The value of Litecoin

I argue that LTC’s marketcap should equal BTC’s marketcap in the long run.

 

Why Did Valuations Soar in 2017?

The value of bitcoin, and other cryptocurrencies/assets, is in all honesty a big fugazi. One bitcoin goes for $9,134 (https://bitinfocharts.com/) as of publication, and is up from $1,271 a year prior. Litecoin (& all other ‘alts’) also followed bitcoin’s ascent in valuation during the year, as LTC’s price increased 45x YOY and some coins even 100x. The dramatic rise in valuation is arguably the result of speculation from countries such as the USA, South Korea, Japan, Venezuela, Canada etc all vying to get access to a scarce internet asset (or whatever it is).

Why did the markets soar in 2017 though? Pure chance? Why not in 2016 or 2018? What was the catalyst? I believe markets move on news, and something had to spark the sudden explosion.

The sudden rise in BTC and other altcoins like LTC and DCR happened around the time SegWit was implemented.  While SegWit wasn’t implemented w/ the BTC blockchain until August 2017, it had been tested on a very similar blockchain. Litecoin is basically a copy of bitcoin’s code with a different name (I talk about this in more detail below), and is an excellent live testing space for updates to BTC’s protocol.

In January of 2017, LTC’s ‘creator’ Charlie Lee tweeted his vision for Litecoin, which outlined SegWit:

Capture

 

Here is the article that discusses SegWit, and other benefits it brings to the network, such as the lightening network (LN). The day LTC SegWit was implemented (05/11/17), LTC’s price was ~$30, after entering the year at ~$3.

SegWit implemented a myriad of updates to bitcoin, and was an attempt to provide a solution to scaling concerns and trxn fees. SegWit also introduced a new technology/possibility on the bitcoin protocol, LN and cross-chain atomic swaps. LN (lightening network), is a ‘side-chain’ that groups multiple trxn’s into a single block, thereby making trxn’s faster and cheaper. Cross-chain atomic swaps are decentralized exchanges between different block chain networks (currencies). For example, you could theoretically switch between LTC/BTC without a trusted third party. This fits perfectly with what we see today, as more exchanges move towards decentralization of custody. In practice, decentralized exchanges relay messages between parties and do not take custody of assets.

Eventually, I reason that there will be a big enough market where we do not even need a platform for exchange, rather a user will be able to broadcast to the network that they want to switch LTC to BTC and counter-parties automatically match up. This may, in my opinion, open the door for friction-less, near instantaneous trxns between different coins that share BTC’s protocol (like LTC).

Similarities Between LTC and BTC and the Law of One Price

This is my understanding, and I may be completely wrong, but instantaneous, friction less transfers between two identical assets/commodities/currencies gives way to law of one price. The difference between LTC and BTC is cosmetic, rather than fundamental. LTC has 4x the amount of supply, 1/4th the block time, a different mining algorithm, and a different name. LTC and BTC share the same code, serve the same market, provide the same utility, and present similar risks. Up until SegWit, LN and Atomic Swaps, there was very little reason to use LTC. With these new features, the future value of LTC and BTC (and other coins that share BTC’s code) has changed.

Admittedly, there is still very little reason to use LTC, let alone any reason to use BTC. However,  people believe BTC has value, and ipso facto LTC has value. Below is a video showcasing a cross-chain swap between LTC and BTC:

 

I have absolutely no idea how any of that works, but it does sound like it worked, and it is obviously in the early stages. Currently, I believe you need to find a third party manually, i.e. via a chat room, to do a cross-chain swap. However, the ability to find a counter party will likely improve with increased adoption. The internet used to run on dial-up, now we are close to having 1gb/s on our mobile phones (with 5G)! Rapid change is to be expected in software and computing. If LN/atomic swaps can scale and become friction less, it may one day be cheaper to go from BTC > LTC > BTC, than going directly BTC>BTC. It may in fact become the cheapest and most secure way to transfer information in the world. Wealth and information flow the path of lease resistance. An atomic LTC/BTC trxn may be the cheapest.

For example, LTC has 4x the supply and 1/4 the block time (making trxn’s faster). LTC’s fees are considerably lower than BTC’s, meaning it is more economical to transfer information on LTC’s network than BTC’s.

The way LN works, is that it takes a bunch of trxn’s that each have their own fee, and transfers the aggregate information from each coin with a single trxn. I should note I could be completely wrong because I am not an engineer and have no idea how the code works. Here is a  source to help explain:

“A channel is committed to using one unspent transaction output (UTXO), settling it consumes only that UTXO and all of the other channels a given party might have are completely unrelated.”

Impact of LN and Cross-Chain Atomic Swaps

So assuming LN and cross-chain swaps can scale, LTC may become a highway that absorbs BTC ‘sexcess traffic. But if BTC and LTC can swap, why can’t other coins as well? Whats stopping them? Nothing. Anyone can create a blockchain that is a fork of bitcoin’s code. But what provides BTC and other incumbents with a moat is protection from coin hopping. Coin hopping, (I’ve also seen it called drive-by hashing) is the process of miners switching between coins to mine the most profitable coin. For example, if a BTC miner wants more BTC, it may sometimes be cheaper to mine a different coin, and sell it for BTC, rather than mine BTC itself.

What happens is that the non-BTC coin’s hashing difficulty dramatically increases to adjust for the influx of miners. Once the difficulty adjust, the miner move onto to an ‘easier’ coin to mine (or back to BTC), leaving the previous coin un-mine-able. As the coin’s difficulty gets too high, miners cannot mine it, and transactions cannot be made without miners, so the network temporarily stops until the difficulty adjust back down (depending on coin, usually ~2-4 weeks).

Namecoin, one of the first alt coins to fork off of bitcoin, was the victim of coin hopping. Charlie Lee does a good job explaining in the below video, starting at 2:00

Basically, namecoin periodically became unusable because its hashing algorithm is the same as BTC’s. Litecoin is protected from BTC coin hopping because it uses Scrypt as its hashing algortihm. Protection from SHA256 asic miners is critical for any coins survival. For example, LTC, Etherum, and Decred all have different mining algo’s. Their values reflect the premium paid for protection from coin-hopping (IMO).

There is also value in how secure a network is. The longest chain is the safest, and BTC’s chain is arguably one of the most secure networks in the world. A long blockchain insulates the network from attacks such as DDoS and increases the difficulty of performing a 51% hack.

As well, having a wide distribution of users decreases centralization, and reduces risk associated with it. A look at the BTC’s wealth distribution shows it moving towards a normal distribution.

Capture

LTC’s distribution is more much positively skewed, as shown below:

Capture

This is a negative, but may improve overtime. As LTC’s distributions becomes more normal (standardized?), I believe more users will enter the ecosystem, driving up the value of LTC’s economy. Moreover, given LTC’s long chain and secure network, I believe a similar distribution will drive BTC and LTC’s valuation closer together.

Worth the Risk?

With the possibility of nearly friction-less, instantaneous trxn’s between BTC/LTC, and the fundamental similarities yet key difference (protection from coin hopping), law of one price will dictate that BTC and LTC converge in value overtime. Assuming BTC has value, LTC should be valued nearly the same as BTC, adjusted for 4x the supply. The going rate for BTC:LTC is about .02 BTC for 1 LTC. I believe it should be closer to 1:1 in the long term.

If you want to get exposure to cryptoassets, I think LTC is worth the risk. There is a possibility that LTC may continue to increase in value while BTC declines in value. Or they both may increase. More realistically, they both may decline in value. Either way, in the long run BTC and LTC will have similar values (IMO), weather it be $0, or $1,000,000.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s