As an investment manager I am forced to strive to be objective about the assets in client portfolios. An investor must be able to answer three questions about each portfolio holding: (a) what is it that you own? (b) why do you own it? and (c) what is its value?
That is why when it came to bitcoin, I set out to determine a value based on fundamentals, so that an appropriate price-to-value comparison could be made. The paper I wrote has become one of the most cited works on the topic of cryptocurrency valuation. I later applied that methodology to other cryptocurrencies, as well as other network-based assets (like internet companies and payment systems firms). Since that time I've concluded three things about Litecoin, none of them very good:
Litecoin’s price was manipulated in early 2017
Between march and July of 2017, bitcoin's price went from $4 to $50. The price-to-Metcalfe ratio went from 0 (equilibrium) to 800%. The approximate odds of this happening naturally: 1 in 25 million. In late 2017 it fell victim to the same manipulation that hit bitcoin, and LTC traded at 25 times Metcalfe value by December that year. This means that, whereas most of bitcoin's price has corrected to fundamental value, Litecoin probably has further to drop.
Litecoin’s user base is declining
This next graph shows network (Metcalfe) value per coin. It is based on number of users and number of transactions. Except for a brief period in late 2017, bitcoin continued to add users and transact on the network. After the initial price correction in 2018, Litecoin users continued to leave the network.
Litecoin promised to correct the perceived deficiencies in bitcoin. If the market liked this alternative, it would adopt Litecoin. The verdict is in: it hasn't. Litecoin’s market cap relative to bitcoin has never made it beyond 10%. As of today, it's lower than where it started in 2013. While Litecoin may well be a better designed and implemented cryptocurrency, the graph below shows the power bitcoin has as "first mover." You can also see that it has only broken 5% during periods where the price was suspected of being manipulated, followed by gradual declines in dominance. If Litecoin’s compelling use case is that it is a better, business-friendly bitcoin, its value has yet to materialize in the market. The eventual advent of sovereign cryptos will not help, either.