A simple guide to mining or buying Litecoin
Litecoin has made a name for itself as a faster, cheaper altcoin. If you’ve ever wondered how to mine it, or how to buy Litecoin, we take a closer look
What is Litecoin?
Since the birth of Bitcoin in 2009, developers have wondered if they could do better. The idea of a secure, digital currency that allows fast, cheap transfers to anyone across the globe while not reporting to banks or financial institutions created quite a buzz. And while many have tried to improve on the original, Charlie Lee’s Litecoin, created as a fork of the Bitcoin blockchain, has been one of the most successful new coins launched.
One of the main differences between Bitcoin and Litecoin is the way in which transactions are verified on the blockchain. By using a different algorithm, Litecoin transactions are approved four times faster than Bitcoin. Litecoin can thus be mined more quickly than Bitcoin.
But what is mining and how does Litecoin mining work?
One factor about digital coins that piqued many people’s interest was the fact that they can be obtained for free. Yes, that’s right, free. All you needed was a fast computer, a bit of time and you could go mining for Litecoin. But what does that mean?
How Litecoin mining works
When a Litecoin transaction occurs, it must be recorded on a digital ledger known as the blockchain. But before the system will allow this to happen, developers known as “miners” must use their computing power to solve a complex cryptographic puzzle to check the new transactions against the previous ones on the chain. This prevents the same Litecoin being spent twice.
All being well, the miner shares that solution with the other computers or “nodes” on the network, which is known as a “proof of work”. If the other nodes verify the proof of work, a new block is added to the blockchain.
Miners were rewarded with 50 Litecoin for completing a block, making the process a very attractive proposition and a huge global network of enthusiasts emerged.
Improvements over Bitcoin
One significant improvement Litecoin had over Bitcoin involved the processing power needed for mining.
Bitcoin uses a complex algorithm known as SHA-256 which takes around 10 minutes to confirm a block. Lee believed this algorithm, with its long confirmation time would negatively affect Bitcoin’s ability to scale up in the future. He created Litecoin using the simpler “scrypt” algorithm, which reduced block confirmation times to just two and a half minutes.
What’s more, as scrypt is more memory intensive and relies less on processing power than the SHA-256 algorithm, this meant any computer could mine Litecoin. This was important, as by 2011, intense competition meant Bitcoin miners without powerful graphics processing units (GPUs) were finding it impossible to mine blocks.
Litecoin benefits from reduced Bitcoin mining
As Bitcoin gained in value, more people wanted to become miners and increasingly sophisticated systems were created. Soon, specially designed ASIC computing rigs were the only machines powerful enough to mine the coins. These hugely expensive rigs, coupled with the colossal amounts of electricity consumed quickly made Bitcoin mining the preserve of purpose-built mining warehouses and left mining enthusiasts in the cold.
But interestingly, this was to benefit Litecoin. As Lee later explained: “When Bitcoin mining went from GPUs to ASIC, all the Bitcoin GPUs were looking for a coin to mine, and Litecoin just happened to have transitioned from CPU to GPU at that time."
The extra manpower in the form of frustrated Bitcoin miners definitely helped boost the success of Litecoin.
Halving Litecoin rewards
The maximum number of Litecoin that will ever exist is capped at 84 million, four times more than Bitcoin’s 21 million. Creating the coins is termed mining, as it is modelled on mining gold. The theory is, while gold was relatively easy to find at first, as it becomes scarcer it is harder to mine.
In a similar way, while the initial reward for completing a block in the Litecoin blockchain was 50 coins, this will halve every 840,000 blocks. The last “halving” was in August 2019, with the reward for completing a block currently 12.5 Litecoin.
Every halving sees a drop in the number of miners as the blocks become harder to mine and less profitable. What’s more, ASIC rigs have now been developed for the scrypt algorithm, too. Nowadays, while Litecoin mining is still possible it would be hard to turn a profit using anything but these specially built rigs.
What’s more, unless you have a lot of “hash power” (multiple ASICs) your chances of mining a block by yourself nowadays are very low, which essentially excludes anyone using a GPU. It would therefore make sense for GPU miners to pool resources and this is what some choose to do.
By joining a mining pool, cooperating miners agree to share block rewards in proportion to their contributed mining power. However, while this can produce a steady pay-off for the average miner, the mining pool’s owner does tend to be the winner. What’s more, with hacking and scams rife it is worth checking on a potential pool’s reputation before joining and removing any earned coins immediately.
How to buy Litecoin
If you don’t fancy your prospects as a Litecoin miner, fear not: there are other ways to obtain the digital coin. Litecoin can be bought very easily with fiat money from exchanges. You can also convert Bitcoin into Litecoin. Incidentally, if you’re wondering what Litecoin is worth, one coin currently stands at $48.75 (£37.82) and Litecoin has a market cap of $3.11bn (£2.41bn, €2.83bn).
Contract for Difference
Alternatively, companies such as Capital.com allow us to speculate on the price of Litecoin using Contract for Difference (CFD). Rather than buy Litecoin yourself, you have a contract between a broker and investor where one party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade. You can choose to either hold a long position (speculating that the price will rise) or a short position (speculating that the price will fall).
If you do choose to buy Litecoin, however, it is important to consider moving it into a hot or cold wallet as exchanges are sadly often hacked. Wallets supply you with a public key code, which you share when you wish to spend the coins, and a private key code, which obviously must stay private. The combination of both keys allows you to access your coins.
That said, observe the story of Gerald Cotten, the 30-year-old CEO of Canadian Bitcoin exchange Quadriga CX. A stickler for security, Cotten ensured the laptop and messaging systems he used were encrypted and took sole responsibility for handling funds and cryptocurrency coins for the business to protect them from being hacked.
However, while on honeymoon in India last December, the unthinkable happened and Cotten died, apparently of complications from Crohn’s disease.
Despite concerted attempts to find them, no one has discovered Cotten’s private keys, meaning a mind-blowing C$190m (£111m, $143m, €130m) in Bitcoin, Litecoin, Ether and other digital tokens cannot be retrieved.
With 75 per cent of the total Litecoin that will ever exist already in circulation, there are just over 20 million coins still to be mined and with scarcity comes greater value. But whether or not we fancy turning our hands to Litecoin mining, it will be interesting to see what the future holds for this exciting digital currency.
FURTHER READING: Why private keys are important – and how to keep crypto safe
FURTHER READING: What is Litecoin?