While bitcoin is currently the undisputed leader of the cryptocurrency world, it is not the only coin deserving of attention. Much has already been said about the ethereum blockchain and its token ether, which this year established itself as bitcoin’s closest rival. Ripple (XRP), the third-largest digital currency by market capitalisation, also shows a lot of promise and has received backing from major banks. And then there is litecoin – the token often referred to as the “silver to bitcoin's gold”.
The litecoin project was created by former Google employee Charlie Lee in 2011. While it is heavily influenced by bitcoin, there are key differences that separate it from its older and more established sibling. This puts the cryptocurrency in the unique position of being in many ways similar to bitcoin, while at the same time striving to improve on the original concept.
So what does this mean for litecoin’s prospects as an investment class? In a recent article for Seeking Alpha analyst Melwin Phillip assesses the cryptocurrency’s potential by examining how it compares against bitcoin.
Looking at the similarities between bitcoin and litecoin, Philip points to the deflationary nature of the two coins. The supply of both these coins will be tapered in the coming years, while at the same time demand will presumably be rising. Here comes the first big difference between the two currencies – the total amount of bitcoins is capped at 21 million, while the limit on litecoin is 84 million – exactly four times higher.
Another key difference is that the block generation time of litecoin is 2.5 minutes, compared to 10 minutes for bitcoin. In simple terms this means that transactions are confirmed four times faster in litecoin, Philip notes. However, there is a drawback – a smaller block generation time makes it easier for reversal of transaction to occur compared to a larger block. The analyst sees the future of litecoin as a medium of exchange for small transactions as the transaction fees associated with the cryptocurrency are negligible compared to bitcoin’s transactions.
The analysis quotes Ryan X. Charles, CEO content micropayments startup, as saying: “Litecoin has a large economy and our technology works on Litecoin with almost no changes. We like ethereum too, but ethereum is too different from bitcoin for us to easily switch. Litecoin has the best combination of economic size and technical similarity to bitcoin.”
Yours recently decided to move its platform to litecoin, which was described by Lee as notable "win" that suggests further progress can be made with the altcoin's target audience.
Bitcoin and litecoin share another similarity in that their coin rewarding functionalities are based on the concept of proof of work. However, algorithms used by the two blockchains are different. Litecoin’s Scrypt is simpler and it is much easier to run on GPUs, and tends to use up less energy than bitcoin’s SHA-256, Phillip notes.
The litecoin project has also shown that it is much more adaptive to improvement plans that bitcoin. In May the project activated Segregated Witness (SegWit) – a scaling proposal currently at the centre of a heated debate among the bitcoin community, which could lead to a split in the larger cryptocurrency next month. Litecoin’s roadmap has also indicated that it is working on implementing lightning network, which would increase the scalability of transactions. It also shows litecoin’s interest in anonymous smart contracts.
Phillip concludes that litecoin is undervalued, suggesting that, given the supply difference, its ideal is ultimately pegged with 1/4th of bitcoin price. He also thinks that both coins can compliment each other on a long run. And it seems that this is the preferred scenario of litecoin’s creator Charlie Lee.
"I'm a huge proponent of bitcoin getting SegWit as soon as possible. My vision for litecoin is to have it work closely with bitcoin,” he said in a recent interview with Coindesk.
However, the activation of SegWit for bitcoin could pose some risks for the smaller cryptocurrency. The activation of the scaling upgrade played a crucial role for litecoin’s resurgence after years of decline and inactivity. As noted by Coindesk, some even view the coin as some sort of a backup plan should bitcoin never adopt SegWit. And if there is no need for such backup plan to exist, this could lessen the appeal of “litecoin’s silver”.
As of 16:16 BST, the litecoin price stood at $42.20. The cryptocurrency has risen 12.90 percent in the last 24 hours, according to GDAX data.