Why Does Litecoin Follow Bitcoin Closely?

Litecoin founder Charlie Lee often refers to the cryptocurrency as the “silver to Bitcoin’s gold.” Apart from sharing the same codebase, both cryptocurrencies also exhibit mostly similar price movements in cryptocurrency markets, rising and falling in tandem. 

They also complement each other. Bitcoin’s original mandate was to become a medium for daily transaction. But scaling problems have prevented it from fulfilling that role. Meanwhile, Litecoin has picked up the mantle and incorporated scaling technologies into its ecosystem to enable digital payments on its platform. In 2017, Litecoin had, what some analysts called, a phenomenal year.

The resemblance between the two cryptocurrencies might seem baffling to observers, especially since the cryptocurrency ecosystem is premised on a diversity in applications. But it came about largely due to a conscious decision by Lee to have Litecoin follow bitcoin. In a 2018 interview, he explained the rationale for his call.

Why Does Litecoin Follow Bitcoin? 

Lee started bitcoin because he knew that equal transaction fees on bitcoin would prove to be problematic for transferring small as well as large amounts. “If bitcoin is focused on moving large amounts of money, then the fees will be high and security will be high. Litecoin can act as a compliment. It can be used for smaller amounts of money and have lower fees,” he explained. In 2018, Litecoin Foundation, the nonprofit associated with Litecoin, acquired 9.9% of Germany’s WEG bank, opening the door for the cryptocurrency to become a part of mainstream banking.

Bitcoin is the mother ship for a majority of cryptocurrencies today, meaning that they have repurposed its code to suit their ends. But Lee adopted a hands-off approach to bitcoin’s original code while developing Litecoin. Instead, he enhanced bitcoin’s original code with new features and functionalities. For example, Litecoin has a larger block size and processes transactions much more quickly as compared to bitcoin. Lee said he trusts bitcoin and its code is structured in such a manner for a reason. “We’re seeing a lot of coins change some stuff around and then get hacked or have something blew up in their face, simply because they didn’t realize that the thing they changed was there for a reason,” he said.

What Are The Drawbacks Of Lee’s Approach? 

There are two main drawbacks to Lee’s tactics. 

The first one is that, barring a couple of exceptions, Litecoin’s price has mostly mimicked that of bitcoin’s price trajectory. It also means that Litecoin is not as attractive to investors as bitcoin because it is not sufficiently distinguishable from the original cryptocurrency. Not surprisingly, litecoin’s valuation is minuscule ($12 billion market cap) as compared to bitcoin ($724 billion), as of May 25, 2021.

The second one is a transference of bitcoin’s vulnerabilities to its progeny. In the interview, Lee said he was worried about a bitcoin bug that has the potential to crash nodes in its network and destroy their value. Litecoin will be directly affected by such a crash because it shares code and copies bitcoin’s price movements. 

“Something like that could like destroy 90 percent of its value overnight. So stuff like that definitely keeps me up at night. In Litecoin’s case, we’re running a network that is worth three billion dollars. That’s still a lot of money,” said Lee.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.21 bitcoin and 1 Litecoin.