Last year, cryptocurrencies put themselves on the map with perhaps the greatest single-year performance in the history of any asset class. After beginning the year with a market cap of $17.7 billion, digital currencies finished 2017 with an aggregate market cap of $613 billion, representing an increase in value of more than 3,300%.
2017 was also the first time we saw a clear bifurcation in purpose among cryptocurrencies. Most have chosen to focus on the development of blockchain technology, which is the digital, distributed, and decentralized ledger underpinning most virtual currencies that's responsible for transparently logging all transactions without the need for a financial intermediary. Blockchain is primarily being marketed at financial institutions, although it has plenty of non-currency applications, too.
The other purpose for cryptocurrencies is as a medium of exchange and a replacement for cash. There aren't too many digital currencies focused on securing merchants, but that's exactly what bitcoin, the largest cryptocurrency in the world by market cap, and Litecoin, which I'd consider to be bitcoin's greatest rival, are trying to do.
Bitcoin's reign as a medium of exchange appears to be coming to an end
Bitcoin was the first cryptocurrency to be traded back in March 2010 and is often credited with bringing blockchain technology into the spotlight. Having a first-to-market advantage has certainly helped with its media exposure and its ability to sign up new merchants. In many instances, bitcoin is the cryptocurrency that investors will need to buy to exchange for less popular digital currencies on decentralized exchanges.
Yet for as consistent as bitcoin has been, Litecoin is catching up. As bitcoin's popularity has grown, chinks in its armor have become clearly visible. Its large, open-source network has made gaining consensus difficult when trying to implement needed software upgrades to its blockchain. With bitcoin, 80% approval is needed among the community to implement upgrades. An inability to reach this consensus has caused numerous forks, creating new digital currencies in the process, and relegated bitcoin to an ever-slower and pricier network. On average, the typical bitcoin transaction takes longer than an hour to process, with fees of around $28. That's almost the same cost as a bank wire transfer, and as a result it makes bitcoin a poor choice for day-to-day transactions.
On one hand, transactions that take a little over an hour to process are still favorable when talking about cross-border remittances. With the current banking system, cross-border transactions can take up to five business days to clear. On the other hand, bitcoin's processing speeds and transactions fees are considerably worse than its peers. To its benefit, few digital currencies are attempting to become a medium of exchange, so it's not had much in the way of competition. However, Litecoin is, and it's running circles around bitcoin.
Litecoin has a real shot to overtake bitcoin
Though Litecoin is often described as "bitcoin-Lite," and is considered to be in cooperation not competition with bitcoin, it most definitely has the tools to push aside bitcoin and become the go-to medium of exchange for digital currency users.
To begin with, the processing times aren't even close. HowMuch.net recently examined maximum transactions processed per second and found that bitcoin maxed out at seven per second, compared with 56 for Litecoin. Of course, transaction speed isn't everything -- block-processing times matter, too. Bitcoin completes a block about every 10 minutes. By comparison, Litecoin completes a block in a fourth of the time, about every two and a half minutes. So, to summarize, Litecoin can process transactions quicker than bitcoin, and its quicker block time suggests that it can handle more capacity than bitcoin.
Speaking of network capabilities, Litecoin has implemented an upgrade to its blockchain known as Segregated Witness, or "SegWit" for short. SegWit has boosted the capacity of Litecoin's blockchain to handle more merchants and transactions, as well as improved processing speeds and lowered transaction fees. Bitcoin was supposed to implement SegWit, but it couldn't gain the needed consensus to do so.
Litecoin also has its founder, Charlie Lee, working full-time on securing new merchants and improving its network. Since Lee moved from a part-time to full-time role, Litecoin's average daily transaction count has jumped from a few thousand to between 40,000 and 50,000 transactions per day. Understand that some of these transactions are investors buying and selling digital currencies. Nevertheless, Lee has had a clearly positive impact in terms of drumming up interest for Litecoin with merchants, consumers, and investors. By comparison, bitcoin has no one specifically leading its charge, and the number of daily transactions conducted on its network has been range-bound for two and a half years.
Litecoin appears to have a clear path to becoming the go-to medium of exchange over time. Keep in mind that this doesn't necessarily mean its coin will increase in value, as there's been virtually no fundamental reasoning behind cryptocurrency valuations to this point. But if there's one medium of exchange virtual currency that has a genuine shot of surviving over the long run, Litecoin looks to be it.
Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool has a disclosure policy.