I normally only write about gold and silver mining stocks. However, I did post a Bitcoin article once before (Bitcoin: Buy, Sell, or Hold). Now, I’m going to post one on Litecoin.
In my opinion, Litecoin has an excellent risk/reward profile. Below, I will outline the reasons why. If you have read a little about Bitcoin or Litecoin, then this article will give you information about what the excitement is all about.
Litecoin offers a unique opportunity. It’s similar to a technology investment, such as the companies that invented computers or software. The valuation of the companies that survived, such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Oracle (NYSE:ORCL), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), all exploded in value. For this reason, you didn’t have to invest much if you got in early.
Today, it is still early for cryptocurrencies and Litecoin. The percentage of people who own Litecoin is tiny. If Litecoin is going to be successful, then the upside potential is huge. For this reason, a small exposure is all you need.
Litecoin is basically a copy of Bitcoin with a few differences. I think these differences actually give Litecoin an advantage over Bitcoin. Let me list some of them.
Litecoin has 4x as many coins. You may think this is a bad thing because they are not as rare. But it keeps Litecoin more affordable. This should allow Litecoin to outperform Bitcoin.
Litecoin transactions are 4x faster than Bitcoin. It takes Bitcoin 10 minutes to generate a new block of coins, whereas it only takes Litecoin 2.5 minutes.
Litecoin has a foundation that makes it much easier to make changes to the code base. Bitcoin, on the other hand, is a rudderless developer network that requires an extreme amount of agreement to make changes. This makes Litecoin much more adaptable and responsive to technological change.
Litecoin has one objective, which is cheap and fast financial transactions. Bitcoin has a dual objective of providing peer-to-peer financial transactions and maintaining a secure stable network. Bitcoin provides transactional ability but also a source of value from a dependable network. Litecoin also does this, but it is not something they need to focus on. Bitcoin is not really that concerned with transaction costs, because it’s not their first priority. Their first priority is maintaining a secure stable network. Litecoin, on the other hand, will quickly lower their transaction fees if they rise too quickly.
Litecoin has a foundation that not only markets their product but also proactively works with other companies to expand the reach of Litecoin as a transactional currency. Litecoin can proactively and quickly change their code to work more efficiently with specific companies or standards.
I don’t know which of these advantages will end up helping Litecoin, but I’m confident that one of them will. The risk/reward profile of Litecoin seems to be one of the best in the crypto space. While I do think Bitcoin is the king of cryptocurrencies and should be held, I also think Litecoin will likely outperform it over the next 3 years.
It should be noted that Litecoin originated from a copy of Bitcoin. It’s underlying technology and network are essentially the same. They have diverged in subtle ways as listed above and will continue to diverge, but the strength of Bitcoin’s blockchain is the underlying technology of Litecoin. Moreover, I think the success of Litecoin is dependent on Bitcoin, since their blockchains are so similar.
So, while I like Bitcoin, I think Litecoin will outperform it. I think it has better fundamentals. It has everything that Bitcoin has, plus a few extras that give it more value. The opportunity that exists is that most investors have not figured this out.
While I am bullish on Litecoin, it does have risk. The biggest risk is that its use-case of being a low-fee transactional currency may run into competition. Bitcoin could figure out a way to scale in such a way that allows very low transaction fees. If this happens, then why would anyone need Litecoin? Secondly, Litecoin has several competitors, such as Dash and Monero, as well as any new cryptocurrency that suddenly appear, such as AmazonCoin.
It’s amazing how many of the older crowd think crypto is scam and have zero intention of owning any. I would imagine that none of them have read an article this long on cryptos. They think it is a waste of time. In my opinion, they are wrong. Those who think Bitcoin has peaked or is going to zero will be proven wrong. At least, that is my expectation, with a high level of confidence.
I think this will be the year when cryptocurrency is revealed as the real deal. We are already seeing this by the way the mainstream media is presenting it. We will likely look back at 2018 as the year when cryptocurrencies and their underlying technology (the blockchain) became legitimate, as well as one of the most significant financial inventions ever.
In 10 years, most financial transactions will likely occur via a blockchain. And, the blockchain and cryptos will be used for far more than just financial transactions. In fact, the majority of use-cases for the blockchain will most likely surpass financial transactions.
Any company that finds a use-case for the blockchain and figures out a way to monetize it could become a large business. That is what is happening today, with over 1,600 crypto traded coins and tokens, and more added every month.
For this reason, it seems like the financial titans of the over-50 crowd, are missing an opportunity with cryptos. I could be wrong and cryptos will all crash, but that’s not what I expect. In fact, I expect Bitcoin to reach at least $20,000 in 2019. If that happens, it will bring the valuations of other cryptos much higher, including Litecoin.
I will focus my discussion on Bitcoin. If Bitcoin thrives, then Litecoin will not only thrive but likely outperform Bitcoin because of the list I gave above.
I’m sure many of you do not own Bitcoin and have misgivings about it. I urge you to review your reasons for not owning it. Write them down, don’t just go by your gut feeling. It was my gut feeling that made me ignore Bitcoin for years and not research it. Once I looked under the covers, I discovered that the technology behind it (the blockchain) is elegant and likely sustainable for decades to come.
If you prefer gold to Bitcoin, compare them. What is the difference between gold and Bitcoin? Both require energy and labor to be turned into an asset. Both are mined and are rare. Both are an asset that can be converted into fiat. Both are based on supply/demand forces. Both have no counter-party risk. Both have the characteristics that define money.
My main concern with Bitcoin is that it has high risk because of uncertainty. We don’t know which countries will adopt it and which countries will fight it. I live in the US, and I expect both the State and Federal government to fight against Bitcoin to some degree. If I lived in Japan, I would be much more comfortable owning Bitcoin. Even with my discomfort, I do not expect the US to ban Bitcoin. After all, digital currencies are likely the future of commerce throughout the world.
Bitcoin is clearly a threat to the financial system and even the monetary system. This creates risk for Bitcoin investors. The reason I am more optimistic than pessimistic is that the US is competing in a global economy. If the US government outlaws Bitcoin and other cryptocurrencies, they will be ignoring the economic advantages of blockchain cryptocurrencies.
There is a reason why Bitcoin has a market cap today of $125 billion. And that reason is the ability for two parties to do peer-to-peer transactions using a secure blockchain ledger. That is a revolution in commerce. Is the US going to turn their backs on this development and outlaw it? I don’t think so. This is why Japan has embraced it. They could read the writing on the wall.
The technology behind Bitcoin (the blockchain) is essentially a digital ledger that records all transactions that have occurred in Bitcoin. Not only is the entire history of all Bitcoin transactions on the blockchain, but it is also a record of which public keys own which Bitcoins. Anyone can see the list of public keys (wallets) and how many Bitcoins are in each wallet. The caveat is that you do not know who owns those public keys. Each public key has an associated private key, which is needed to do transactions.
What makes Bitcoin work is encryption. This is where the name cryptocurrency comes from. Those private keys are encrypted, and the only thing preventing someone from stealing your Bitcoin are those keys. The reason hackers have stolen so many Bitcoins over the years is from hacking websites and finding those private keys. If you keep your Bitcoins off Internet exchanges, then the odds of getting your Bitcoin stolen is very low. This is why hardware wallets are so popular, where you can store your private keys on a device. These are similar to thumb drives.
The other thing to know about Bitcoin (as well as Litecoin) and what makes it so powerful is that it is decentralized. This means there is no central computer or even an organization that runs it. The Bitcoin network is composed of thousands of computers. If you randomly turned off half of them, the network would continue to work. Anyone can join the network (by adding a server), and there is no organization that approves someone or charges them a fee to join. It is open to the global public. It is truly a global network, with no owner.
My nickname for Bitcoin is the Unstoppable Train. In my opinion, the only thing that can stop Bitcoin is Bitcoin. The Bitcoin developers would have to make some stupid decisions, which is not what I expect. I don’t think a single country can slow it down through legal means. If the USA or China make it illegal, it will continue to rise in value. This train is going to continue to run, unless perhaps, something better replaces it.
Some investors are paranoid that futures trading in Bitcoin will allow banking interests to manipulate the Bitcoin price downward. I suppose that is possible, but the largest Bitcoin exchanges are all in Asia (Bitmex, Bitfinex, Binance, Huobi, Bithumb, OKEx). It will be difficult to manipulate those exchanges. I actually think futures trading will push Bitcoin prices higher as it creates more legitimacy and publicity.
For those of you who think Bitcoin is in a bubble, consider this. Only 1,800 Bitcoins are created each day. That is only $18 million at $10,000 per Bitcoin. You may think that is a lot of money, but what if a hedge fund wants to own $1 billion in Bitcoin? Where do they get it? They have to buy it from people who already own Bitcoin and are willing to sell at a premium. That buy order will push the Bitcoin price much higher.
My example is for a single hedge fund. Multiply that by dozens of hedge funds. There is no reason why Bitcoin can’t go to $50,000 or $100,000 in the next 5 years if it remains the leading cryptocurrency.
Bitcoin (and Litecoin) has several benefits:
1) You get a personal bank (which is what your Bitcoin wallet becomes).
2) You get to hedge against fiat currency.
3) You get an investment.
4) You get to hedge against inflation.
5) You can spend it using a debit card (this is becoming more common) or you can buy a gift card with a Bitcoin (or Litecoin).
You may be thinking, but is this a good entry point? That’s hard to say because Bitcoin is highly volatile. It’s quite possible that it will trade significantly lower in the near term. However, I don’t know why anyone would want to sell their Bitcoin at this time when it appears that cryptocurrencies and the blockchain are the future.
Ironically, most people think that cash is less risky than Bitcoin. I think the opposite is probably true. When you compare cash to Bitcoin, the one that will appreciate in value is likely Bitcoin. For this reason, trading cash (or Yen, Euros, Yuan) for Bitcoin is a trend that will likely continue. And probably a smart trade.
Consider that a year ago, Bitcoin was trading under $1,000. Will we ever see that again? Probably not. However, cash (or Yen, Euros, Yuan) will likely depreciate in value. Which will be more stable going forward? Which one is unencumbered by debt? I’m starting to think it is Bitcoin. That’s only a hunch, but the facts seem to support that outcome.
That said, what will perform better over the next 3 years, Bitcoin, silver, or junior miners? I expect it to be the junior miners because they are bouncing on the bottom and have huge leverage. But, when you add Litecoin to the mix, the winner is Litecoin, in my opinion. The upside potential for Litecoin is the highest, with silver having the best risk/reward profile.
People tend to dismiss Bitcoin as a bubble because of their belief that it has zero intrinsic value. However, I think Bitcoin has intrinsic value because of its network. After all, the value of Facebook (NASDAQ:FB) is its network of users. Plus, Bitcoin has value from its rarity, with only 1,800 new Bitcoins mined each day and a maximum of 21 million coins.
It is one of the rarest cryptocurrencies. This is why holding Bitcoin is probably smarter than holding any fiat currency. We have been conditioned to believe that cash is safe. The truth is probably that Bitcoin is safe, and cash is not. Time will tell, but the underlying debt of most currencies is currently perceived as low risk, when it’s probably not.
One of Bitcoin’s biggest strengths is that it solves the problem of a third party holding your money. Also, when you try to spend your money via a credit card, a third party verifies that transaction and approves it. With Bitcoin, the only thing that approves the transaction is the Bitcoin network.
I think that peer-to-peer transactions is the reason for Bitcoin’s success. Sure, it is exploding in value because of its investment allure, but the true value of Bitcoin is its network. Bitcoin allows people to break away from the banking system. I think Barrack Obama had it right when he said that owning Bitcoin is like having your own personal bank. The banking system is clearly in bad shape because of all of the debt, so Bitcoin is providing an answer to this problem.
By owning your own personal bank, not only can you secure your Bitcoin at a location of your choosing, but you can do a transaction anywhere in the world from your computer or phone. The only third-party is the Bitcoin network taking a fee. That’s a powerful use case. But perhaps the biggest use case is the ability to retain value. Inflation is always devaluing fiat currency. Bitcoin is the answer to that problem.
These powerful use cases are why Bitcoin is clearly becoming adopted. Every day, week, month, we see evidence of its proliferation. Not just in the US, but throughout the world. In my opinion, this trend isn’t going to stop anytime soon.
How many Bitcoins are needed for $1 billion? 100,000 at $10,000. That is 55 days of new mining supply at 1,800 coins per day. And in a couple of years, the daily mining supply drops in half, through a process called Halving. One of Satoshi Nakamoto’s (the anonymous inventor of Bitcoin) brilliant ideas was to not only restrict supply (only 21 million will ever be created) but to continually make the supply increase at a slower rate.
82% of all Bitcoins have already been mined and it will take another 100 years to mine the final 18% (this is also true for Litecoin). The reason it will take 100 years is that every four years the daily mining supply is cut in half. In May 2020, it drops to 900 Bitcoins per day. Then in 2024, daily mining supply will drop to 450 Bitcoins per day.
So, in May 2020, it will take 110 days to mine $1 billion worth of Bitcoin at a value of $10,000 per Bitcoin. In 2024, it will take 220 days. That fact should make your head spin.
If Bitcoin survives as the dominant cryptocurrency until 2020, the odds are very good that the value will be multiples of its current value. Why? Rarity. Only 3% of Bitcoin owners own 1 or more Bitcoins (see distribution list below). And if you are lucky enough to own 10 Bitcoins, then you are in a very small group of around 150,000 people.
And now for my final argument. If Bitcoin succeeds, then the odds favor Litecoin to also succeed. Today, 1 Litecoin is valued at $66 versus 1 Bitcoin at $7,300. That means that a single Litecoin is worth 1% of a Bitcoin. If only 4x as many Litecoins exist, then it should be worth much closer to 25%. This is the main reason why Litecoin should outperform Bitcoin. It simply has some catching up to do. My estimate is that it should reach at least 3% of Bitcoin’s value. Of course, I’m just guessing, and no one has a crystal ball.
I feel strongly that Litecoin has enough demand that it can’t be held under $100. Sure, it could trade below $100 again, but my feeling is that it won’t stay there very long. The Litecoin brand is too strong. At least, that’s my opinion. I equate it to silver. Sure, silver could trade below $10 again, but it won’t stay there very long.
One last note on timing. There is currently a somewhat famous Bitcoin technical analyst who recently made a bet that Bitcoin will trade below $6,000 this year (before blasting off higher). He has a pretty good record, so you may want to be patient and see if we go lower.
Bitcoin has always been volatile and we should continue to see big moves, both up and down. We could see much lower prices, but I expect to also see big moves up and a new high either this year or next.
For Litecoin, that would a price over $360, its all-time high. Get your popcorn ready for the 4th quarter. We could get the same rally we had in 2017. Why? Expectations. Investors follow sentiment and then market psychology takes over. If Bitcoin and Litecoin start rallying in September or October, the herd is going to start running. If you want to accumulate at a low valuation, this summer is probably the time to do it.
If I lose money in Bitcoin and Litecoin, I will look back and say that it was a good bet. The risk/reward profile is excellent, and the upside potential is huge.
I normally only invest in gold and silver mining stocks, which are one of the highest risk investments you can make. Bitcoin and Litecoin seem tame by comparison. Plus, I don’t invest very much in cryptocurrencies (about 3% of my cost-basis) because the returns can be so high. The key is to just have a position.
I consider cryptocurrencies to be an investment for diversification, although to be honest, it is really a FOMO (fear of missing out) investment. I don’t want to feel like an idiot if Bitcoin explodes in value when that was the obvious outcome.
Disclosure: I am/we are long LTC-USD, BTC-USD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.