A look at Litecoin
In my last piece, I wrote about the Network to Spend Ratio (NSR) for Bitcoin. I believe it is the single most important metric in valuing crypto. Why? Because the entire point of crypto is to facilitate the transfer of value. It stands to reason that a crypto that transfers vast sums is more valuable than one that doesn’t. By measuring the spend, you can measure what is happening in a crypto network.
The table shows you the spend, network value (market cap) and the NSR over the past week. The NSR 5 (NSR over the past five weeks) tends to be more stable because the level of spend is relatively volatile. Five weeks is enough time to stabilise the measure.
A successful investor will select the crypto with the most spend for the lowest price, as that results in a lower valuation as measured by the NSR 5. A lower valuation means less risk, and if the network grows, there will he higher returns. Bitcoin is trading just above its fair value with an NSR of 8.2 weeks, compared to a long term average of 6.8 weeks.
In comparison, Litecoin stands out as the value trade, as it sits at an NSR of 5 weeks, against a long term average of 4 weeks. Litecoin has always been cheaper than Bitcoin using this measure, presumably because it is underappreciated. It is neither the grandest and most liquid crypto, nor does it have special features such as privacy or tokens. yet it has been brave and innovative being a test bed for new ideas such as SegWit and the Lightening Network. It has also maintained a vibrant community and an active foundation.
In my opinion, it should be the crypto of choice for the value investor. The level of spend is credible as it is within spitting distance of a billion dollars a week; something few coins have managed to achieve. It is worth remembering that the most valuable coins in the future will have the largest networks, as defined by spend. And there is no reason why Litecoin won’t continue to grow, and stay on the ladder.
The chart shows you the price of Litecoin and the spend rebased to one in late 2013. These series are joined at the hip, but on occasion, there are significant deviations. Throughout 2014, when the Litecoin price collapsed by 97%, it was consistently higher than the level of spend. That was a bad time to own Litecoin. Then from mid 2015, the price was below the level of spend, and despite the weakness in 2018, Litecoin is 20 times more valuable than it was back then. Recently, the price has recovered and is back in line with spend.
I would add that while valuation is important, so is network growth. Ideally, you would want to own a crypto that has an attractive valuation and a rising level of spend. Litecoin saw $707 m change hands across its network over the last week. If that grew 10 times, it would match the level of spend in the bitcoin network. Impossible? Not at all. Admittedly that scenario would likely see Bitcoin’s network surge into the tens of billions each week, but unlike Bitcoin, Litecoin has more room to expand its NSR. In other words, if both Bitcoin and Litecoin saw their spend double, you’d probably make more money in Litecoin.
I suppose one reason Litecoin trades at a structural discount to Bitcoin is because the rate of inflation is 8.6% compared to bitcoin’s 3.8%. To put that into perspective, today there are three times more Litecoins than there were in late 2013, which is a huge amount for the market to absorb. Yet it has. And better still, the next halving event is expected to occur on 7 August this year. That’ll see Litecoin’s inflation drop to around 4.2%. At that point, the scarcity premium starts to kick in. Litecoin will no longer be Bitcoin’s silver, but its palladium.
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