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What is Litecoin & How Does it Work?

November 27, 2019 · 7 minute read

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What is Litecoin & How Does it Work?

Cryptocurrencies have been a hot topic of conversation over the last few years. Sometimes it seems like everyone has an opinion—your uncle, the guy in line at Starbucks, and of course, every person on the entire internet.

Perhaps it should come as no surprise. Cryptocurrencies are built using exciting technology that could potentially change the way our economies work. Certainly, the wild swings in the prices of cryptocurrencies draw a lot of attention (and criticism).

Volatility can generate curiosity from investors, speculators, and those with a general interest in seeing how the future of the cryptocurrency market will unfold.

The first and largest cryptocurrency is Bitcoin. But, that’s not the only cryptocurrency out there. Ethereum, Ripple, and Litecoin are also familiar.

What is Litecoin? Litecoin is a peer-to-peer internet currency that is sometimes referred to as “Bitcoin’s little brother” or as a “lite version of Bitcoin.” In November of 2013, Litecoin had its first major price surge . Unsurprisingly, this period of rapid increase got people talking about the hottest new cryptocurrency of the hour.

Since then, Litecoin has become one of the most recognizable names in cryptocurrency. Currently, it ranks as the sixth largest cryptocurrency by market cap in a sea of thousands. So far, Litecoin has survived and remained relevant in an environment where many cryptocurrencies have failed and are now defunct.

Potential cryptocurrency purchasers will likely want to do their due diligence before taking the plunge into this volatile holding. Here’s more for those wondering how Litecoin works and what Litecoin is used for.

What is Litecoin?

Litecoin is a peer-to-peer cryptocurrency that aims to enable instant, near-zero cost payments that can be done between people or institutions anywhere across the world. Litecoin is probably most well-known for using a similar mathematical code to Bitcoin, but with four times as much supply and four times the processing speed.

But to fully understand “what is a Litecoin” and what makes it different, it helps to first have a general understanding of cryptocurrencies, so let’s start there.

A cryptocurrency is an online-only digital currency that acts as a direct financial exchange between users without the involvement of a bank or other third parties. Many cryptocurrencies, including Litecoin, are decentralized.

This is opposed to what we are more commonly used to, which is a currency system that uses a central bank. These currencies are generally controlled by the government of the country or bloc of countries that issue that currency (like the dollar or euro).

The decentralization of the banking system is a goal of cryptocurrency. Many of us who have ever tried to send or receive money across financial institutions or to another country have likely dealt with inconveniences. Frankly, it’s not that easy to understand how money is sent between banks, what the costs are, and why transactions take as long as they do. To technology buffs (and institutions moving large sums of money), these inconveniences are even more pronounced in the digital age.

Charlie Lee, a former Google employee and engineering director at Coinbase, released Litecoin in 2011 . To compare, Bitcoin was created in 2009 by an unknown person or group of individuals called Satoshi Nakamoto.

Lee designed Litecoins be a compliment to the original cryptocurrency, not to be a replacement or even a competitor. That’s why it is sometimes referred to as “Bitcoin’s little brother.” Lee has said that he wanted to create the “silver” to Bitcoin’s “gold.”

Because Litecoin can create blocks in 2.5 minutes (as opposed to Bitcoin’s 10), the transaction time is also faster. Thus, Litecoin is often considered a “lighter,” faster version of Bitcoin.

What is Litecoin Used For?

Litecoin advertises itself as a “cryptocurrency for payments—based on blockchain technology.” Its primary focus is to act as a medium for transacting payments without a bank or other third-party intermediary.

Litecoin uses a very similar technology to Bitcoin, but with the ability to conduct transactions faster than Bitcoin. How much faster?

According to Litecoin, it takes two-and-a-half minutes to “process a block” compared to Bitcoin’s ten, making the currency four times faster than bitcoin. The tradeoff is that a transaction done in litecoins may not be as secure as a transaction done in bitcoins.

But of course, many people are interested in Litecoin as a potential long-term holding, not just as a means to process transactions. Similar to making a purchase of any type of currency, the hope is that the new currency will increase in value relative to base currency.

Therefore, many speculators looking into a cryptocurrency like litecoin are generally speculating that the currency will build relative wealth over time. However, there are always risks with speculative plays like currency.

How Does Litecoin Work?

In order to understand how litecoin works, it is good to first have a base knowledge of the underlying technology of blockchain. With blockchain, information is coded and stored in a block, and each block strung together creates a chain. The chain of information acts as litecoin’s transaction ledger.

Blockchain is an open, distributed ledger that, as described by the Harvard Business Review, “can record transactions between two parties efficiently and in a verifiable and permanent way.” The ledger itself can also be programmed to trigger transactions automatically.

The information used within a blockchain system is kept safe through the use of encryption techniques. Transactions using blockchain technology are generally assumed to be anonymous (although in fact they are pseudonymous—because each user has a public address, someone could do lots of legwork to trace it back to an actual IP address, and thus the actual person).

As with many cryptocurrencies, Litecoins are mined by users, hopefully in exchange for the currency. Miners verify transaction and create new blocks by solving complex mathematical equations—making Litecoin part of the math-based currency cohort.

With litecoin, miners are awarded with 25 new Litecoins per block they mine, an amount that gets halved roughly every four years (every 840,000 blocks).

Litecoin has a cap of 84 million Litecoins in total—four times as many units as Bitcoin. Similar to Bitcoin, Lee designed Litecoin to have the majority of coins mined in the first two decades. As of this writing, there are over 63 million Litecoins.

Speculatinging in Litecoin

Anyone feeling ready to take the plunge and purchase Litecoin may want to learn about the unique way that cryptocurrencies are bought and held.

It is not possible to buy Litecoin or other cryptocurrencies through many traditional brokers. Instead, Litecoin must be purchased in a digital wallet, 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 buy and hold cryptocurrencies.

No matter where Litecoins are purchased, they must be stored in a cryptocurrency wallet. A wallet—which is either a software program or actual hardware—allows you to send and receive digital currencies and keep an eye on your speculative play.

It might be helpful to understand that cryptocurrency isn’t “stored” in the traditional sense, as in dollars that are stored in a bank account. Instead, records of transactions are stored on the blockchain.

Most wallet options are either considered offline or online, with online wallets generally considered to be riskier and more open to hacking than offline wallets. An offline wallet, such as a wallet stored on a hard drive, may be safer, but buyers run the risk of losing the hard drive.

What is the Price of Litecoin?

You can view the current price of Litecoin here .

As with many of the most popular cryptocurrencies, Litecoin has experienced significant volatility over its short history on this planet. This volatility has happened on both the upside and the downside.

At its highest point, in December of 2017, Litecoin was trading at over $375, its most precipitous rise to date. In December of 2018, the price was as low as $24, before another uptick during early 2019.

What Are the Risks of Litecoin?

The risks of litecoin are similar to the risks of most cryptocurrencies. First, potential buyers are wise to be mindful of scammers. Unfortunately, there are always people out there who are willing to take advantage of others.

Cryptocurrency, which is a new, exciting, and sometimes misunderstood frontier, is an environment that is ripe for such activity.

Also, cryptocurrency wallets and exchanges are not impervious to hacking. Hacking could be a major concern of anyone making a decision about where to buy and store their cryptocurrencies. If cryptocurrencies are hacked and stolen, there may not be a way to recover them.

Here’s another perspective: For an idea of the Securities and Exchange Commission’s stance on cryptocurrencies , the agency recently again denied a crypto-ETF, stating that “its disapproval does not rest on whether bitcoin or blockchain more generally, has utility or value as an innovation or investment,” but was because it is not meeting the requirement to “prevent fraudulent and manipulative acts or practices”—a standard requirement for the SEC.

There are plenty of what-ifs when it comes to cryptocurrency. For example, what is the fate of cryptocurrencies if they are not widely adopted? Cryptocurrency, along with blockchain, are technologies that are still in their infancy.

As with the invention of the internet and ensuing internet-related companies, it is extremely difficult to predict which cryptocurrencies could be successful, or whether any of them will be successful.

It’s hard to tell how blockchain technology ultimately will be used. Here’s one opinion on the predicted adoption of blockchain technology from the Harvard Business Review : “While the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure.

“The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum.”

The authors go on to say, “Our experience studying technological innovation tells us that if there’s to be a blockchain revolution, many barriers—technological, governance, organizational, and even societal—will have to fall.” Blockchain, and cryptocurrency, currently face major regulatory challenges from the very systems that they are aiming to disrupt—and may continue to.

The Takeaway

Risk is a natural part of purchasing volatile assets. But it’s important to know that crypto, due to its volatility, carries a higher degree of risk. When purchasing cryptocurrency, a buyer should know how much they can afford to lose.

When buying cryptocurrency, it may be helpful to be saving and investing in other more established ways, as well. And there’s always the option to purchase a small amount of crypto, which somewhat alleviates the risk.

For example, investors and speculators may want to consider building out a portfolio of stocks and bonds using diversified funds. Although these investment types will also experience volatility, they have long track records of providing value to investors over time. Always keep in mind investing comes with risk, including the risk of loss.

On SoFi Invest®, investors can trade their first cryptocurrency with as little as $10. Doing so will get them a bonus of $10 in Bitcoin. Unlike the stock market, investors can also trade cryptocurrencies like Bitcoin, Litecoin and Ethereum 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors' crypto holdings secure.
Get started trading crypto on SoFi Invest today.

✝SoFi takes security seriously across all of the brand’s products. SoFi Invest uses a number of tools to secure crypto holdings against theft, including two-factor authentication, SSL encryption, partnering with trusted exchanges like Coinbase to complete transactions, and not sharing personal information about our members with crypto trading partners and custodians. Before you purchase crypto through SoFi Invest, it is important to understand the volatility of its value, and therefore its inherent risk.
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