Why Is the Stellar Lumen Cryptocurrency Up 18% Today? – Motley Fool

On an otherwise sleepy morning in the cryptocurrency market, most of the major currencies trade within a few percentage points of their value 24 hours ago. Stellar Lumen breaks with this calm trend, trading 18% higher as of 9:20 a.m. EST. There's a fairly simple explanation for why this particular cryptocurrency is surging today, and it's a twist on the familiar theme of share buybacks aimed at controlling dilution.

Stellar Lumen is one of the largest cryptocurrencies on the market today. Sporting a market cap of $1.6 billion, according to CoinMarketCap.com, it's the 10th-largest cryptocoin both by market value and by daily trading volume.

Technically speaking, Stellar is a money transfer protocol designed to simplify transactions across international borders in a variety of local currencies. That core idea is very similar to the larger service known as Ripple. The two crypto networks were both founded by industry bigwig Jed McCaleb, who left the Ripple project amid disagreements with the rest of the company to start Stellar as a fairly direct alternative.

While the Ripple corporation works closely with banks around the world in an attempt to disrupt international payments at the professional level, Stellar is organized as a nonprofit foundation with the goal of achieving similar cross-border transparency for ordinary people.

"For example, using Stellar, a family in Venezuela can keep some of its savings in dollars, or in euros, and protect itself from local economic upheaval -- without having to keep bills 'under the mattress' or operate through a gray market broker," according to an official statement found on Stellar's web site.

Like Ripple's XRP token, Stellar uses the Lumen token to achieve its technology goals. This cryptocoin, traded across the Stellar network, can be translated into different real-world currencies for a near-zero transaction fee.

You can't mine Lumen, creating new tokens on the fly as you do in other popular systems such as Bitcoin. Instead, and again just like Ripple, Stellar created 100 billion tokens at the launch of the new cryptocurrency. The foundation keeps most of these tokens stacked away, allowing a trickle of new supply to reach the open market at a tightly controlled pace.

And that's where we find the reason for today's big jump. Stellar just made a big change to the supply of Lumen tokens.

Image source: Getty Images.

Remember the finite supply of Lumen, set to 100 billion units from the start? Well, that changed last night.

The Stellar foundation destroyed 55 billion Lumen tokens, permanently and irrevocably. Out of the 17 billion Lumens that were allocated to the foundation's operations, 5 billion tokens were destroyed. Reserves for various giveaway programs dropped from 44 billion to 6 billion units. Partnership programs now have access to 12 billion Lumens, down from 25 billion.

It's like an utterly massive share buyback that reduced the total share count by 55% in a regular stock structure, or firing over half of the world's gold into the sun. The underlying ideas are different here but the effects are similar. Lower supply equals higher prices for the units that remain.

The Stellar foundation says that the new supply structure more closely aligns with the foundation's mission.

"We owe it to the ecosystem, to the network, and to ourselves, to be as efficient as possible in our work," the official announcement stated.

We should only keep what we're confident we can actually use. And use relatively soon, at that -- in the next ten years. That's the proper scope for the Foundation. The ecosystem is already moving ahead on its own, alongside [the Foundation] rather than driven by us. We were never meant to be and would never want to be a perpetual custodian for Stellar's programs. Getting to our goal and still having Lumens at the end would serve no purpose.

Spoken like a true nonprofit organization with big dreams and a limited mandate. To be clear, it would be kind of crazy to see a publicly traded company performing a similar move in the form of a supermassive share buyback. But for a nonprofit whose assets are closely tied to a noncash cryptocurrency under its own control, it actually makes sense.

Now, the 55% supply cut did not double the street price of Lumens right away. The market reaction was muted by several factors, including the limited availability of Lumen tokens on the open market and the fundamentally unstable nature of cryptocurrency valuation in this evolving market. The Stellar foundation hopes that this drastic move will move the whole Stellar Lumen project closer to its stated mission of providing global banking tools for the unbanked masses, but only time will tell.

Until then, remember that any cryptocurrency comes with a massive amount of risk to investors. It's a promising market for sure, and the Stellar Lumen currency has increased 25-fold in value since its launch in 2014. But the coin could just as easily drop to zero in the long run, Stellar's good intentions notwithstanding.

Be careful out there, and only invest money you could afford to lose in these risky cryptocurrency vehicles.

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Why Is the Stellar Lumen Cryptocurrency Up 18% Today? - Motley Fool