Litecoin is a digital currency that provides rapid, low-cost payments that can be sent to recipients all over the world.
Like fiat currencies, digital currencies have their own, unique price determinants. Variables such as foreign investment and international trade can play a huge role in the exchange rates of fiat currencies, while more complicated factors help determine the price of cryptocurrencies.
The underlying technology of digital currencies like litecoin is complex, and gaining an understanding of this foundation is very important to understanding these digital assets.
The Basics Of Litecoin
Litecoin is an open-source, decentralised digital currency that was created in 2011. It is also very similar to bitcoin, and was created using code from a bitcoin client. Because of the close relationship between the two, many have described litecoin as being the silver to bitcoin's gold.
Because the code of these two cryptocurrencies is so close, litecoin has frequently served as a testing ground for upgrades that could later be implemented on the bitcoin network. For instance, Litecoin implemented "Segregated Witness," an update that allows individual blocks to hold more transactions, before bitcoin.
While litecoin is very similar to bitcoin, the two digital currencies have some important differences.
For starters, litecoin's protocol caps the total coins at 84 million, compared to bitcoin's maximum of 21 million. While some have predicted that having 84 million litecoins would enable greater liquidity, others believed that it would simply make the individual coins less valuable because they wouldn't be as scarce.
Litecoin has a block time of 2.5 minutes, meaning that it mines blocks full of transactions four times as often as bitcoin. Also, litecoin uses a hashing algorithm called Scrypt, which was designed to make mining more "democratic" by making it easier for more traditional CPUs to mine the digital currency.
The fact that litecoin has a faster block time than bitcoin makes it so that the former cryptocurrency has a greater bandwidth for processing transactions than its digital sibling and is able to confirm transactions more quickly. This particular benefit has helped litecoin stand out at times, particularly when bitcoin has struggled with scaling problems.
Litecoin Investment Basics
Investors who are interested in litecoin can trade the digital currency on many exchanges, including Bithumb, GDAX and Bitfinex. Investors have the opportunity to trade LTC/KRW on Bithumb and LTC/USD on both GDAX and Bitfinex. Other trading pairs are also available, such as LTC/BTC, LTC/CNY and LTC/USDT are also available.
One thing that investors may not about litecoin is that the digital currency has enjoyed some very robust returns during its lifetime. Between March and September 2017, litecoin rose from roughly US$4.30 to approximately US$92, an increase of more than 2,000%.
During periods like this, litecoin has outperformed many other assets, including stocks and bonds.
Charlie Lee, the creator of litecoin, stated in an interview with Forbes that "I'm sure there are Litecoin millionaires out there."
Investors should keep in mind that bitcoin and litecoin have frequently displayed strong price correlations. In November 2013, for example, their monthly price correlation reached as much as 0.95, a very strong correlation.
However, this relationship weakened at points, for example when bitcoin has surged in price and litecoin has failed to enjoy the same gains.
Anyone who is thinking about investing in litecoin can benefit significantly from obtaining an understanding of the major developments that coincided with these trends of sharp volatility and general malaise.
Growing Interest In Cryptocurrencies
One clear trend in digital currencies is the growing interest they have enjoyed. One good way to quantify this interest is to measure the total market capitalisation—or market value—of these cryptocurrencies.
This total market capitalisation stood at roughly US$1.6 billion in April 2013. In September 2017, the total value of these digital assets reached nearly US$180 billion, representing an increase of more than 11,000%.
This growth became particularly rapid in 2017, when the total market value of digital currencies rose from roughly US$17.7 billion at the start of the year to almost US$180 billion in September, an increase of more than 900% in less than nine months.
Traders should remember that while cryptocurrencies have produced some compelling returns, these digital assets are very new. Bitcoin, the first digital currency to scale, came into existence in 2009. At the time of report, these currencies have been around for less than a decade.
Over time, these digital assets could see their average returns decline. In addition, cryptocurrencies could experience notable losses.
Rising Adoption Of Litecoin
Another development that has taken place alongside the sharp rise of litecoin prices is the growing number of exchanges that offer trading of the digital currency. In May 2017, Coinbase began offering trading of litecoin currency pairs. A few months later, Japanese exchange Bitflyer started letting investors trade litecoin.
In spite of these impressive returns, traders should keep in mind that digital currencies have only achieved widespread adoption in the last decade. As a result, investors could flee these digital assets, which would send their values significantly lower.
Like many other digital currencies, litecoin has frequently displayed significant volatility. The digital currency first experienced sharp price fluctuations in late 2013, when it increased from less than US$2 in October to more than US$50 in November, rising more than 3,000% in the process.
After reaching US$53 in late November 2013, litecoin fell sharply, declining to less than $10 by mid-December. The currency managed to stage a brief rebound, but it fell to less than US$5 within the next year.
Litecoin also experienced some sharp price movements in 2017, when its price rose more than twentyfold and climbed from roughly US$4 to more than US$90. Within a month of reaching that all-time high of more than US$92, the digital currency plunged to almost US$30.
While litecoin has experienced these periods of sharp volatility, there have also been times when its price fluctuations have been far more modest. Between September 2014 and March 2017, the digital currency traded mostly below US$5.
A Speculative Investment
Any investors who are interested in digital currencies should keep in mind that they are speculative investments. Unlike more traditional assets like stocks and bonds, cryptocurrencies do not produce earnings or interest payments.
Investors who are considering digital currencies will need to evaluate a different set of fundamentals.
Digital currencies have not had the opportunity to develop the kind of market history that stocks and bonds have. If an investor is thinking about buying stocks, for example, he or she can look at more than 100 years of market history.
For cryptocurrencies, there is far less market history to observe. As of October 2017, bitcoin, the first digital currency to scale, had been around for less than a decade and provides potential investors with less data to observe.
In light of these considerations, any investors who are thinking about trading cryptocurrencies should be sure to conduct thorough due diligence on these digital assets.
Investors should know that while cryptocurrencies have generated some very compelling returns, some market observers have expressed concerns that these digital assets have entered bubble territory. Many have likened the sharp increases in the value of these assets to the tech bubble that stocks experienced during the 1990s.
Richard Turnill, global chief investment strategist for BlackRock, has expressed such concerns. "I look at blockchain, I look at the charts, and to me that looks pretty scary, and reminiscent of what we've seen before," he told Fortune, alluding to bubbles that have built up in the past, including the one that existed in the 1990s.
Litecoin is a digital currency that is similar to bitcoin, though there is a handful of variations. From the perspective of traders, the two cryptocurrencies have similarities and differences. While they have frequently displayed a strong price correlation, litecoin has not enjoyed as much price growth.
While bitcoin has benefited from the network effects that come along with being the largest—and most well-known—digital currency out there, litecoin has not been able to experience these same benefits.
Investors need to keep in mind that while litecoin has generated some compelling returns, it is a speculative investment that has been around for less than a decade. Litecoin has experienced frequent and intense volatility, suffering sharp price fluctuations in short periods of time.
While investors may find litecoin compelling, they can benefit from conducting significant due diligence before buying, selling or otherwise investing in it.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…