Investing Idea: Stellar

Despite the many advances in technology, sending payments to a person or entity in another country can be a particularly frustrating process. In addition to paperwork, you have to pay exorbitant fees that cost as much as 10% of the total funds transferred. More importantly, the transfer is not instantaneous. Even if you send money online using a a third-party service provider like PayPal, it can take up to four days for funds to appear in the recipient’s bank account. Needless to say, the cross-border payment sector is extremely inefficient.

This is where Stellar plans to make a huge impact.

Stellar was created to provide a decentralized network where people and banks can efficiently conduct cross-border transactions between cryptocurrencies or fiat currencies. It relies on a shared, distributed, and public ledger to keep track of all transactions in the network. Using the Stellar protocol, transactions happen in mere seconds. On top of that, transaction fees are extremely cheap. The network charges a fixed rate of 0.00001 XLM for every transaction.

Stellar offers a unique value proposition that can disrupt a multi-trillion dollar industry. This is our investment case for the altcoin.

Stellar Value Metrics

  • Current Price: $0.099152
  • All-Time High: $0.938144
  • All-Time Low: $0.001227
  • YTD Performance: -12.4%
  • Market Cap: $1.89 billion
  • Market Cap Ranking: 9th
  • ROI Since Launch: 3,232.05%
  • Primary Markets: Bitfinex, Kraken, Coinbase, Binance

Investment Case

There are about 2 billion people who do not have a bank account or have access to a financial institution. Stellar wants to change the lives of these people by providing a platform that enables them to send or receive money almost instantaneously at near zero fees.

To accomplish this herculean task, the team behind Stellar has forged partnerships with tech giant IBM and borderless payment platform Wirex.

IBM World Wire

On March 18, 2019, IBM launched World Wire, an international payments solution based on Stellar’s decentralized ledger technology. It is available in 72 countries and 47 different currencies.  

The blockchain-based platform offers an elegant solution that simplifies international settlements. Before World Wire, cross-border transactions had to go through messaging, clearing, and settlement before funds can appear in the recipient’s account. This is a complicated and lengthy affair that requires a number of intermediaries, which adds time and cost to the whole process. World Wire eliminates these intermediaries by relying on the Stellar protocol.

The key to this elegant solution is the use of a stablecoin that is backed by fiat currency. For example, if bank A in Brazil wants to send money to bank B in the Philippines, both banks will agree to come up with a new stablecoin (BPCrypto for instance). The bank in Brazil will buy BPCrypto using the Brazilian Real and then send it to the Stellar network. Stellar will forward BPCrypto to bank A in the Philippines. Bank A will then convert BPCrypto into Philippine Peso.

Borderless payments through IBM World Wire

Source: IBM

Since World Wire uses the Stellar network, the transaction happens in seconds with almost no loss of value other than the 0.00001 XLM network fee. With this solution, six international banks have already provided letters of intent to issue stablecoins on World Wire.

Also, while it is not explicitly stated, it is safe to assume that you don’t need a bank account to use World Wire. Partner banks can simply access the World Wide platform by plugging into a set of provided APIs. Thus, it is an additional service that doesn’t require users to have accounts in participating banks.

With this development, Stellar’s road to mass adoption appears to be clearing. IBM’s World Wire is just the beginning.

Wirex Partnership

Using the same ingenious system mentioned above, Wirex in collaboration with Stellar, plans to launch 26 stablecoins backed by fiat currencies. Some of these stablecoins are pegged to strong currencies such as the US Dollar, Euro, British Pound, Hong Kong Dollar, and Singaporean Dollar. The partnership puts Stellar in a great position to corner the international remittance market. If it does, there will be a surge in demand for XLM.

Analyst’s Take

The retail cross-border payment industry is expected to swell to a whopping valuation of $3.56 trillion in 2022. With the current setup of international payments, it is not difficult to imagine that people are frustrated paying high charges and waiting for several days to receive funds. Many are very likely waiting for the next big thing that can disrupt the multi-trillion dollar industry.

An investment in Stellar is a bet that it will eventually become a dominant player in the cross-border payment industry. By partnering with IBM and Wirex, it is now laying the infrastructure to achieve that end. Imagine a future where a huge chunk of the 2 billion unbanked population are using XLM to process financial transactions. On top of that, banks and financial institutions are hoarding XLM as a cryptocurrency hedge as well as for trading against stablecoins.

This is our investment idea for Stellar.

 

Disclaimer: The author owns Stellar. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Kiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and funds, as he does his own crypto research and is a Product Manager at Mitre Media. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.