Bitcoin has shot up about 125% this year and is now moving at $8,600, recovering much of the interest of the investment community, but it is not the cryptocurrency that has run more so far this year. Without making noise, and exhibiting a performance four times higher than bitcoin, the palm is taken by Litecoin, which has surpassed by far the bitcoin itself and other popular digital currencies, such as Ether or Ripple.
With a market capitalization of around $8.4 billion, Litecoin is the seventh most traded digital asset in the world and uses a different cryptographic algorithm than bitcoin itself, as well as a faster payment confirmation program. According to experts consulted by Bloomberg, this rally can be attributed to what is known as ‘halving,’ or the process by which the remuneration earned by miners who create the currency is halved from time to time.
The idea behind this concept is quite simple. Since paying half to the miners means cutting the money supply, the price should rise as there are fewer coins in circulation, which in turn will result in less value erosion. This halving process, which takes place every four years, will take place on 6 August and will mean that miners will receive 12.5 units of Litecoin for each block mined, compared to the 25 Litecoin they currently earn. Four years ago, when Litecoin’s last halving occurred, the coin was revalued 60% in the previous three months.
The truth is that this process of reducing the money supply has also been cited by some experts to explain the rally that has lived the bitcoin itself, which will face its halving in May next year. “Every time we’ve seen this halving event in bitcoin or litecoin, the price has gone up astronomically,” says Matti Greenspan, an eToro analyst. Currently, bitcoin miners receive 12.5 coins for each block they add to the shared record, but this amount will fall next year to 6.25 coins. By 2140, the supply will be 21 million bitcoin, and no more coins will be issued.
Litecoin was created in 2011 by Charles Lee, a former Google employee, and its name comes from the English term ‘light,’ which means light. The algorithm is practically identical to bitcoin in technical terms, but quite different in the process of creating the money supply, which means that the block is generated in two minutes, while in bitcoin, the blocks are added to the shared record every ten minutes. This means that transactions with Litecoin are validated much faster than with bitcoin. Moreover, that’s why Litecoin’s mining doesn’t require such powerful computing equipment.
The problem is that Litecoin’s monetary policy will mean that four times as many coins are issued as bitcoin, which in itself lowers the value of each unit. In other words, it is a more abundant currency, with more transactions but less than bitcoin if it is to function as a store of value.