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Is the Stellar Lumen a Good Crypto Investment?

By Colin Dodds · April 09, 2021 · 5 minute read

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Is the Stellar Lumen a Good Crypto Investment?

As a key component in Stellar’s global payment system, the Lumen (XLM) has attracted increasing attention since it came out in 2014. Lumen has seen major growth since its inception, and its recent gains have attracted fresh attention from investors.

Here’s what you need to know about this blockchain-based cryptocurrency, and whether to invest in it.

What are Stellar Lumens?

Lumen is a cryptocurrency that trades on the open-source, decentralized payment protocol Stellar network. The Stellar network was built to help users large and small send money and assets around the globe. As such, Stellar has positioned itself as a fast, global exchange network that can host thousands of trades between a wide array of traditional, government-issues currencies and a host of blockchain-based tokens and coins per second.

Currently, investors who want to exchange cryptocurrency tokens for established currencies can run into a lengthy and expensive process. Stellar pitches itself as a way to make those trades faster and cheaper, using Lumens to pay transaction fees and maintain investor accounts within the Stellar network.

There are roughly 22.1 billion Lumen coins in circulation, with a maximum supply of 50 billion. As of late January 2020, it had a market capitalization of more than $6 billion.

How Lumens Work

Like most cryptocurrencies, Lumens use a blockchain-based technology, and so the transactions on the Stellar network go into a shared, distributed, public ledger, which can be accessed by anyone around the globe. That public ledger is essential for anyone trying to buy or sell a token, and requires consensus on the ledger about the ownership and value of the tokens in order to function.

Consensus within that shared public ledger is where Stellar differs from many other forms of cryptocurrency, such as Bitcoin. Bitcoin uses what’s probably the most popular way to reach consensus on a blockchain, called proof-of-work (PoW). In PoW, a single market participant announces their conclusion about the information that’s been submitted in a blockchain, which all other participants can then verify. This process protects against false conclusions, while rewarding participants who verify the true information with newly mined bitcoins.

But the Stellar network takes a different approach, by distributing the consensus function to mini-networks. Each Stellar network participant chooses other participants whose consensus they agree with. And the consensus of each mini-network will function as valid for the overall Stellar network, as long as the conclusions of mini-networks overlap.

By relying on mini-networks rather than mining, Stellar’s consensus method is designed to offer faster and less-expensive transactions between Lumens and any other crypto or traditional currency. Stellar didn’t invent the process, but adapted an open-source version of it from Ripple.

How to Buy Stellar Lumens

For those still learning the basics of crypto investing, Lumens may not be as familiar as Bitcoin, Ethereum, and other cryptocurrencies. But investors who want to buy Stellar Lumens have a wide range of options.

The coins themselves are available for purchase on every major cryptocurrency exchange, including Coinbase, Kraken, Bittrex, Coincheck and more. Investors can also buy Lumens on Stellar’s own free peer-to-peer trading network StellarX. And investors without a crypto wallet can buy crypto through an exchange-traded-fund (ETF) that invests in cryptocurrencies, including Lumens.

Recommended: Understanding the Different Types of Cryptocurrencies

Stellar Lumens Price

As of this writing in early April 2021, the price of Stellar Lumens was $0.50. It experienced an all-time high of $0.87 in early 2018.

History of Stellar Crypto

Stellar and Lumens came into being in 2014, when Ripple co-founder Jed McCaleb launched the new network in collaboration with Stripe CEO Patrick Collison. Ripple is also a blockchain-based network, with its own currency, called XRP, which had a market cap of just over $12 billion as of late January.

Stellar quickly gained traction. By August of 2014, the first Brazilian bitcoin exchange, Mercado Bitcoin, selected the Stellar network for its transactions. And by the beginning of 2015, roughly 3 million user accounts operated on the Stellar network, and the market cap of the Lumen was almost $15 million at the time.

A year later, Stellar entered into a partnership with global consultancy Deloitte to develop a new payments app. And in 2017, Stellar made headlines when it partnered with IBM to establish “currency corridors” in the South Pacific. Its goal was to process up to 60 percent of the cross-border payments between countries including Australia, Fiji, and Tonga.

The connections between Stellar’s Lumen and Ripple’s XRP may prove more important than just having the same co-founder. In many ways, the two are competitors. They use similar technology and offer similar advantages, when it comes to allowing quick and inexpensive transfers of funds. The difference at the moment is that Ripple’s XRP are targeted at large financial institutions, while Stellar is also intended for individual users—especially populations around the globe without easy access to banks.

Is Stellar Crypto a Good Investment?

For investors in Lumen, the developing legal situation with XRP may be worth watching. In late 2020, the Securities and Exchange Commission sued Ripple for not registering XRP coins as securities. The regulator claims that because Ripple owns the majority of the existing 100 billion XRP coins, and sells some each quarter, they fall under securities laws.

Whether Stellar and the Lumen will benefit from that development, or face similar challenges, remains to be seen.

When investing in crypto, most seasoned investors stress caution. While there are regular headlines about one form of crypto or another reaching record heights, many other forms have fallen to zero, and many estimates list more than 1,000 cryptocurrencies that have become “dead coins.”

Some failed cryptos were scams, but others simply failed to catch on. At the same time, the entire cryptocurrency asset class faces other risks, such as hacks and the possibility of large-scale crackdown by crypto regulators. And as with any investment, investors should be mindful of the impact of paying crypto taxes on their returns.

Lumen is one of the more larger cryptocurrencies. As of late January 2020, it was the 11th-largest crypto with a market capitalization of more than $6 billion, according to coinmarketcap.com. By comparison, bitcoin had a market cap of just over $602 billion. And Ripple’s XRP was the fifth largest, with a market cap of more than $12 billion.

Being relatively established helps Lumen by making it more heavily traded and liquid than lesser-known cryptocurrencies. But like many other cryptos, it is subject to big price swings. After months in the 6-to-8-cent range, it jumped to 44 cents in early January 2021, only to drop to 27 cents in the following days, making for a wild ride.

The Takeaway

Stellar Lumen is a blockchain-based cryptocurrency that has much in common with Ripple. While its intended use is as a secure and accessible way to process cross-border payments between individuals all over the world who may not have access to traditional banking options, it has become the 11th-largest crypto, and investors have taken note.

While Bitcoin launched a new asset class little more than a decade ago, today there are many different cryptocurrencies for investors to learn about and invest in. If your curiosity about cryptocurrency is fueled by a desire to start investing, SoFi Invest® can be a great place to start. SoFi members can buy crypto online in the SoFi app, with the confidence of knowing their crypto is in a secure platform.

Find out how SoFi Invest can help you with your investment goals.

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