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

Thesis

Litecoin (LTC-USD) is unlikely to outperform Bitcoin (BTC-USD) in the long term despite arguably being the better cryptocurrency for payments and transactions. This is because it lags Bitcoin in terms of security and developer interest, among other issues.

What Is Litecoin?

Litecoin was created as a fork of Bitcoin in 2011 with the goal of making a cryptocurrency more suited for payments and transactions. It uses proof of work like Bitcoin, but it uses a different proof of work algorithm that results in over 3x faster transaction confirmations and up to 50x lower transaction costs.

Besides using a different proof of work algorithm, Litecoin and Bitcoin are very similar from a technical perspective. However, investors so far have preferred Bitcoin, as Bitcoin has a market cap of $387 billion compared to Litecoin’s (still respectable) market cap of $4.4 billion.

Why Did Litecoin Rally?

Interest in Litecoin shot up on November 2nd after MoneyGram (MGI) announced a new feature that will allow users of its mobile app to buy and trade Bitcoin, Ethereum (ETH-USD), and Litecoin.

Bitcoin and Ethereum didn’t really react to the news, but Litecoin rallied from $55 to $62 shortly after the announcement. Investors were likely excited that Litecoin was the only cryptocurrency chosen besides the two stalwarts Bitcoin and Ethereum. But despite the rally, Litecoin is still underperforming Bitcoin and Ethereum over the past year.

MoneyGram is a peer-to-peer payments company that was recently bought out at a valuation of over $1 billion. It makes sense that MoneyGram would be interested in supporting Litecoin considering that Litecoin markets itself as being optimized for payments, MoneyGram’s specialty. However, MoneyGram is a small company even compared to Litecoin and Litecoin’s involvement only relates to one MoneyGram feature, so the reaction in Litecoin’s price is quite extreme relative to this news.

Thus, it’s also possible that other events contributed to the rally. For example, Litecoin’s halving is coming up in less than one year, whereas Bitcoin’s next halving will be in 2024. Like Bitcoin, Litecoin halves about once every four years, but it operates on a different halving schedule because it was created at a different time.

Overall, it’s possible that multiple factors contributed to the rally, with the MoneyGram announcement being the most timely one.

Could Litecoin Outperform Bitcoin?

The question most investors probably have is whether Litecoin’s recent rally could be the start of a larger trend in which Litecoin continues to outperform Bitcoin. I think that this result is unlikely for a few reasons, which I’ll now dive into.

Less Developer Interest

When looking at stocks, it’s generally accepted that a company that’s capable of hiring and motivating talented workers will likely outperform peers that fail to successfully hire as many good/motivated employees. However, when it comes to cryptocurrencies, many investors seem willing to turn a blind eye to actual developer interest. Perhaps that’s because developers are often looked at as unpaid volunteers, even though many Bitcoin developers are now employed through members of the crypto community like Block.

When it comes to developer involvement, there’s no question that Bitcoin is superior to Litecoin. The 25 most recently closed pull requests on Bitcoin Core span only 10 days. On the other hand, the 25 most recently closed on Litecoin Core go all the way back to December of last year. This means that far more work is being done in Bitcoin’s code base compared to Litecoin.

Granted, because Litecoin is a fork of Bitcoin, it can copy many updates made to Bitcoin for free. But the point here is clear: there’s much more developer interest in Bitcoin than Litecoin.

Scalability Issues Aren’t Solved

Litecoin admittedly delivered on its promise to be more scalable than Bitcoin, as it’s able to process about 56 transactions per second compared to Bitcoin’s 7. Due in part to this faster processing, Litecoin charges about 4 cents per transaction compared to $7.60 for a Bitcoin transaction. Thus, it’s objectively true that Litecoin is a better payment network in the one aspect that matters most.

However, Visa dwarfs both Bitcoin and Litecoin in terms of scalability, as it manages over 65,000 transactions per second. Between the fees and this huge difference in scalability, it’s unlikely that either Bitcoin or Litecoin is the payment network of the future.

Bitcoin’s active developer community is solving this by building the Lightning Network, a Layer 2 solution which essentially bundles multiple transactions into one to reduce fees. Litecoin has also adopted its own version of the Lightning Network, which it was able to do easily because it’s a fork of Bitcoin. However, this arguably negates the claim that scalability is an important attribute for a Layer 1 solution.

Bitcoin’s lightning network has base fees of less than 1/10th of a cent per transaction (compared to 4 cents for Litecoin). That should be all the information you need to know whether Litecoin is the payment network of the future.

Worse Security

For proof of work cryptocurrencies, the security of the network is largely a function of hash rate because a higher hash rate increases the difficulty of validating transactions. This makes it more difficult for any one actor to obtain enough compute power to control the network with a 51% attack.

Litecoin’s current hash rate is 543 terahash/second, while Bitcoin’s hash rate is 223 exahash/second, or 223,000,000 terahash/second. Clearly, Bitcoin’s hash rate and overall network security is multiple orders of magnitude greater than Litecoin’s.

It’s going to be difficult for institutions and perhaps even high net worth individuals to seriously consider Litecoin for important transactions when the hash rate of some individual Bitcoin miners is more than the total hash rate of the entire Litecoin network. In theory, that means that large miners could hack the Litecoin network if they wanted, but in practice the hardware requirements for mining Bitcoin vs Litecoin are quite different.

Higher Volatility

The entire argument for Litecoin centers around payments and transactions. If that ends up being the primary use for cryptocurrency, then perhaps there’s an argument to be made that Litecoin is the better solution from a purely technical perspective, even if a Layer 2 solution is needed to fully scale.

However, other uses have come up for crypto in recent years, including as a scarce store of value. For this use case, Bitcoin is superior because there will be fewer total Bitcoin than Litecoin and because Bitcoin currently has lower volatility and more liquidity than Litecoin.

When it comes to transactions, there’s an argument to be made that volatile cryptocurrencies can’t completely displace more stable fiat. And even if they could, Bitcoin’s lower volatility arguably makes it more useful for large transactions than Litecoin despite not scaling as well.

There are a variety of ways that blockchain-based payment networks could ultimately develop. One is that Layer 2 solutions built on top of Bitcoin’s Lightning Network will allow people to send and receive payments in USD, a topic that I covered much more in depth in this article for Tech Investing Edge subscribers. Another option is that stablecoins will win out as a more practical solution despite being more centralized, a topic that I covered in this article for subscribers.

Either way, it’s difficult to imagine a world where an asset that can move 10% in a day based on a product announcement by a little-known small-cap company becomes the preferred method for global transactions, regardless of how efficient it is at processing those transactions.

Final Thoughts

In theory, I have nothing against Litecoin as a concept. It’s a version of Bitcoin that’s in many ways better for transactions and payments. In practice, a cryptocurrency’s value is largely a function of its brand/reputation, network security, scarcity, liquidity, and developer community. In all of these aspects, Bitcoin is clearly superior to Litecoin. Even if Litecoin is theoretically the better cryptocurrency for payments, in practice more people are going to continue to use and pay with Bitcoin, especially if developers continue to make great progress on its Lightning Network.

Litecoin may stick around and continue to trade in a similar pattern to the rest of the cryptocurrency market, with occasional blips like the one seen today. I’m bullish on crypto overall, and if crypto prices increase in the long term, Litecoin’s value may increase as well. But the way I see it, there’s no real argument for investors to hold Litecoin instead of Bitcoin.