through and falls below the 810-815 satoshis range, it’s likely to retest the 750 satoshis, potentially down to the 700 satoshis area again.
This scenario is less likely due to the bullish structure created on the higher time frames. Within the cryptocurrency market, groups of coins like XLM and XRP tend to move together, and given that XLM is showing potential bottoming signals, traders are keeping an eye on XRP as well.
Interestingly, the technical and fundamental analysis are aligning for potential movement. Who really knows how the market will respond after the Stellar Conference? Any news could signal movement in the market and prompt more volatility, giving XRP a potential avenue for a breakout. From a technical perspective, XRP/USDT is at an important horizontal resistance level. Clearing this area opens the door to a rally up to $0.36.
The Theory Behind Crypto Burns
The general theory surrounding cryptocurrency burns is that they are enormously effective at increasing value in the short term because it restricts the supply of the altcoin, which then positively impacts the price. In essence, we’re fudging with the basic laws of supply and demand.
According to Litecoin Foundation’s blog post, its community collectively decided that the XLM allocation was too large.
“SDF can be leaner and do the work it was created to do using fewer Lumen. So we’ve decided to reduce our Lumen allocations.”
In addition to making the ecosystem more efficient, the Foundation believes that this massive token burn will promote healthy trading, and people will develop further use cases for Lumen, plus gain marketing support, and a greater appreciation for rolling out new products.
Vocal Bitcoin maximalist and co-founder of coinmetrics.io, Nic Carter, was quick to point out the disappointing XLM surge. He said this was “solid evidence” against the “burns are deflationary” concept.
He went on to point out that unlike Bitcoin, Stellar Lumens is centralized, which means the broad community has no say in the token burn or the project’s direction. Some have even concluded that if a centralized authority can burn that many tokens, they could certain create new ones.
Carter’s comment sparked a debate on crypto Twitter with people like Elizabeth Stark of the Lightning Network joining in to make fun of the valuation. Other people called the token burn a stunt and a fairly large amount of crypto enthusiasts felt like this could be real trouble for the project.
For one, cryptocurrency exchanges could start treating XLM as a security and possibly delist Stellar Lumens because SDF showed excessive control over the blockchain asset when they cut down its supply from 105 Billion to 50 Billion. This move also comes almost a year after the New York Department of Financial Services (NYDFS) allowed a local exchange, itBit, to list XLM. While the department did not issue any statement regarding the cryptocurrency’s original category, its move indicated that it considered XLM a security token.
Instances such as these also prompted other US exchanges to list XLM pairs on their trading platforms. San Francisco-based Coinbase started offering XLM trading services from March 2019 all across the US, with the exception of New York City. However, in September 2019, the firm obtained permission from the NYDFS to cater to New York residents for XLM trading.
Crypto exchanges are comfortable with listing XLM due to its nonprofit backing. SDF never behaved as an organization that was out to sell XLM for profit. In September, for instance, SDF announced a massive giveaway of $124 Million worth of XLM tokens to Keybase – a group messaging, community and file transfer hub. In contrast, Stellar’s closest rival, Ripple, has been selling off its XRP holdings worth hundreds of millions of dollars to boost its adoption.
Ripple continues to be in a legal battle with its early investors, attempting to prove that XRP is a token and not a security. With the community’s backing and adoption by exchanges and the government as a security, XLM has created a place for itself in the new economy.
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