Litecoin is up 320% YTD, but is it a good investment?

Litecoin is one of the world’s most popular cryptocurrencies.

It’s currently the fourth largest crypto by market cap and has remained near the top pretty much since its inception in October 2011.

Litecoin was created by the now well-known crypto personality Charlie Lee. It is essentially just a fork of bitcoin with some of the code changed.

The main differences between Litecoin and bitcoin are as follows:

  • Litecoin’s block time is around 2.5 minutes, as opposed to bitcoin’s 10 minutes. This means Litecoin can process transaction faster.
  • Litecoin’s total supply will eventually reach 84 million, whereas bitcoin’s will top out at 21 million.
  • It uses a slightly different mining algorithm to bitcoin, which means it’s more costly to mine Litecoin using a large-scale mining rig. So, in theory, Litecoin will be less centralised.

People often talk of Litecoin as the silver to bitcoin’s gold. If bitcoin is a store of value, Litecoin is more of a currency. At least, that’s how its advocates see it.

During the golden bull of 2017, Litecoin saw its price increase by a massive 7,800%. £1,000 of Litecoin bought on 1 January 2017 would have been worth just over £79,000 on 19 December 2017.

It still flaws me to think of the gains that were on offer throughout 2017. But to be fair, the gains that have been on offer since the start of this year aren’t half bad either.

Litecoin is up 320% year to date (YTD). So £1,000 in Litecoin at the start of this year would be worth £4,200 today, which is a far better return than you could get in almost any other asset class.

People like Litecoin because our brains like whole numbers

The main reason Litecoin went up so much during 2017 was Coinbase. Coinbase is the way most people get into crypto. It’s the simplest, easiest and most secure way to “buy in”.

And in 2017 Coinbase only let you buy three different cryptos: bitcoin, Litecoin and Ethereum.

And thanks to our brains’ innate liking of whole numbers, Litecoin looked like a steal.

Back in June 2017, if you were spending $100, you could either get 0.039 bitcoin, 0.25 Ethereum or 2 whole Litecoin.

So because you could buy whole numbers of Litecoin for a fraction of one bitcoin or Ethereum, many new investors bought Litecoin. Or they bought a couple of whole Litecoin to go with their fraction of bitcoin and Ethereum.

And another quirk of our minds is the comparisons we can’t help making with similar assets:

“If Bitcoin is trading for $2,500 then maybe Litecoin will one day be trading for that, too. And I can get 50 Litecoin for the price of one bitcoin. If I do that, and Litecoin hits $2,500… I’ll be rich.”

It doesn’t matter that Litecoin would never hit the same price as bitcoin, even if its market cap was the same, because its supply is much larger. Our brains like to make these kind of irrational future predictions because it makes us feel happy.

There is no need for Litecoin to exist

As you may have gathered, I’m not a massive fan of Litecoin. Here’s why:

  • The slight speed increases it has over bitcoin are being rendered moot by bitcoin’s Lightning Network implementations.
  • Just like bitcoin, it uses a proof-of-work consensus mechanism so it wastes a lot of energy.
  • And its mining algorithm didn’t end up making it less susceptible to mining pools. It has ended up mostly controlled by specialised mining equipment run by major mining pools. So it is not decentralised.

Given this, Litecoin is essentially pointless. It has no advantages over bitcoin.

That’s not to say I am a bitcoin maximalist. There are a number of other cryptos I think are better than bitcoin for many different applications: Ethereum for smart contracts, Nano for peer-to-peer payments, IOTA for machine-to-machine payments… the list goes on.

Unlike those cryptos, and many others, Litecoin is not an evolutionary step. It’s just a bitcoin clone with very slight variations.

Even Litecoin’s Charlie Lee sold off all of his Litecoin stack at the peak of 2017’s crypto bull run:

So, why am I writing an article about Litecoin, if I believe it to be pointless?

Well, firstly, just because it’s pointless doesn’t mean it can’t increase in value, as we have seen over the last few years.

And secondly, Litecoin’s recent price surge tells us something very important about its big brother bitcoin and what we can expect to see as the havening approaches.

More on that tomorrow…

Until then,

Harry Hamburg
Editor, Exponential Investor

Category: Cryptocurrency

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