Bitcoin vs. Litecoin: An Overview
Over the past several years, public interest in cryptocurrencies has increased dramatically. The main focus of this interest has been Bitcoin, which, following the release of its first public client in 2009, has become the dominant name in cryptocurrency. Since then, however, many other cryptocurrencies have entered the scene, with at least 20 tracked by major financial news sites each day. Among these, one name which has garnered increasing interest is Litecoin. Indeed, Litecoin’s own developers have long stated that their intention is to create the “silver” to Bitcoin’s “gold.”
On the surface, Bitcoin and Litecoin have a lot in common. At the most basic level, they are both cryptocurrencies. Whereas state currencies such as the U.S. dollar or the Japanese yen rely on political and legal mechanisms for value and legitimacy, cryptocurrencies rely only on the cryptographic integrity of the network itself. Yet Bitcoin and Litecoin also differ in important respects.
- Bitcoin has been the dominant name in cryptocurrencies since 2009, but Litecoin and others have joined the fray.
- Bitcoin's market cap is over $67 billion, while Litecoin's is under $3 billion.
- Litecoin can produce a greater number of coins than Bitcoin and its transaction speed is faster, but these factors are largely psychological boons for the investor and don't impact the value or usability of the currency.
- Bitcoin and Litecoin use fundamentally different cryptographic algorithms: Bitcoin uses the longstanding SHA-256 algorithm, and Litecoin uses a newer algorithm called Scrypt.
As of February 24, 2019, Bitcoin’s market capitalization sits at roughly $67 billion, vs. a market cap of $2.7 billion for Litecoin. Whether Bitcoin's market cap strikes you as either high or low depends largely on a historical perspective. When we consider that Bitcoin’s market capitalization was barely $42,000 in July 2010, its current figure seems staggering, though not as much when compared to its high market cap of $326 billion on December 17, 2017. While Bitcoin remains by far the most valued player in the cryptocurrency space, others such as Ethereum, Ripple, and Litecoin are catching up.
One of the main differences between Bitcoin and Litecoin concerns the total number of coins that each cryptocurrency can produce. This is where Litecoin distinguishes itself. The Bitcoin network can never exceed 21 million coins, whereas Litecoin can accommodate up to 84 million coins. In theory, this sounds like a significant advantage in favor of Litecoin, but its real-world effects may be negligible. This is because both Bitcoin and Litecoin are divisible into nearly infinitesimal amounts. In fact, the minimum quantity of transferable Bitcoin is one hundred millionth of a Bitcoin (0.00000001 Bitcoins) known colloquially as one “satoshi.” Users of either currency should, therefore, have no difficulty purchasing low-priced goods or services, regardless of how high the general price of an undivided single Bitcoin or Litecoin may become.
Litecoin’s greater number of maximum coins might offer a psychological advantage over Bitcoin, due to its smaller price as of yet for a single unit.
In November 2013, IBM executive Richard Brown raised the prospect that some users may prefer transacting in whole units rather than in fractions of a unit, a potential advantage for Litecoin. Yet even assuming this is true, the problem may be solved through simple software changes introduced in the digital wallets through which Bitcoin transactions are made. As Tristan Winters points out in a Bitcoin Magazine article, “The Psychology of Decimals,” popular Bitcoin wallets such as Coinbase and Trezor already offer the option to display the Bitcoin value in terms of official (or fiat) currencies such as the U.S. dollar. This can help circumvent the psychological aversion to dealing in fractions.
Although technically transactions occur instantaneously on both the Bitcoin and Litecoin networks, time is required for those transactions to be confirmed by other network participants. According to data from Blockchain.info, the Bitcoin network’s long-term average transaction confirmation time is just over 10 minutes per transaction, though this can vary widely when traffic is high. The equivalent figure for Litecoin is roughly 2.5 minutes. In principle, this difference in confirmation time could make Litecoin more attractive for merchants. For example, a merchant selling a product in exchange for Bitcoin would need to wait nearly four times as long to confirm payment as if that same product were sold in exchange for Litecoin. On the other hand, merchants can always opt to accept transactions without waiting for any confirmation at all. The security of such zero-confirmation transactions is the subject of some debate.
By far the most fundamental technical difference between Bitcoin and Litecoin are the different cryptographic algorithms that they employ. Bitcoin makes use of the longstanding SHA-256 algorithm, whereas Litecoin makes use of a comparatively new algorithm known as Scrypt.
The main practical significance of these different algorithms is their impact on the process of “mining” new coins. In both Bitcoin and Litecoin, the process of confirming transactions requires substantial computing power. Some members of the currency network, known as miners, allocate their computing resources toward confirming the transactions of other users. In exchange for doing so, these miners are rewarded by earning units of the currency which they have mined.
SHA-256 is generally considered to be a more complex algorithm than Scrypt, while at the same time allowing a greater degree of parallel processing. Consequently, Bitcoin miners in recent years have utilized increasingly sophisticated methods for mining Bitcoins as efficiently as possible. The most common method for Bitcoin mining consists of the use of Application-Specific Integrated Circuits (ASICs). These are hardware systems that, unlike the simple CPUs and GPUs which came before them, can be tailor-made for mining Bitcoins. The practical consequence of this has been that Bitcoin mining has become increasingly out-of-reach for the everyday user.
Scrypt, by contrast, was designed to be less susceptible to the kinds of custom hardware solutions employed in ASIC-based mining. This has led many commentators to view Scrypt-based cryptocurrencies such as Litecoin as being more accessible for users who also wish to participate in the network as miners. While some companies have brought Scrypt ASICs to the market, Litecoin’s vision of more easily accessible mining is still a reality, as most Litecoin mining is done via miners' CPUs or GPUs.
While Bitcoin and Litecoin may be the gold and silver of the cryptocurrency space today, history has shown that the status quo in this dynamic and emerging sector can change in even a few months. It remains to be seen whether the cryptocurrencies with which we have become familiar will retain their stature in the months and years to come.