What is Litecoin? | A Complete Beginners’ Guide
Litecoin (LTC) is one of the oldest existing cryptocurrencies, and also one of the most valuable. For much of its existence it has been seen as the silver to Bitcoin’s gold, but in the past couple of years it has lost its place as the second most popular cryptocurrency, with innovative competitors like Ethereum, Ripple, Cardano and Steller entering the market to claim their piece of the action.
In this guide, we’ll explore what differentiates Litecoin from Bitcoin and other cryptocurrency technology, along with these topics:
- What is Litecoin?
- What is the Technology Behind Litecoin?
- Mining Litecoin
- Buying Litecoin
- Storing Litecoin
- How Do Transactions Work?
Litecoin was one of the first “forks” of the first cryptocurrency Bitcoin. In other words, Litecoin took Bitcoin’s free and open source code base and tweaked it slightly. Founded by former Google employee Charlie Lee in October, 2011, and developed and maintained by the Litecoin Association, the cryptocurrency was meant to improve on Bitcoin in a few key ways. Goals included increasing transaction speeds, decreasing the potential of spam transactions harming the network, and making it easier for more people to participate in the network.
As you might guess, Litecoin is nearly identical to Bitcoin in that it operates through a blockchain, which is simply a sequence of transaction records making up a decentralized ledger. This is in contrast to how traditional currency transactions are tracked through centralized bank ledgers. As with Bitcoin and most other cryptocurrencies, Litecoin’s blockchain is distributed across a peer-to-peer network made up of computers called “nodes” that run its software.
These nodes securely store a record of all transactions that happen on the network in near real-time, grouping them together into “blocks” that make up the blockchain. Litecoin adds a new block to the blockchain every 2.5 minutes containing a record of all transactions that happened after the previous block. The blockchain is extremely difficult to modify since it would have to be modified on every single node in the network. This is one of the major strengths of cryptocurrency as compared to traditional banking.
The process of collecting newly broadcast transactions together into blocks and adding them to the blockchain is called “mining” because the people doing said activities are rewarded with litecoins. A given “node” or computer in the network will only be rewarded when they successfully add a block by creating a valid “hash”.
A hash is simply a long string of numbers that serves as proof that a block contains valid, unmodified data before it’s added to the blockchain. All hashing functions are one-way: there is no way to derive the original data from them, as they can only be used to validate that the data that generated the hash has not been altered.
The fact that all of these blocks are linked together means that to alter one block, one must alter all previous blocks in the chain, which makes altering the blockchain pretty much impossible.
How to Mine Litecoin
Mining litecoins isn’t as easy as it used to be, but because of the aforementioned modifications to Bitcoin’s code, it’s still much easier than mining Bitcoin and many other cryptocurrencies. In fact, old Bitcoin mining rigs that are no longer good enough to keep up with the increasing difficulty of Bitcoin mining can often be repurposed to mine litecoins, especially if decent graphics cards are added. Newer dedicated “ASIC Scrypt Miners” are also an option. These are computers specially designed to mine litecoins and other cryptocurrencies based on the same technology (more on this later).
Before beginning to mine, however, you should first do up a budget based on the current difficulty of mining and estimated electricity usage, and then factor in your electricity costs. You may find that it isn’t profitable to start a mining operation unless you get enough equipment together that is somewhat energy efficient and can somehow effectively dissipate the extra heat that is generated by your mining rigs (mining is often more profitable in cold climates, for example, where the heat generated from mining rigs is actually an asset).
Once your equipment is set up, the most profitable way to mine is usually to join a mining pool, where the hashing power of your computer joins a network of other computers that together have a much higher chance of successfully generating a valid hash. Mined coins are then distributed across the network based on percentage of computer power contributed.
Besides the hardware, you’ll also need to set up mining software on your mining rigs, although many purpose-built rigs will come with software pre-installed. If you don’t have software yet, consider setting up Cgminer, CUDAminer or Cpuminer. These are all good options for mining litecoins.
The final thing you need for mining is a litecoin wallet, which we’ll go into more below. If you’re looking to get your litecoins right away, however, purchasing them is far more straightforward.
- Coinbase: This simple to use, USA-based exchange is one of the oldest and most trusted. Coinbase offers Litecoin, Bitcoin, Ethereum and Bitcoin Cash for sale using credit and debit cards. In the United States, money can be deposited using bank transfers as well. The website is very user friendly, and fees are reasonable.
- GDAX: This exchange is owned by Coinbase, but has a more advanced interface than Coinbase. Trading fees are low at 0.25%, and money can be transferred in via ACH bank transfers and wire transfers.
- Kraken: Another large USA-based exchange, Kraken allows you to buy Litecoin and other cryptocurrencies with USD, GBP, JPY, EUR and CAD via wire transfers.
Although it’s possible to keep your coins in your account on an online exchange, for security reasons it’s best to transfer them to an outside wallet. Here are your basic choices:
- Software wallets are programs on your computer or mobile device that allow you to send and receive Litecoins and to see the history of your transactions. If using a software wallet, it might be a good idea to use a wallet such as Jaxx that supports multiple currencies, since you may want to expand into other cryptocurrencies at some point. Jaxx has the added benefit of allowing you to exchange Litecoins for other cryptocurrencies directly in the wallet. Other good software wallets include Electrum-LTC and Exodus.io.
- Hardware wallets, meanwhile, are physical devices, usually a USB key, that store your private key offline in “cold storage”. Make sure to purchase them directly from the manufacturer to avoid fake or modified hardware wallets that can be used to steal your funds. Hardware wallets generally offer the best security while still remaining very user-friendly. Learn more in our Ledger Nano S, Trezor, and KeepKey reviews.
- Online wallets are held on the servers of a company. Although you can access these wallets from anywhere, the disadvantage is that your private keys are stored on a computer that isn’t your own. This means you not only have to trust that the company won’t steal your coins, but you must also trust that their security is good enough to prevent someone else from stealing them.
- Paper wallets are another very secure form of wallet. They are really just a print out of the public address and associated private key of your litecoins, which you can then use to unlock/access them via digital wallets that connect to the Litecoin network.
Check out our full list of recommend cryptocurrency wallets here.
Remember, litecoins don’t actually physically exist. They are merely records of transactions involving the sending of values between Litecoin addresses.
Litecoin transactions work the same way as most cryptocurrencies: they are simply digital messages, similar to email, which are combined with other transactions into blocks and added to the chain. All transactions that happen on the network are public and can be viewed on the public blockchain ledger.
To send litecoins, you need the address you are sending to, your private key (which should remain hidden to everyone but you), along with the amount of litecoins you wish to send. Wallets that “contain” your litecoins really contain the private keys behind the scenes without you needing to worry about them (unless you want to). Private keys should remain private. Never share them with anyone unless you want them to have access to your coins.
An example transaction would go something like this: the sender’s wallet uses a private key to sign a transaction message with the transaction details (the input address, amount, and the output address). This message is broadcast to the Litecoin network, where the lucky miner verifies that the keys have access to the requested coins, and the transaction is then grouped with other transactions into a block via the previously described mining and hashing process and added to the public blockchain.
- Decentralized: Litecoin’s hashing algorithm, called Scrypt, differs from Bitcoin’s SHA-256 hashing algorithm in that it not only requires computer processing power (CPU power) to run its hashing calculations, but also uses computer memory, making it easier for non-specialized computers without as much processing power to mine them. This means that Litecoin can potentially be less centralized than Bitcoin, since less money and resources are needed to take part in the network.
- Faster than Bitcoin: Additionally, the Litecoin network is not nearly as bogged down with transactions as the Bitcoin network at the moment, so Litecoin is a great choice for sending money between exchanges for faster and cheaper transactions. Further, since blocks are created every 2.5 minutes, this means Litecoin is better for time-sensitive purchases than Bitcoin with its 10 minute block additions. Even if Litecoin was as popular as Bitcoin, transactions would still happen much faster. Because of speed and fee advantages, Litecoins are a great choice for converting fiat currencies into cryptocurrencies. If you’re interested in purchasing a specific cryptocurrency token/coin on a specific exchange, simply buy litecoins, send them to that exchange, exchange it for bitcoins or another cryptocurrency that has a trading pair with the token you want to purchase, and voila!
- Availability: Another potential advantage of litecoins is that there will be four times more of them than bitcoins once all the coins are mined (cryptocurrencies generally have caps on the amount of coins that will ever come into existence). This means they could theoretically be more widespread and easier to acquire. However, since both cryptos are infinitely divisible, it’s quite easy to have a fraction of either, which makes the total cap somewhat arbitrary.
- Spam Resistant: A fix was implemented in Litecoin that prevents many small “spam” transactions from slowing the network. This fix simply charges a sender a fee for every tiny transaction a sender creates, making it cost a lot more to spam the Litecoin network with tiny transactions than it would cost to spam the Bitcoin network, for example.
- Superiority of other Cryptocurrencies: Over the past couple of years, Litecoin has been losing ground to and being surpassed by other cryptocurrencies in terms of value in relation to fiat currency. This is likely because these other cryptocurrencies offer more utility beyond simply acting as a store or exchange of value. Ethereum, for example, offers a decentralized platform allowing the creation of things like digital contracts (smart contracts), decentralized applications (dapps), and more.
- Lack of Scaling: Cryptocurrencies such as Steller, Ripple, and Steem offer increased scaling capacity for potentially wider use. For example, Ripple and Steller can perform 1,000 transactions per second, while Steem can perform 10,000 to 180,000+ transactions per second compared to Litecoin’s meager 14 to 28 per second. VISA and Mastercard, by comparison, process somewhere in the thousands of transactions per second presently.
It’s important to note, however, that a new technology called the Lightning Network may be implemented within the Litecoin network even before it’s implemented on the Bitcoin network. This could potentially see transaction speeds in the millions or billions of transactions per second. It’s still too early to tell if this technology can work, however, as it’s currently in its testing phase.
Other cryptocurrencies such as IOTA and Byteball are also seeking to overcome the scaling issue with technologies that are different altogether from blockchains and involve no mining at all (albeit they are in their infancy, and IOTA, for one, has faced challenges with its technology).
Instead of using dedicated nodes, they use true peer-to-peer verification systems, with each entity that performs a transaction on the network also verifying other transactions at the same time. This means they could theoretically scale infinitely.
- Low Payment Acceptance: As with all cryptocurrencies, very few product or service providers accept payment in Litecoin. This disadvantage could be mitigated through the use of cryptocurrency loaded credit cards. These include Coinbase’s Shift Card, Monaco’s card, and Change’s and TenX’s upcoming cards that could be used to instantly convert cryptocurrencies to fiat currency on the spot for payment anywhere VISA or Mastercard are accepted. As one of the most popular cryptocurrencies, Litecoin is already integrated, or will be integrated into these cards.
- Legal Problems: Cryptocurrencies are facing tight restrictions and regulations in China, and other countries are also seeking to limit cryptocurrency trading and use. South Korea is now regulating exchanges to make sure all users are identity verified, while Russia is also hinting stronger regulation in the near future.
- Price Volatility: As with most cryptocurrencies, price volatility is a problem with Litecoin. Using Litecoin as a means of storing value mid or long term is therefore not for the risk averse, as its price has been known to fluctuate by double digit percentage points within days, hours, or even minutes.
This volatility comes from the highly speculative markets that cryptocurrencies are sold on, where price is driven by the quickly changing perceptions of a relatively small percentage of the population. Perceptions of value can and do change in the wind with news about government crackdowns on cryptocurrencies, hacks on major exchanges, or announcements of new technology being integrated. Litecoin itself may not even be the focus of a news story that sets its price plummeting, since cryptocurrencies in general usually follow the rise and fall of Bitcoin prices.
Some cryptocurrencies such as USDT and bitUSD have sought to alleviate this problem by creating what are called “stable coins”, which seek to tie the value of their currencies to a fiat currency, while others seek to tie their value, at least partially, to commodities like gold.
Litecoin, like most other cryptocurrencies, seems to have no plans to tackle this price volatility problem head on. Consensus in the cryptocurrency community seems to be that as markets become more mature and more capital enters the market, prices will naturally become more stable.
The cryptocurrency space is changing so fast that it’s hard to say what the future will bring for Litecoin, but we can say for sure that the development team is making an effort to adapt and improve to remain competitive. The name recognition and well-regarded team members alone are also worth something. Whether or not Litecoin is a good investment for you, whether you choose to buy it outright or invest in a mining operation, is up to you to decide.