Proponents of litecoin, the seventh-largest cryptocurrency, have long touted it as “silver to bitcoin’s gold,” the medium of exchange to BTC’s store of value. Much like physical silver, though, litecoin currently trades well below its all-time high, having plunged to about $55 from a peak of $358. However, according to cryptocurrency hedge fund Multicoin Capital, even at that mark litecoin is “significantly overvalued.”
A Maturing Market and a Diminishing ‘Coinbase Effect’
The Texas-based fund, via Jain, argues that LTC faces a variety of negative catalysts, with no bull case to offset them.
First, Jain alleges that litecoin’s 2017 bull run came predominantly as a result of naivety among retail investors and immaturity in the cryptocurrency market. As evidence, he cites the fact that LTC was the “least expensive per-unit asset on Coinbase,” one of the most popular trading platforms among inexperienced cryptocurrency buyers — the most likely group to not recognize that you can purchase fractional coins.
The coin no longer bears that distinction, though, since Coinbase listed ethereum classic (ETC) in August and has further announced plans to consider listing a variety of other assets, which promises to diminish the impact that a Coinbase listing provides for an individual cryptocurrency.
Questionable Financials & Development
Next, Multicoin argues that the Litecoin Foundation is in a poor financial situation to continue operating effectively, holding only about $322,000 in assets — with 82 percent of those funds denominated in LTC.
Moreover, the firm says that LTC does not have a unique development roadmap, which helps explain the dearth of LTC GitHub commits, with the majority of LTC updates being forked from Bitcoin Core.
With these factors in mind, Jain, like several other analysts, called founder Charlie Lee’s decision to sell his entire LTC stake a “red flag,” regardless of his stated intentions in so doing.
“Despite his intentions, a misalignment of incentives now exists that decreases his motivation to continue development and add value to the protocol,” Jain wrote. “To better achieve this goal, we would have liked to see him time-lock his holdings or use them to fund further LTC development.”
Finally, Multicoin argues that the litecoin price will not be able to overcome the significant selling pressure it will likely face in the near future.
To wit, the report notes that Bitmain — the most valuable cryptocurrency company — owns over 1 million LTC, according to a leaked investor deck. The firm, led by CEO Jihan Wu, has been an outspoken supporter of bitcoin cash (BCH), which — like litecoin — aims to become the internet’s “digital cash.” Consequently, Multicoin believes that Bitmain will eventually dump the LTC, either to provide BCH with price support or to force litecoin further into bearish territory.
Even absent that looming risk, LTC faces continuous sell pressure from mining, a drawback which applies to all inflationary and disinflationary cryptocurrencies but whose effects will be particularly pronounced on an asset already facing significant negative catalysts.
Batting Down the ‘Bull Case’ for Litecoin
Meanwhile, Multicoin believes the supposed bull cases for litecoin — e.g. that it is an ideal medium of exchange and/or a testnet for the Bitcoin network — fail to stand up to scrutiny.
Writing in the firm’s report, Jain takes aim at the narrative that if bitcoin is gold, then litecoin is silver. Jain says that this is a false analogy because, unlike physical gold, bitcoin will likely in the future become a viable medium of exchange through the adoption of technologies like the Lightning Network (LN).
“Comparing digital assets to precious metals may be a nice analogy, but it does not have any substance. The value of the ratio of silver-to-gold is based on the idea of price-to-weight ratio. A lower price-to-weight ratio makes payments for smaller purchases more convenient. Digital assets are weightless, and thus the same analysis cannot be made.”
Even if there is room in the cryptocurrency ecosystem for a non-bitcoin medium of exchange, Multicoin argues that there is no reason why LTC will be the asset that fills this void:
“Litecoin’s adoption is generally shown using qualitative evidence of merchants accepting Litecoin. Merchants accepting Litecoin also generally accept a basket of other cryptoassets because crypto payment processors such as BitPay support many cryptocurrencies. Merchants are not explicitly choosing to support Litecoin payments. Rather, they’re electing to accept payment in any crypto, of which Litecoin is just one.”
Perhaps a stronger case is that, as a member of the “Satoshi family tree,” LTC can serve as a live-fire testnet for BTC, whose developers tend to move cautiously to preserve the network’s security. Even if true, though, Multicoin argues that there is no reason why such a testnet should be worth $3 billion, much lest present token holders with any further upside from that mark.
LTC a ‘Relic of the Pre-Smart Contract’ Age
Summarizing the firm’s position, Multicoin says that while LTC may be historically significant, its founding vision has become obsolete and has not been replaced by a viable roadmap. Jane writes, “In truth, Litecoin is a relic of the pre-smart contract platform crypto ecosystem. Perception resulting from these outdated narratives has led to a large divergence between current price and fundamental value.”
“Hovering at approximately $50, we believe LTC is significantly overvalued. Given the lack of a viable investment thesis, nonexistent positive catalysts and strong negative catalysts, we expect LTC to continue to substantially underperform the crypto market.”
Though withering, Multicoin’s view is not universally shared among cryptocurrency analysts. Last month, CCN reported that Mati Greenspan, senior market analyst at eToro, said that LTC is trading at a “massive discount” to its fundamental and technical factors.