What is Litecoin & How Does it Work?

November 01, 2021 · 8 minute read

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What is Litecoin & How Does it Work?

Litecoin (LTC) is a cryptocurrency created in 2011 by former Google engineer Charlie Lee. It was one of the first “altcoins” — or alternatives to bitcoin. Though it’s built on bitcoin’s original source code and shares certain features with BTC, Litecoin was designed to improve upon bitcoin, especially in terms of transaction speed.

Though Litecoin was initially a popular entry into the crypto category, it has gained and lost value over time, displaying a similar volatility to many cryptocurrencies (or even certain stocks and bonds). As of October 25, 2021, Litecoin was worth roughly $195.13, with a market capitalization of $13.42 billion.

If you’re wondering how Litecoin works, what Litecoin is used for, and whether it makes sense to trade Litecoin, keep reading.

What Is Litecoin?

Like many forms of crypto, Litecoin is a decentralized, peer-to-peer cryptocurrency; it was created from a fork in the bitcoin blockchain, the transparent, digital public ledger used by most cryptocurrencies. Litecoin was designed to enable almost instant, near-zero cost payments that can be exchanged between people or institutions worldwide.

Like Bitcoin, Litecoin uses a proof-of-work system (PoW) to verify transactions on the blockchain, but owing to certain modifications it’s considered a “lighter,” faster version of Bitcoin. The main difference between Litecoin and Bitcoin is that Litecoin uses a mining algorithm called scrypt, to enable faster transaction times.

Litecoin generates a new block to be mined every 2.5 minutes, which is about four times faster than Bitcoin’s 10 minutes. The Litecoin supply is also four times as great. While Bitcoin has a cap of 21 million coins, the Litecoin supply overall has a cap of 84 million.

Unlike traditional fiat currencies like the dollar or the euro, the litecoin supply is capped at 84 million. As of late October 2021, about 67 million Litecoins had been mined.

How Does Litecoin Work?

The process of mining Litecoin is similar to Bitcoin and other blockchain-based cryptocurrencies. Each block of transactions is confirmed by miners, who use high-powered computer hardware to confirm each block and secure it to the blockchain, a process that involves literally billions of calculations. Hence the term “proof of work.”

Once the block is verified, the next block enters the chain. Transactions using blockchain technology are generally assumed to be anonymous (although in essence they are pseudonymous — because each user has a public address). Miners who successfully verify the block are rewarded with 12.5 Litecoins. Similar to bitcoin, the number of Litecoins awarded is halved on a regular cadence.

Recommended: SoFi Crypto Trading Guide: Resources for Traders of Any Level

When was the Last Litecoin Halving?

When Litecoin was launched in 2011, the reward was 50 LTC. The first halving was in August 2015, to 25 LTC. In August 2019, the reward was reduced from 25 to 12.5, and the halving will continue at regular intervals — every 840,000 blocks — until the 84,000,000th Litecoin is mined.

Given that Litecoin blocks are mined about every 2.5 minutes, the halving occurs roughly every four years. This cadence is built into the Litecoin algorithm.

What Is Litecoin Used For?

Litecoin’s primary focus is to act as a medium for transacting payments without a bank or other third-party intermediary.

Litecoin was designed to be used for cheaper transactions, and to be more efficient for everyday use. In comparison, bitcoin can often be used as a store of value for long-term purposes.

How Is Litecoin Different From Bitcoin?

Litecoin differs from bitcoin in four main ways, including the litecoin supply, which is capped at 84 million coins versus bitcoins 21 million. (Note: Not all cryptocurrencies are capped; some, like Ethereum (ETH) have an unlimited supply.) Three more distinctions to bear in mind:

1. Cryptography

In order to add new Litecoin or bitcoin blocks to the blockchain, miners must solve hash functions. A big differentiator between Litecoin and Bitcoin are the cryptographic algorithms they employ. Bitcoin uses the SHA-256 algorithm, whereas Litecoin uses a newer algorithm called scrypt.

Litecoin developers chose scrypt initially so that LTC mining wouldn’t be dominated by ASIC-based miners, thus allowing GPU and CPU-based miners to compete. Over time, though, ASIC-based miners have become more scrypt-capable and typically generate more hashes. Scrypt was also considered less vulnerable to cyber attacks.

2. Speed

Charlie Lee, Litecoin’s founder, wanted to prioritize transaction speed, and this is still a major reason for LTC’s popularity. The bitcoin network’s average transaction confirmation time is about 10 minutes per transaction, while litecoin’s is roughly 2.5 minutes. Thus Litecoin’s network can handle more transactions because of its shorter block generation time.

3. Market capitalization

Bitcoin leads the crypto-verse in terms of market cap, and therefore has a much greater market capitalization than Litecoin. As of October 25, 2021, the total value of all bitcoins in circulation was around $1.1 trillion, while the market capitalization of Litecoin was about $13.42 billion.

How to Invest in Litecoin

You can’t buy Litecoin or other cryptocurrencies through many traditional brokers. Instead, Litecoin must be purchased via one of the cryptocurrency exchanges, or through an online brokerage firm that offers crypto trading.

Consider fees, security, and accessibility before making a decision about where to trade cryptocurrencies.

To store crypto securely, you need to use a cryptocurrency wallet, a software program for managing the assets. But even if you have software you trust, you must remember and secure a password or key that only you know. This has been an issue with crypto, as people who forget their passwords essentially lose the assets.

To get crypto into the wallet itself, investors need to use a crypto exchange. How crypto exchanges work is that they provide a platform for buying and selling crypto — either by exchanging one type of crypto for another, or, more typically, using fiat money (like dollars) to purchase or receiving fiat money for crypto you sell. Even as crypto exchanges grow in popularity and more sophisticated security systems are designed, hacks and instances of theft still continue to take place.

What Is the Price of Litecoin?

You can view the current price of Litecoin on CoinMarketCap and other sites. As with many of the most popular cryptocurrencies, Litecoin has experienced significant volatility over its short history.

At its highest point, in December of 2017, Litecoin was trading at over $375, its most dramatic rise to date. In December of 2018, the price was as low as $24, before another uptick during early 2019. Litecoin is currently trading at about $195, as of October 25, 2021.

What Factors Affect LTC Price?

Like the price of any investment, Litecoin’s price is subject to market demand. But what are some of the key factors that can impact demand?

When Litecoin was launched in 2011, it was one of the first altcoins and it was considered a worthy rival to Bitcoin, thanks to its faster transaction speed and overall efficiency.

A lot has changed in 10 years; now there are thousands of cryptocurrencies on the market, and many coins that offer faster transaction speeds and other important features like the ability to create d’apps (decentralized apps), smart contracts, and more. The increased competition has lowered the demand for LTC, which in turn has impacted its price — and the lower price means it’s less lucrative for miners, who get compensated with Litecoins.

That said, as of Oct. 25, 2021, Litecoin was still the 17th largest cryptocurrency by market cap — hardly a laggard.

What Are the Risks of Litecoin?

The risks of litecoin are similar to the risks of most cryptocurrencies. The entire sector is barely a dozen years old, as of this article’s publication. And like any growing industry — in this case one that’s not yet well regulated — the risk of losses looms large. Here’s why:

High volatility

The crypto market is highly speculative and therefore highly volatile. As of June 2021, Litecoin was among the top 10 cryptocurrencies; as of October 2021, it’s nearing the bottom of the top 20. Given how swiftly things can change, this trend may not be an indicator of things to come, but it’s important for investors to bear in mind when considering litecoin as a speculative play vs. a store of value.

Uncertain future

As noted earlier, when LTC first launched in 2011, traders were intrigued by its innovative use of the bitcoin source code to provide transactional efficiencies. Now that novelty has worn off, thanks to innumerable new crypto contenders, and it’s not clear whether LTC has the staying power to keep investors’ loyal.

Regulatory holdups

Although in theory Litecoin can be used for swifter payments, the reality is that the adoption of crypto as a universal means of payment and legal exchange is still up in the air.

All of which to say, though investing in Litecoin does offer some upsides — the currency has high liquidity, for one, and a full decade’s worth of staying power, for another — it’s not without some risks.

The Takeaway

The 10-year history of Litecoin is a fascinating one. What started as a quasi experiment — a curious engineer crafting an innovative fork off the bitcoin blockchain — quickly became a widely adopted and traded altcoin that remains among the top 20 cryptocurrencies today. Thanks to its use of scrypt, a faster algorithm, litecoin’s transaction speed is just 2.5 minutes compared to about 9 minutes for bitcoin.

A decade later, litecoin is still valued for its faster transaction speeds, although it’s facing some headwinds. At the moment, those include possible regulatory hurdles and perhaps a loss of popularity among investors. But what the future will bring is anyone’s guess. One thing that is certain, investors with a front-row seat will have more visibility as the future unfolds.

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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.


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