"What goes up can go up a whole lot more" has sort of been a theme of cryptocurrencies in 2017. Despite no shortage of skeptics, the aggregate market value of every cryptocurrency combined has vaulted from $17.7 billion on Dec. 31, 2016, to as high as $635 billion as of Dec. 20, 2017. That's right -- a nearly 3,500% increase in value in less than a year.
What's fueling the crypto craze?
There have been a number of catalysts pushing the value of virtual currencies higher as a whole. Topping this list is the emergence of blockchain technology. Think of blockchain as the infrastructure that these virtual coins are built upon. Blockchain is the digital, distributed, and decentralized ledger that records all transactions, and does so without the need for a third party. Using blockchain as opposed to current databases might lead to more secure networks that settle transactions faster and cheaper.
Emotions have played a pivotal role as well. Since institutional investors have mostly stuck to the sidelines, retail investors have been responsible for the upward move in digital coins thus far. Some of these investors, especially those with little investing experience, have been lured in by the fear of missing out on big gains. These emotions have compounded to push cryptocurrencies ever higher.
An increase in use for virtual coins has also served as a catalyst. Bitcoin, which has served as the face of this rally, has successfully been adding new merchants to its network, to go along with the brand-name merchants it added back in 2014. As more merchants become willing to accept virtual coins, the validity of using these tokens to purchase goods and services rises.
Lastly, news-driven events have definitely helped. For example, Japan adopted bitcoin as a legal form of tender earlier this year, while both the CME Group and CBOE Global Markets have begun trading bitcoin futures. All of these events add to the validity of having cryptocurrencies become a new asset class.
Forget bitcoin: Litecoin looks to be a better choice
But as you can tell from the aforementioned catalysts, a lot of them have to do with bitcoin. As the cryptocurrency that currently makes up 45% of the aggregate market cap of all virtual coins, and the most traded cryptocurrency in the world by average daily dollar value, it naturally receives the most investor attention.
However, that doesn't make it the best investment opportunity. Instead, I'd suggest that Litecoin, which is occasionally referred to as "bitcoin-Lite" since it came into being through a fork in bitcoin back in October 2011, is actually the better choice for prospective investors, if comparing the two.
You'll note that bitcoin and Litecoin do have some similarities, as would be expected given that Litecoin forked from bitcoin. Both digital currencies have a primary focus on being used as a peer-to-peer payment facilitator, and they both cap the number of coins that can be mined (21 million for bitcoin, and 84 million for Litecoin). Nonetheless, Litecoin appears to offer five reasons it could outperform bitcoin over the longer run.
1. Charlie Lee is fully dedicated to Litecoin
Charlie Lee, who created the Litecoin project while working at Alphabet subsidiary Google back in 2011, had been working at cryptocurrency exchange Coinbase for years -- until recently. This past June, Lee announced his departure from his day job to work full-time on promoting Litecoin. He's made no secret of Litecoin's plans to go after merchants and exchanges, with a goal of bringing Litecoin into the mainstream. In short, having a visible founder heavily involved gives Litecoin a clear advantage over bitcoin.
2. Litecoin implements the SegWit upgrade
Another difference between the two, and a big reason Lee decided to leave his job as director of engineering at Coinbase, was the completion of the Segregated Witness (SegWit) blockchain upgrade in May. Beating bitcoin to the punch, Litecoin's SegWit upgrade helps to boost the capacity of its blockchain, while speeding up transaction settlement times and lowering transaction costs. If there are fairly consistent complaints with bitcoin's blockchain, it concerns either transaction fees or settlement times. Litecoin has the advantage, for now.
3. A more decentralized proof-of-work algorithm
Litecoin has also taken a very different path with regard to its proof-of-work algorithm. By "proof-of-work" I mean the process whereby miners use high-powered computers to solve complex equations to validate transactions on a network.
As noted by YourStory.com, bitcoin mining is highly processor-intensive, while Litecoin is memory-intensive. In simpler terms, bitcoin mining can only be done by specialty (and costly) application-specific integrated circuit devices with high processing capabilities, whereas Litecoin mining can be performed by less cost-intensive graphics processing units (GPUs). Allowing GPU-based mining encourages more miners to become involved and ensures that no one can corner the market on mining Litecoin, as has happened with a handful of larger players with regard to mining bitcoin. In short, it's an even more decentralized network than bitcoin.
4. A faster block-processing rate
Fourth, and building on a previous point, the Litecoin network processes blocks at a much faster rate than bitcoin. Litecoin processes a block, and therefore issues a reward to the miner, every 2 1/2 minutes, compared to bitcoin, which processes a block about every 10 minutes. This fourfold improvement allows Litecoin to handle more capacity than bitcoin's network, as well as processes those transactions much faster.
5. The rule of large numbers
Lastly, investors can lean on the rule of large numbers to possibly work in Litecoin's favor. It would, psychologically, be a lot easier for Litecoin and its $17.4 billion market cap to double in size to roughly $35 billion than it would for bitcoin to double in size from $281 billion to $562 billion. Investors are actively looking for "the next bitcoin," and many have already found it in Litecoin.
A word to the wise
While it's pretty evident that I favor Litecoin over bitcoin, it's also important to recognize the possible dangers of investing in virtual currencies following their exponential moves higher.
For instance, the regulatory environment is still unsettled in many countries around the globe. Sure, Japan opened its arms to bitcoin, but we also saw China and South Korea crack down on initial coin offerings, with China also putting its foot down on domestic cryptocurrency exchanges. Governments could choose to outlaw digital currencies or create a government-backed cryptocurrency, leaving bitcoin or Litecoin on the outside looking in.
It should also be pointed out that competition is fierce and the barrier to entry relatively low in the virtual currency space. There's no denying the value that media exposure has played for bitcoin and Litecoin. However, we're seeing between 50 and 100 digital currencies, along with their underlying blockchain technology, being brought to market each month. There's simply no guarantee that bitcoin or Litecoin will remain the go-to virtual currency for merchants over the long run.
And who can forget how notorious investors are at overestimating how quickly new technology will be adopted. From human genome decoding to 3D printing, investors have a long history of expecting new technology to be integrated immediately, when in reality it often takes years or a decade to really get off the ground. A lack of quick adoption with regard to blockchain and/or virtual coins could cause stomach-churning volatility in these cryptocurrencies.
In short, while Litecoin should outperform bitcoin, in my opinion, neither appears to be a sound investment at the moment.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Cboe Global Markets and CME Group. The Motley Fool has a disclosure policy.