The Stellar Development Foundation (SDF) announces a token burn of more than 50% of its total supply. The decision was made to improve the efficiency of the development of the token.
The price of XLM gained over 20% following the announcement. Decreasing the supply has a positive effect on the crypto token, but not up to expectations.
XLM/USD 1-Day Chart on Coinbase (TradingView)
Ideally, to maintain the market capitalization, the total price should have doubled. Nic Carter, founder of Adamant Capital and Coinmetrics noted,
I’ll be the one to point out that the fact that XLM is only up 20% on the news (instead of 100%) that 50% of supply is being burned is solid evidence against the “burns are deflationary” thesis
This is the second change announced on Stellar supply metrics. Recently, it also decided to burn the coin fees in the future, eliminating the 1% annual inflation.
Why was the price reaction so Dull?
There is more to it than meets the eye. The coin burn does not affect the circulating supply of the cryptocurrency. Hence, the actual holdings of investors at the moment remains the same. SDF held the quantity that has been burnt from the supply. While the exact amount decreased from about 105 billion to 55 billion, the circulating supply remains at 20 billion XLM.
Furthermore, decreasing the total supply would not effectively decrease the market capitalization by 50%. Accounting for the 20% increase, the market capitalization till stands to lose about 40% from its total book value.
Stellar Supply and Total Market Cap (CoinMarketCap)
(The total market cap of 1.6 billion is based on the circulation supply only)
According to the new mandate,