Trading ETH/XLM: An Overview
Trading ETH/XLM is a position on the relative strength of the Ethereum platform’s native cryptocurrency Ether and XLM, also known as Lumens. Lumens is the native coin of the stellar payments processing blockchain platform. Ether (ETH) bases the pair, meaning that a long position on Ether XLM finishes up successfully if the dollar value of Ether strengthens in relation to the XLM over the course of the trade. A short position on this pair is a trade on lumen’s dollar value gaining more in relation to Ether.
Ether in Focus
The pair’s movement, or pips gained or lost, is the result of the relative percentile fluctuation in the relative dollar value of the two cryptocurrencies.
The volatility of cryptocurrencies, most of which demonstrate average daily volatility in the mid- to high-single digits, is much higher than that of traditional fiat currencies. The comparatively significant daily medium-term swings typical of cryptocurrency value makes them attractive to traders willing to take on a higher risk to reward ratio. It also means that the level of leverage employed is usually lower.
The Ethereum blockchain platform, of which ETH is the native cryptocurrency, is used to build smart contracts and DAPPs (decentralised applications). These range from commercial agreements to games and the majority of ICOs also use Ethereum. Despite several new rivals who claim their own smart contract platforms employ superior technology to Ethereum, it is still considered a market leader and one of the largest cryptocurrencies in the world by overall market cap.
Stellar in Focus
Stellar, like its competitor Ripple (XRP), is a payments processing blockchain. Also founded by Jed McCaleb, it facilitates cross-border transfers between any two currencies, either fiat or crypto, and has already been used by major partners such as Stripe (which provided initial seed funding), IBM and Deloitte.
Ether (ETH) and Lumens (XLM) are very different cryptocurrencies, though both are ‘utility’-type tokens, used to pay for the bandwidth of their respective blockchain platform solutions, rather than being intended as fiat currency alternatives. That means that their respective value moves on the relative success of both blockchain solutions and wider cryptocurrency market sentiment.
Why Include ETH XLM in an Investment or Trading Portfolio?
1. Ethereum and Stellar bulls and bears have an obvious incentive to trade this particular pair. A trader with a bullish position on Ether and a bearish one on Lumens over a particular period of time would stand to gain most by trading the ETHXLM chart pair rather than separate long and short ETH/USD and XLM/USD trades. A bullish position on XLM and bearish one on ETH could also be reflected through a short trade on the pair.
2. Day traders simply looking for attractive trades involving cryptocurrencies but without a particular focus on any specific cryptocurrency, would also be attracted to this pair if their analysis highlighted the likelihood of diverging directional trends for ETH and XLM.
3. Investors with a longer term outlook on ETH or XLM, again with conflicting bull and bear sentiment, might also opt to trade this pair to magnify gains. When buying the actual cryptocurrencies themselves, profit can only be gained from an upwards price movement, but when trading a CFD pair, a trader can also profit from one of the two cryptocurrencies losing value. It can also be easier to open a CFD position than buy cryptocurrencies over an exchange, set up a wallet etc.
4. Bigger potential returns are also an obvious reason to trade cryptocurrency pairs like ETH XLM, instead of, or as a supplement to, trading more traditional asset classes, such as commodities or indices. Their higher volatility offers more potential trade openings and larger pip swings.
Major Drivers of the ETH/XLM Price
Cryptocurrency market sentiment/price trend: the cryptocurrency market still shows relatively high correlation, even between very different cryptocurrencies such as Ether and Lumens. When overall sentiment is positive, most or all of the major cryptocurrencies tend to move up. Likewise, when the mood turns dark, most of the major cryptocurrencies move down. However, sometimes there is a delay in how quickly the cryptocurrencies follow the overall market trend and traders who have noticed common patterns inthe speed by which different cryptos react to sentiment, can leverage this to profit from the time lag by timing trades to take account of it.
Ethereum platform activity: the more activity taking place on the Ethereum platform, the higher the demand for the Ether that pays for the blockchain’s bandwidth. As such, spikes in usage, such as a new game going viral, or longer term trends such as more actively used DAPPs being built on Ethereum, influence Ether’s exchange value.
ICO activity: another major driver of Ether’s price and, of course, part of wider Ethereum platform usage levels. However, ICO activity on the blockchain can be a complicated catalyst to Ether’s dollar value, driving it both up and down. ICOs create tokens that are sold to investors and when using Ethereum to create the ICO, these tokens are usually paid for in Ether. This drives demand for Ether. However, the companies behind ICOs generally then sell all or a large portion of this Ether for the fiat currency they need to pay expenses. When a big ICO concludes, this can be a negative drag on Ether’s value.
Stellar platform activity: the volume of usage of the Ethereum platform drives the price of ETH; the same logic holds true for the Stellar platform. The more payment transfers there are, using the Stellar blockchain, the more demand there is for Lumens and this represents a positive driver on their value. Dropping activity would, of course, mean the opposite.
Stellar partnership announcements: breaking news of major new partnerships between Stellar and companies that will use its blockchain, are a positive driver of XLM value, even if it takes some time for that partnership to increase usage of the platform itself.
Conclusion: the ETH/XLM trade
The ETHXLM pair, when traded as either a long or short position, is gaining in popularity due to the relative lack of correlation between these two very different cryptocurrencies. The additional volatility in the relationship between the two cryptos, offers strong potential for the kind of short-, medium- and long-term pip swings traders wait for.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.This content is intended for information and educational purposes only and should not be considered investment advice or investment recommendation. Past performance is not an indication of future results.