One of the more intriguing things about
the long-term bullish growth of the cryptoasset market is the rise of highly
liquid large-cap altcoins. Altcoin is portmanteau of ‘alternative’ and ‘coin’
and refers to every cryptoasset other than Bitcoin.
One of the most
enduring of these is Litecoin (LTC). Once released, it quickly rose to prominence and has
remained popular ever since. As of 23 March 2021, Litecoin has amassed a market
cap of $12.4bn, compared to Bitcoin’s $1.01trn.
Litecoin is now one of the
most recognised, trusted, and most utilised blockchain-based payment networks
in the world. This kind of longevity has been crucial to its incorporation onto
all of the largest cryptoexchanges including
Binance, Coinbase and
Huobi Global, as well as mainstream recognition from major global payment
processor Paypal.
When Paypal announced in October 2020 that it would cross the Rubicon to start
supporting cryptoassets, only four of the most recognised projects were chosen: Bitcoin, Litecoin, Ethereum and
Bitcoin Cash. At Paypal’s recent Investor Day
2021 the
payment company’s chief strategy and growth officer Jonathan Auerbach noted
there were plans to expand support for these cryptoassets in the UK, “within
months”, while Techcrunch reported that mobile payment app Venmo would receive
the same functionality
by mid-2021.
For illustrative purposes only. Past performance is no
guarantee of future performance. Source:
https://coinmetrics.substack.com/p/coin-metrics-state-of-the-network-50a
Investor’s guide to Litecoin
Analysts tend to spend a large
proportion of their focus on Bitcoin and Ethereum or the 'hot' coins of one
particular month. The current
situation does purport to offer
an entry point for the long-term investor to amplify their crypto portfolio
gains at a relatively low risk, given the project’s longevity, wide-scale usage
and trading liquidity.
This relative underappreciation on an analytical level is clear: few
investment banks have proposed long-term price predictions for Litecoin in the
way JP
Morgan or Citibank have for
Bitcoin. This is starting
to change,
with more analysts devoting time to Litecoin price predictions.
Among the more recent investigations of institutional altcoin
accumulation comes from Messari, whose screeners display the portfolios
of crypto hedge funds and
venture capitalists like Andreessen Horowitz (a16z), Coinbase Ventures, Pantera
Capital and Winkelvoss
Capital, for example.
Institutional investors are also starting to accumulate Litecoin in
increased amounts. Litecoin is now the $39bn cryptoasset manager Grayscale’s
third-largest holding behind Bitcoin and Ethereum and as of early March 2021 it
has around
1.45 million LTC under
management in its Litecoin Trust. This is a significant expansion since the
beginning of 2021. Data from market intelligence provider Bybt.com also shows that Grayscale bought
80% of all the Litecoin
mined in February 2021.
Litecoin was created in 2011 by the MIT-educated software engineer
Charlie Lee, who helped develop some of the early iterations of Chrome OS and
Youtube at Google, before going on to become the Director of Engineering at
Coinbase, leaving in 2017 to develop Litecoin full-time. As the name suggests, Lee’s intention for
Litecoin was to be a ‘light’ version of Bitcoin: an altcoin more suited to
payments than the original cryptocurrency, with faster transaction times and
lower fees.
Litecoin Core, the code that underpins the blockchain, is
written in the highly-popular and common programming language C++, while Python
is used for some ancillary tools. That means its code is simple for external
developers to use and understand.
With its faster block times and higher transaction throughput, Litecoin
was conceived as a more practical and scalable medium of exchange. So while
Bitcoin’s use case has evolved into more of a store of value than a currency,
Litecoin remains a popular payment alternative to fiat cash like US dollars or
pounds sterling.
The interesting point to note about Litecoin is its incredible
durability. Cryptoasset data provider Coinmarketcap.com first started tracking valuation metrics in
early 2013, and across that eight-year period only two coins have never
fallen out of the top 10 projects by market cap: Bitcoin and
Litecoin.
Source:
https://coinmarketcap.com/; Values as of 8 January 2021
While many pretenders and challengers have risen in prestige
and then fallen into obscurity, Bitcoin and Litecoin remain the bedrock of the
entire cryptoasset market.
Litecoin versus Bitcoin - Similarities and
Differences
Bitcoin is an open-source software and as such, any developer can copy
its codebase to create their own version. Thousands of
Bitcoin-alike projects have been spawned from this single technological marvel.
But only one has remained in the most traded, most used and most desirable
category since data records began: Litecoin. Within two years of the Bitcoin
whitepaper debuting to
a small audience of cryptography enthusiasts on a little-known mailing list,
Charlie Lee launched this new blockchain. Lee made some striking changes to Bitcoin’s functionality but the two
blockchains share many features.
For illustrative
purposes only. Past performance is no guarantee of future performance. Source: https://bitinfocharts.com/comparison/litecoin-activeaddresses.html
Similarities
Scarce: 80% of the all the litecoins that will ever
exist have already been mined into existence. There is a hard cap of 84 million
LTC. As of 23 March 2021, 67.4 million LTC have been created. Like Bitcoin,
Litecoin undergoes a halving of its block rewards every four years to maintain
a deflationary structure, and therefore retains a similar long-term value
proposition.
Secured by Proof
of Work: Both the Bitcoin
and Litecoin blockchains are secured by a Proof of Work consensus mechanism.
This means that miners compete to solve challenging mathematical puzzles in
order to win the right to confirm blocks of transactions, and win compensation
in the form of block rewards. Block rewards for Litecoin mining are paid in
LTC, whereas rewards for Bitcoin mining are paid in BTC.
Highly
divisible: Both Bitcoin and
Litecoin are divisible into near-infinitesimal amounts. In fact, both
are divisible to 8 decimal places, and the current
minimum amount able to be transferred are 0.00000001 BTC and 0.00000001
LTC.
Strong network
effects: Aside from the
original cryptocurrency, Litecoin is one of the oldest and most secure
coins on the market as well as one of the most used digital currency payment
platforms. One widely-cited 2017 research
paper found that
blockchains like Bitcoin appear to conform to Metcalfe’s
Law, which states that the
value of a network is proportional to the number of connected users in the
network. While originally used to describe the increased value of connections
in telecommunications, tech applications like Facebook and Tencent have been
shown to act in this way, and cryptocurrencies have too.
The implication
here is that the more widely utilised a blockchain network like Litecoin
becomes, the more its value grows over time.
Supporting this
conclusion is the fact that the number of unique Litecoin addresses has grown strongly
over the past 12 months. According to data from BitInfoCharts, in March 2020
the number of unique Litecoin addresses holding the cryptoasset was
just under 43,000. A year later, that number was over 200,000.
Differences
4x faster: New blocks of transactions on the Litecoin
network are generated on average every 2.5 minutes, compared to Bitcoin’s 10
minute average. As a consequence, Litecoin’s transaction throughput is also
approximately four times faster than Bitcoin.
As Lee explains: “Just a few years after Satoshi Nakamoto’s
whitepaper ushered in a new financial and technological paradigm with Bitcon, I
quickly realised that one of its major drawbacks was speed. A new block is
added to the Bitcoin blockchain approximately every ten minutes and, thinking
of a future where this incredible new technology would be widely adopted, I
realised that transaction throughput would become a serious scalability problem.”
Dramatically
lower fees per transaction: Throughout its history, Litecoin has
maintained reasonable fees at a consistently low level. Unlike Ethereum, whose
fees to process transactions rise and fall depending on how many people are
utilising the network at any one time, Litecoin fees have remained remarkably
stable over time.
Litecoin’s fee structure is one of the most attractive elements
of its use. It costs around 1/1000 of an LTC to process a transaction and
crucially, fees do not rise at larger transaction amounts. This stability and
usability has allowed Litecoin to maintain a very strong userbase.
And while both
Bitcoin and Litecoin mean fees per transaction can spike during periods of
volatility, the baseline for Litecoin is several orders of magnitude lower.
Taking a snapshot of the market in February 2021, for example, we can see that
the mean transaction (tx) fees in USD for Bitcoin was $14.30, while for
Litecoin it was $0.03 (NB, chart is shown on a logarithmic scale).
For illustrative purposes only. Past performance is on
guarantee of future performance. Source: https://charts.coinmetrics.io/network-data/
Scrypt not
SHA-256: While Litecoin’s
codebase is a copy of Bitcoin, and both networks are secured by Proof of Work,
one very important technical difference remains. Litecoin uses a unique
cryptographic hashing algorithm called Scrypt, which is specifically designed to make it
prohibitively costly to perform large-scale hardware attacks on a network. As
well as offering a very strong cryptographic basis for the Litecoin blockchain
this produced two interesting effects.
Firstly, in the
early years of Litecoin, Scrypt made mining this cryptoasset far more
accessible to individuals, who were able to mine and mint new Litecoin with the
processing power available from most home computer CPUs.
Secondly, it meant
that Litecoin was not competing with Bitcoin for miners, as users could mine
both Bitcoin and Litecoin at the same time. Attempting to mine two
cryptographically identical cryptocurrencies in parallel requires twice the
connections and twice the distribution channels, adding to cost-intensiveness.
As
the Litecoin Foundation explains: “It was considered of extreme importance to utilize a different mining
algorithm to not compete with Bitcoin miners. Thanks to this decision, Litecoin
dominates Scrypt mining, making it more secure and less prone to being
successfully attacked. This decision has helped Litecoin maintain its
reputation as a secure coin and has contributed to it withstanding the test of
time, unlike other more easily attackable coins that have met unfortunate
fates.”
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