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. In recent years, however, many other cryptocurrencies have entered the scene. 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”. In this article, we will explore the similarities and differences between these two leading cryptocurrencies.
On the surface, Bitcoin and Litecoin share a lot in common. At the most basic level, they are of course both cryptocurrencies. Whereas state currencies such as the U.S. dollar or the 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. In what follows, we will address four of their most important differences, progressing from the most straightforward differences to the more complex. (Read more What Is Litecoin And How Does It Work?)
Market Capitalization and Popularity
At the time of writing, Bitcoin’s market capitalization sits at roughly $4 billion. Whether this figure strikes you as either high or low will depend largely on your historical perspective. When we consider that Bitcoin’s market capitalization was barely $42,000 in July 2010, its current figure seems staggering. When, however, we consider that it has declined by roughly 66 percent since its all-time high in December 2013, its current figure seems comparatively modest. What is clear is that Bitcoin remains by far the most highly valued player in the cryptocurrency space.
We can now ask the question, what other characteristics set Bitcoin and Litecoin apart?
Total Amount of Coins
One of the main differences between Bitcoin and Litecoin concerns the total number of coins which each cryptocurrency can produce. The Bitcoin network can never exceed 21 million coins, whereas Litecoin can accommodate up to 84 million coins. Although in theory this sounds like a significant advantage in favor of Litecoin, its real-world effects may be negligible. This is due to the fact that 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.
Despite this, Litecoin’s greater number of maximum coins might offer a psychological advantage over Bitcoin, due to its (so far) smaller price for a single unit. In a video interview posted by IBM’s banking division 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 that this is true, this problem may be solved through simple software changes introduced at the level of the digital wallets through which Bitcoin transactions are made. As Tristan Winters points out in a November 2013 Bitcoin Magazine article, “The Psychology of Decimals,” popular Bitcoin wallets such as Multibit and Electrum already offer users the option of displaying the value of their bitcoins in terms of official (or fiat) currencies such as the U.S. dollar. This can help circumvent the psychological aversion to dealing in fractions when using bitcoin.
Transaction Processing Speed
Although technically transactions occur instantaneously on both the Bitcoin and Litecoin networks, time is required in order 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 9 minutes per transaction. The equivalent figure for Litecoin is roughly 2.5 minutes, according to data from BitInfoCharts.com. 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. However, recent innovations such as Bitpay’s proposed Inter-Channel Payments system (nicknamed “Impulse”) may make these kinds of instantaneous transactions significantly more secure, mitigating Litecoin’s faster confirmation time advantage.
Different Algorithms: Bitcoin’s SHA-256 vs. Litecoin’s Scrypt
By far the most fundamental technical difference between Bitcoin and Litecoin are the different cryptographic algorithms which 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 own computing resources toward the task of 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. (Read more What Is Bitcoin Mining?)
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. Today, the most dominant method for Bitcoin mining consists of the use of Application-Specific Integrated Circuits (ASICs). These are hardware systems which, unlike the simple CPUs and GPUs which came before them, can be tailor-made for the sole purpose of mining bitcoins. The practical consequence of this innovation has been that Bitcoin mining has become increasingly out-of-reach for the everyday user.
Scrypt, by contrast, was deliberately 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 Litecoinm as being more accessible for users who also wish to participate in the network as miners. In recent years, however, companies such as Zeus and Flower Technology have brought Scrypt AISCs to the market, suggesting that Litecoin’s vision of easily accessible mining may become a thing of the past.
The Bottom Line
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 profoundly 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. (Read more The 5 Most Important Virtual Currencies Other Than Bitcoin)
Read more: Bitcoin Vs. Litecoin: What's The Difference? | Investopedia https://www.investopedia.com/articles/investing/042015/bitcoin-vs-litecoin-whats-difference.asp#ixzz51xmKWpz8
Follow us: Investopedia on Facebook
