Litecoin: Don’t Chase This Rally (Cryptocurrency:LTC-USD)

Thesis

Litecoin (LTC-USD) is unlikely to outperform Bitcoin (BTC-USD) in the long run regardless of arguably being the higher cryptocurrency for funds and transactions. It’s because it lags Bitcoin when it comes to safety and developer curiosity, amongst different points.

What Is Litecoin?

Litecoin was created as a fork of Bitcoin in 2011 with the objective of creating a cryptocurrency extra fitted to funds and transactions. It makes use of proof of labor like Bitcoin, but it surely makes use of a unique proof of labor algorithm that leads to over 3x sooner transaction confirmations and as much as 50x decrease transaction prices.

In addition to utilizing a unique proof of labor algorithm, Litecoin and Bitcoin are very comparable from a technical perspective. Nevertheless, traders thus far have most popular Bitcoin, as Bitcoin has a market cap of $387 billion in comparison with Litecoin’s (nonetheless respectable) market cap of $4.4 billion.

Why Did Litecoin Rally?

Curiosity in Litecoin shot up on November 2nd after MoneyGram (MGI) announced a brand new characteristic that may permit customers of its cellular app to purchase and commerce Bitcoin, Ethereum (ETH-USD), and Litecoin.

Bitcoin and Ethereum did not actually react to the information, however Litecoin rallied from $55 to $62 shortly after the announcement. Buyers have been doubtless excited that Litecoin was the one cryptocurrency chosen in addition to the 2 stalwarts Bitcoin and Ethereum. However regardless of the rally, Litecoin continues to be underperforming Bitcoin and Ethereum over the previous yr.

MoneyGram is a peer-to-peer funds firm that was not too long ago purchased out at a valuation of over $1 billion. It is smart that MoneyGram can be considering supporting Litecoin contemplating that Litecoin markets itself as being optimized for funds, MoneyGram’s specialty. Nevertheless, MoneyGram is a small firm even in comparison with Litecoin and Litecoin’s involvement solely pertains to one MoneyGram characteristic, so the response in Litecoin’s worth is sort of excessive relative to this information.

Thus, it is also potential that different occasions contributed to the rally. For instance, Litecoin’s halving is arising in lower than one yr, whereas Bitcoin’s subsequent halving might be in 2024. Like Bitcoin, Litecoin halves about as soon as each 4 years, but it surely operates on a unique halving schedule as a result of it was created at a unique time.

General, it is potential that a number of elements contributed to the rally, with the MoneyGram announcement being probably the most well timed one.

Might Litecoin Outperform Bitcoin?

The query most traders in all probability have is whether or not Litecoin’s latest rally could possibly be the beginning of a bigger pattern by which Litecoin continues to outperform Bitcoin. I feel that this result’s unlikely for just a few causes, which I am going to now dive into.

Much less Developer Curiosity

When taking a look at shares, it is typically accepted that an organization that is able to hiring and motivating gifted employees will doubtless outperform friends that fail to efficiently rent as many good/motivated staff. Nevertheless, with regards to cryptocurrencies, many traders appear keen to show a blind eye to precise developer curiosity. Maybe that is as a result of builders are sometimes checked out as unpaid volunteers, although many Bitcoin builders are actually employed via members of the crypto group like Block.

In relation to developer involvement, there is not any query that Bitcoin is superior to Litecoin. The 25 most not too long ago closed pull requests on Bitcoin Core span solely 10 days. Then again, the 25 most not too long ago closed on Litecoin Core go all the way in which again to December of final yr. Because of this way more work is being carried out in Bitcoin’s code base in comparison with Litecoin.

Granted, as a result of Litecoin is a fork of Bitcoin, it might probably copy many updates made to Bitcoin without cost. However the level right here is evident: there’s way more developer curiosity in Bitcoin than Litecoin.

Scalability Points Aren’t Solved

Litecoin admittedly delivered on its promise to be extra scalable than Bitcoin, because it’s capable of course of about 56 transactions per second in comparison with Bitcoin’s 7. Due partially to this sooner processing, Litecoin costs about 4 cents per transaction in comparison with $7.60 for a Bitcoin transaction. Thus, it is objectively true that Litecoin is a greater cost community within the one side that issues most.

Nevertheless, Visa dwarfs each Bitcoin and Litecoin when it comes to scalability, because it manages over 65,000 transactions per second. Between the charges and this big distinction in scalability, it is unlikely that both Bitcoin or Litecoin is the cost community of the long run.

Bitcoin’s energetic developer group is fixing this by constructing the Lightning Community, a Layer 2 resolution which basically bundles a number of transactions into one to cut back charges. Litecoin has additionally adopted its personal model of the Lightning Community, which it was capable of do simply as a result of it is a fork of Bitcoin. Nevertheless, this arguably negates the declare that scalability is a crucial attribute for a Layer 1 resolution.

Bitcoin’s lightning community has base charges of lower than 1/10th of a cent per transaction (in comparison with 4 cents for Litecoin). That must be all the data you should know whether or not Litecoin is the cost community of the long run.

Worse Safety

For proof of labor cryptocurrencies, the safety of the community is essentially a perform of hash charge as a result of a better hash charge will increase the issue of validating transactions. This makes it harder for anybody actor to acquire sufficient compute energy to regulate the community with a 51% assault.

Litecoin’s present hash charge is 543 terahash/second, whereas Bitcoin’s hash charge is 223 exahash/second, or 223,000,000 terahash/second. Clearly, Bitcoin’s hash charge and total community safety is a number of orders of magnitude better than Litecoin’s.

It may be tough for establishments and even perhaps excessive web price people to noticeably think about Litecoin for vital transactions when the hash charge of some particular person Bitcoin miners is greater than the whole hash charge of the complete Litecoin community. In idea, that implies that massive miners may hack the Litecoin community in the event that they needed, however in follow the {hardware} necessities for mining Bitcoin vs Litecoin are fairly totally different.

Increased Volatility

The whole argument for Litecoin facilities round funds and transactions. If that finally ends up being the first use for cryptocurrency, then maybe there’s an argument to be made that Litecoin is the higher resolution from a purely technical perspective, even when a Layer 2 resolution is required to totally scale.

Nevertheless, different makes use of have come up for crypto in recent times, together with as a scarce retailer of worth. For this use case, Bitcoin is superior as a result of there might be fewer complete Bitcoin than Litecoin and since Bitcoin at the moment has decrease volatility and extra liquidity than Litecoin.

In relation to transactions, there’s an argument to be made that risky cryptocurrencies cannot fully displace extra steady fiat. And even when they may, Bitcoin’s decrease volatility arguably makes it extra helpful for big transactions than Litecoin regardless of not scaling as nicely.

There are a selection of ways in which blockchain-based cost networks may in the end develop. One is that Layer 2 options constructed on prime of Bitcoin’s Lightning Community will permit individuals to ship and obtain funds in USD, a subject that I coated way more in depth in this article for Tech Investing Edge subscribers. Another choice is that stablecoins will win out as a extra sensible resolution regardless of being extra centralized, a subject that I coated in this article for subscribers.

Both approach, it is tough to think about a world the place an asset that may transfer 10% in a day primarily based on a product announcement by a little-known small-cap firm turns into the popular technique for world transactions, no matter how environment friendly it’s at processing these transactions.

Ultimate Ideas

In idea, I’ve nothing in opposition to Litecoin as an idea. It is a model of Bitcoin that is in some ways higher for transactions and funds. In follow, a cryptocurrency’s worth is essentially a perform of its model/status, community safety, shortage, liquidity, and developer group. In all of those points, Bitcoin is clearly superior to Litecoin. Even when Litecoin is theoretically the higher cryptocurrency for funds, in follow extra persons are going to proceed to make use of and pay with Bitcoin, particularly if builders proceed to make nice progress on its Lightning Community.

Litecoin could stick round and proceed to commerce in an identical sample to the remainder of the cryptocurrency market, with occasional blips just like the one seen immediately. I am bullish on crypto total, and if crypto costs enhance in the long run, Litecoin’s worth could enhance as nicely. However the way in which I see it, there is not any actual argument for traders to carry Litecoin as an alternative of Bitcoin.