Should You (or Anyone) Buy Stellar (XLM)?

Stellar Lumens dramatically reduces the cost of international transfers.

Stellar is a well-established cryptocurrency project that arguably got a little bit lost in the crypto frenzy of 2021. Price-wise, its Lumens token (XLM) gained about 100% last year, compared to other cryptos that gained 5,000% or more. However, it has been around since 2014, and spent much of that time in the top 50 cryptos by market capitalization, making it an interesting long-term prospect.

It's not a sexy programmable crypto like Ethereum (ETH) or Solana (SOL), though it is working on developing smart contract functionality. However, Stellar is all about money transfers, and money transfers are big business. Stellar lets people send money anywhere, whether it's dollars, Bitcoin (BTC), or euros. It aims to let all the world's financial systems work together on a single network.

XLM basics

Stellar is a remittance and money transfer platform, designed to make it easy to send money anywhere in the world quickly and cheaply. It's similar to another well-known crypto, Ripple (XRP), which is hardly surprising given that crypto-pioneer Jed McCaleb was involved in founding both projects. But where Ripple focuses on financial institutions, Stellar focuses on individuals.

• What it does: XLM, or Lumens, is the native token on the Stellar platform. Users need to hold XLM to make transactions on the platform.
• Management team: Cofounded by Jed McCaleb, David Mazières, and Joyce Kim.
• Date launched: 2014
• Market cap: $4.5 billion (CoinMarketCap, March 16)
• Availability: Many major U.S. cryptocurrency exchanges

Should you buy?

Stellar is a solid cryptocurrency project. It has a strong team behind it and solves an important real-world problem -- the high costs of making international payments. It boasts a number of big partnerships, including MoneyGram, Circle (the company behind USDC), and IBM.

One question to ask of any cryptocurrency is what problem it solves, and whether there's a market for that solution. Stellar's ability to provide rapid and low-cost money transfers certainly addresses the very real issue of expensive money transfers. The World Bank estimates the global average cost of a remittance is around 6.5%. That means someone who's working in the U.S. and sending money home to their family in, say, El Salvador could lose $6.50 for every $100 they transfer. As to whether there's a market, according to Verified Market Research, the remittance market was around $16 billion in 2020, and could reach $40 billion by 2028.

All cryptocurrency investments are risky, so it's advisable to only invest money you can afford to lose. This is a relatively new and unregulated market with a lot of uncertainty. It's also important to do your own research -- only you know your risk tolerance, investment priorities, and financial situation, so only you can decide if this is the right investment for you.

A better-known crypto like Stellar carries less risk than a newer crypto that hasn't established a track record. However, the digital payment space is complicated, and Stellar faces competition from inside and outside the crypto world. Here are two big challenges to pay attention to:

1. Central bank digital currencies (CBDCs) and stablecoins

CBDCs, or GovCoins, are digital currencies issued and backed by a central bank. The U.S. is weighing the pros and cons of a digital dollar, while China is already in the final stages of launching a digital yuan. Stablecoins are cryptos that peg their value to another commodity, such as the U.S. dollar. The rise of both CBDCs and stablecoins could undermine the benefits of the Stellar platform. Essentially, people may be able to move their digital dollars or dollar-pegged cryptos across borders without needing Stellar's platform.

However, Stellar is positioning itself as an ideal partner to CBDC projects. It argues that the platform is a place where trusted issuers can create digital representations of their assets. For example, Stellar had been working with the Ukrainian government on a CBDC project. With around 90 countries considering CBDCs, according to the Atlantic Council, if only a few turned to Stellar to issue their digital currencies, it would be a big boost for the crypto.

2. Regulation

Increased cryptocurrency regulation is a concern for many digital assets. Ripple, a project that's very similar to Stellar, is in the midst of a legal battle with the SEC over whether it is a security or a crypto. If it's deemed a security, it should have registered with the SEC and followed rules around reporting and trading. If the SEC wins this case, it could have a knock-on effect for many other cryptos, including Stellar.

Moreover, countries around the world want to put more controls on how cryptocurrencies operate, especially those like Stellar that offer bank-like services. In the long term, increased consumer protection could build confidence and help weed out bad actors in the crypto market. But in the short term, Stellar might suffer if stricter controls are introduced.

Bottom line

Stellar's strong team, relatively long track record, and solid use case mean it could perform well over the long term. However, regulation and the rise of CBDCs could create some challenging headwinds. All in all, Stellar is a good crypto to keep an eye on.