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This pair is based on Bitcoin (BTC) and is a trade on its price trajectory relative to that of Lumens (XLM), the native cryptocurrency that powers the Stellar payments processing blockchain platform that is a direct competitor to larger rival XRP. A long position on BTC XLM is a bet on Bitcoin’s price gaining more over the course of the trade than that of Lumens. The best possible outcome of a long BTCXLM position would, of course, result from Bitcoin gaining value in dollar terms and Lumens losing value.
Taking a short position on BTC XLM would, inversely, represent a trade on Bitcoin’s value sliding more than that of Lumens or, ideally, Bitcoin dropping in value and Lumens gaining.
Bitcoin was the first cryptocurrency to launch and is still, by some distance, the biggest by market capitalisation. Sentiment around Bitcoin and its price direction is also still the single biggest influence on the overall price direction of the other major cryptocurrencies. It is highly unusual for Bitcoin to see a major price swing up or down without it taking the rest of the market with it.
This is the case despite the fact that Bitcoin (BTC) is intended to eventually offer a viable alternative to fiat currencies and be used to pay for general goods and services in the same way we do so with dollars, euro or pound sterling, while many other cryptocurrencies, including Lumens, are not. Lumens are a utility cryptocurrency, which means it can only be ‘spent’ to pay for the use of the blockchain platform that it is associated with – Stellar.
The Stellar blockchain platform is built as a payments processing network, with a focus on the cross-border exchange between any kind of currency, both fiat and cryptocurrencies. The ultimate ambition of Stellar is to provide a more efficient alternative, both in terms of cost and speed, to incumbent payment processing systems such as SWIFT. Partnerships with major international blue chips such as IBM, Deloitte and Stripe have already been established.
You expect Bitcoin (BTC) to gain: as the base currency of the pair, a stronger gain for Bitcoin respective to that of Lumens would see a Bitcoin XLM trade finish in profit. Of course, if a trader’s analysis highlights the likelihood that the opposite will be the case and Bitcoin’s value is expected to fall in respect to that of Lumens, a short position on the pair can be taken instead.
You expect Lumens (XLM) to fall: even if the value of Bitcoin (BTC) remains stable, a trade on this pair will finish up in profit were Lumens (XLM) to see its dollar value drop. The swing will be most favourable in the case that BTC gains while XLM drops, but just a drop in XLM would still make the trade a profitable one.
You own XLM: if you hold Lumens cryptocurrency units, a smaller CFD position on the BTC XLM pair could provide an effective hedge. If Lumens were to lose more value than Bitcoin during a fall, a long position on the pair would provide a return, offsetting some of your losses on your Lumens holding.
You expect diverging BTC and XLM price directions: the best possible scenario to unfold in the context of a long position on BTCXLM would be diverging price directions for the two cryptocurrencies with the base BTC gaining and the paired XLM sliding.
Relative volatility compared to fiat currencies: many traders are attracted to cryptocurrency pairs such as BTC/XLM due to the much higher volatility the asset class has in comparison to more mature alternatives such as the fiat currencies that make up currency pairs. Average daily volatility is over ten times higher, which, while increasing risk exposure significantly, also means gains have the potential to be far higher.
Bitcoin sentiment: the most influential driver of the BTC XLM pair is market sentiment towards Bitcoin as the highest profile and most established of all of the cryptocurrencies. The big hope for the future of Bitcoin is that it establishes itself as a traded asset in mainstream financial markets.
Trading and Bitcoin-based derivatives being offered through established intermediaries should entice institutional investors into the market with the liquidity they would provide leading to a more mature market for Bitcoin. This would be expected to reduce volatility hugely from current levels and hopefully pave the way for Bitcoin to potentially finally be used as an alternative to fiat currencies on a day-to-day basis.
As a result, the BTC price reacts strongly to any major news around such developments.
Stellar Usage Traction: unless being held as a speculative long-term investment, Lumens (XLM) have just one specific use, which is to be used to pay for the use of the Stellar blockchain platform for payments processing. As such, demand, and price, is strongly tied to the volume of transactions being processed through Stellar.
Stellar Sentiment: due to the relative immaturity of the cryptocurrency market, sentiment on future developments often has a strong influence on the price direction of cryptocurrencies than current reality. XLM is no different, and so news around major new partnerships with big companies typically prove to be a major catalyst to an upward price direction. A quiet period without any publicised progress on new partnerships is also often a catalyst for a drop in enthusiasm and the gradual erosion of XLM value.
The relative volatility of both cryptocurrencies that make up the BTCXLM chart pair provides a wealth of potential trading opportunities for those who follow the two halves to this pair. While the cryptocurrency market is highly correlated to Bitcoin, utility tokens such as XLM tend to show a lower correlation to Bitcoin’s rival ‘currency’ cryptocurrencies. This means diverging price directions more often than would be the case with many other pairs and the chance of the kind of big pip swings traders hope to catch when opening a position.
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 informational and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.
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