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Is Litecoin the new Bitcoin alternative for investors?

(@danielcawrey) | Published on May 29, 2013 at 16:01 BST

Early investors in Bitcoin have been handsomely rewarded for their belief that a decentralized currency could flourish. Despite Bitcoin’s volatile nature, it’s clear based on the volume of transactions per day (over 50,000) that Bitcoin has gained momentum. This has resulted in continued acceptance and adoption, creating a viable market.

Bitcoin transactions per day
Bitcoin transactions per day

This fact has led some people who missed out on the early days of Bitcoin to wistfully wish that they had only been informed sooner, to have known that Bitcoin would rise up, enriching those who got in early.

As a result, there is increased interest in other cryptocurrencies that have emerged since Bitcoin, and one of the most popular by trading volume has been Litecoin. With a market cap of $53 million and growing, Litecoin is the second largest decentralized currency after Bitcoin. And the number of Litecoin transactions is on the rise, a pattern that is consistent with Bitcoin’s overall growth and increased interest.

But what is Litecoin? How is it different from Bitcoin? Is there room for Litecoin as an alternative to Bitcoin?

The Basics

Litecoin transactions per day
Litecoin transactions per day

Litecoin, denoted as LTC, was released in late 2011. The developers of Litecoin took many of the concepts that made Bitcoin successful and tried to expand upon it, making a few key changes. They did this with hopes of improving upon Bitcoin’s features.

The three main differences between Litcoin and Bitcoin come down to speed of transactions, the amount of currency that will be produced and the design of Litcoin’s proof-of-work algorithm in scrypt. Let’s take a moment to explore each of these differentiating factors.

Speed

LTC/USD on BTC-E, past three months
LTC/USD on BTC-E, past three months

Litecoin is able to process transactions more quickly than Bitcoin. It offers less time to first confirmation. That may not be terribly important right now given that the market cap is pretty small for Litecoin. But the developers of Litecoin are thinking ahead to when more people are using it to pay for things. As the currency grows in popularity, transaction speeds could become important if people are relying on transfers to clear quickly. Much like how we currently dread when financial transactions drag out, this could be considered a similar situation when dealing with cryptocurrencies: they have to work, and transfers need to complete quickly.

This means that Litecoin has a higher possible transaction volume in the long run. Of course, that would have to mean people are actually using Litecoin for payments. At this point Litecoin is not at the stage where there is much of an economy around it, but that could change. Transaction numbers continue to increase as a result of the spike in Bitcoin prices that has occurred over the last few months.

Number of Litecoins

LTC/BTC on BTC-E, past three months
LTC/BTC on BTC-E, past three months

The number of Litecoins that will be produced as a result of mining will total 84 million. This means that there will be many more Litecoins than Bitcoins, which will ultimately only have 21 million in existence. Some have speculated that this will result in a diluted value for Litecoin, while others have predicted that there will be more liquidity.

The liquidity theory is hard to swallow, though, since – like Bitcoins – Litecoins can be divided into very small fractions anyway. Yet the number of Litecoins that will eventually be circulation likely will result in their value being less than Bitcoins, because they will not be as scarce. This could also result in Litecoins being used in different scenarios than Bitcoin.

Proof of Work

In simple terms, proof of work is requiring a degree of difficulty to process something. This is used in mining and processing transactions for both Bitcoin and Litecoin. By using this method, it makes the mining process “difficult” to create a market for mining. (Note: This is a very simplistic explanation of proof or work. Take a look at this to understand more how it relates to mining and processing cryptocurrencies.)

In terms of Bitcoin, proof of work is done using GPU-intensive SHA265 hashing. Litecoin uses an algorithm called scrypt that is more compatible with traditional CPUs. While Litecoin is not as heavily mined as Bitcoin, this makes it easier to mine with traditional computers. As Litecoin is adopted, however, this will change as there is more effort put into mining the currency for its increasing value.

Access to Litecoins

Litecoins are harder to obtain than Bitcoins. In fact, the method of exchanging cash for Litecoins is similar to Bitcoin in its early days. The major exchange that offers Litecoins is BTC-E, which is a Russian exchange. To transfer money to BTC-E, you’ll have to use an intermediary such as Perfect Money, which can be expensive since it charges a hefty fee.

Another way to obtain Litecoins that has become quite popular is to exchange Bitcoins for Litecoins. This BTC/LTC market itself is beginning to become quite popular, and many cryptocurrency experts believe that Litecoin can provide a certain degree of redundancy to Bitcoin. If a scenario were to occur that Bitcoin fails or there is some sort of temporary outage, Litecoin is perfectly capable of operating on its own since it is a separate peer-to-peer network.

Conclusion

The market for Litecoin continues to expand, despite limited access to the currency. It’s much easier for the average person to obtain Bitcoins right now. But just as with Bitcoin, as time goes by Litecoins will be easy to obtain as well. Mt. Gox announced plans back in April to add Litecoins to its exchange. Those plans have been delayed due to the problems that the exchange has experienced with DDoS attacks, and the company has established no concrete timeline.

Nevertheless, look for a spike in the value of Litecoins to occur simply because of the access to Litecoins that Mt. Gox can provide. Litecoin’s value as a backup to Bitcoin can’t be denied even if it never ends up being an equal to Bitcoin.

Although neither can be considered traditional commodities, it’s possible that Litecoin could be the silver to Bitcoin’s gold in their relationship to each another. Right now Litecoin adoption is slow going and access by the average person is ultimately a problem. But Litecoin’s slight advantages like the increased transaction performance over Bitcoin that could give it staying power.

To learn more about Litecoin, check out its official website, provided by the developers. What do you think about Litecoin? Is it a suitable alternative to Bitcoin?

litecoin

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